Is Peer-to-Peer Lending the Next Big Thing?

peer-to-peer lending

Peer-to-peer lending is pretty big in the world of personal finance right now. There are a lot of people talking excitedly about the great investment returns they’ve made recently, and of course this has only drummed up interest from others on how to get involved. This is typical of any new investment that’s seen some success, but does it mean that it’s a good thing to get involved with? Today I’d like to share some of my thoughts on peer-to-peer lending and how it might fit into an investment portfolio.

What is peer-to-peer lending?

Peer-to-peer lending is simply the act of one individual lending money to another individual. It’s different from the norm in that instead of going to a bank to get a loan, you’re going to a regular person. It has gained in popularity in the past several years because there are a number of companies who have set up markets where lots of people can do this easily on a large scale.

There is both a social aspect and an investment aspect to peer-to-peer lending. The social aspect is essentially that it feels good to use your money to help someone else out. That’s certainly a valid reason for many, but it is not the focus of this article. My intention here is to focus solely on the investment merits of peer-to-peer lending.

The arguments in favor of peer-to-peer lending

Most of the articles I’ve seen that recommend peer-to-peer lending focus on the good returns they have personally experienced over the last few months or years. The returns I have seen reported recently typically range from 10-12%, which is certainly nice.

I have also seen people argue that they are getting these returns with much lower risk than other investments. This would of course be desirable if it were correct, and I will discuss below whether I believe it to be true.

My arguments against peer-to-peer-lending

I want to be clear up front. I do not think that peer-to-peer lending is necessarily a bad investment. It may have a role as a small part (5-10%) of some people’s portfolios. But I would like to warn against the kind of thinking that happens in situations like this, when many people are excited about a new kind of investment, which is that the investment will only deliver great positive returns without any downsides. On the contrary, I think there are plenty of risks with peer-to-peer lending that people should be aware of before deciding to invest.

1. Recent returns can be misleading

There’s no shortage of history demonstrating that investments can have very strange and abnormal returns over 1, 3, 5 and even 20 year periods. Over the past 13 years, US bonds have outperformed US stocks by 2%. From 2009 to mid-2011 gold returned about 25% per year, and since then it’s lost about 16% per year. Houses were recently seen as investments whose value could only go up.  Heck, 17th century century Holland saw a tulip bubble where a single bulb sold for more than most people made in an entire year.

The point is that short-term returns really tell us nothing about what will happen going forward. Once peer-to-peer lending has a long history under its belt (and it has a long way to go), we might be able to understand what to expect from it. But for now, the recent history is fairly meaningless and is actually somewhat dangerous to rely on because of its lack of meaning.

2. All investments come with risk

In investing, better returns only come from a higher amount of risk. It’s a lesson that’s been taught over and over again throughout history, and there isn’t a single example to disprove it (beyond simple diversification). There is no investment in the world that will give you double-digit positive returns without also suffering big losses at some point. It just doesn’t happen and it isn’t realistic to think that peer-to-peer lending will be different.

Peer-to-peer lending has real risks. The people borrowing your money are unable to get loans otherwise because the banks deemed them too risky. You are deciding to take on that risk. It is real and it will show up somewhere down the line. Just recently we had entire banks shut down because the people they gave mortgages to couldn’t pay back those loans. For those people, the consequence for not paying was losing their home. The only consequence for a borrower who doesn’t pay back in a peer-to-peer market is a credit hit. If the default on mortgages was serious enough for banks to go under, you can be sure that at some point your peer-to-peer loans will perform poorly enough to put a real dent in your money.

3. Recent returns have fallen in line with expected risk

Since all investments involve risk, where does peer-to-peer lending rank in terms of risk involved? It’s far too early in its history to say for sure, but my best guess is that it is less risky than stocks but somewhat more risky than investing in junk bonds, which are the bonds issued by the riskiest companies.

While recent returns are not proof of anything, as I talked about above, it is somewhat useful to look at the recent returns from peer-to-peer lending relative to other investments. I don’t have hard numbers (has their been academic research into this market?), but the best numbers I’ve seen reported have been 10-12% over the past 1-3 years. Well, over the past 3 years the stock market (measured by VTSMX) has returned about 18% and junk bonds (measured by VWEHX) have returned about 9%.

This is relevant information for two reasons:

  1. Returns from peer-to-peer lending have been less than that of stocks and slightly more than junk bonds. That fits right into my guess on risk-level above.
  2. The returns from peer-to-peer lending really haven’t been anything special. They’ve simply followed the recent trend of risky investments, which has been up. Looked at in isolation, a 10% return sounds great. But when looked at in comparison to other similar investments, it seems pretty normal.

Conclusions

In my view, peer-to-peer lending is a classic example of a new fad that will generate a lot of excitement until it eventually has its big crash and people run for the hills. That’s not to say it won’t stick around. It very well may exist as an investment option for years to come, and if so there will always people who use it as part of their portfolio. But it is not a magic bullet. No investment is.

Before you get involved with any investment, understand the trade-off between the expected returns and the very real risks that are involved. If you’re seeing great returns now, know that there will be periods of rough returns later. You might be okay with that, but it’s a choice that should be made with eyes wide open. And as always, make sure the investment fits into your personal investment plan. Investing in something because other people seem to like it is never a good enough reason. Do your homework and make sure the risks involved align with your overall financial plan.

Image courtesy of nuchylee / FreeDigitalPhotos.net

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Matt is a fee-only financial planner dedicated to helping new parents build happy families by making money simple. His free time is spent building block towers and jumping on beds with his two awesome boys. If you want to learn more, you can go here.

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  • http://www.mymoneydesign.com/ MyMoneyDesign

    I remember reading about P2P lending in a Smart Money magazine article probably 8 years ago and thinking how incredible of an opportunity it must be. But then as soon as I did some online research I saw an abnormal number of people, forums, and general complaints about the default rate by the borrowers. So for years I stayed away.

    Just last year I worked up the courage to give it another shot with a petty cash pool of $1,000, but then found out that Michigan doesn’t allow it. It turns out it is not available in all states. I think that has since changed, but I quickly switched gears and turned my efforts to developing niche websites instead.

    I think there are some huge risks with P2P but the returns do entice me enough to remain curious. Perhaps I’ll work up another $1000 and give it a try someday. Like all investments, there are rules to the game to be learned. Stay within them and you will be rewarded.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      For me, the risk/return tradeoff just doesn’t fit into my overall portfolio. It has no place. I’m also pretty hesitant to put my money into something with such a short track record. I like to have a better idea of how an investment should perform before committing myself to it.

  • Alexa Mason

    I think P2P could have potential so I researched it as well and Lending Tree wasn’t available for investments in Ohio. So, I am assuming it’s not available in Ohio at all. Although it would definitely be something I would like to experiment with one day.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      I actually didn’t know that it wasn’t available in certain places. If you’re interested in trying it out, just make sure it makes sense alongside your other investments. Not every piece of your portfolio should be about maximizing returns. Finding the right balance between returns and protection is key.

  • Your Daily Finance

    Like you mentioned Matt all investments come with risks. The key is trying to be as calculated as possible in avoiding the risks. With P2P I found that investing in more loans at a smaller amount makes it easier to cushion losses. If you have 1k and invest in multiple loans at $25 it is very unlikely that all loans will default. But as usual what you invest in has to be feel comfortable and safe to the investor. If people are not sure/confident I would not do it.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Sure, diversification is a good tool with any investment. It’s more about how the asset class as a whole will perform. I would never suggest that all of your loans will default, but I do think that people will experience years with much more negative returns than they are currently expecting.

  • http://www.monsterpiggybank.com/ Glen @ Monster Piggy Bank

    I can’t wait until peer to peer lending comes to Australia. It is something that I have been really interested in, but am not sure how well it would work doing it over different currencies.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      What is so appealing about it to you? How would its behavior fit alongside your other investments? How would your portfolio be better off with an allocation to peer-to-peer lending? I’m pretty curious to hear people’s thoughts on this.

  • http://www.youngadultmoney.com/ DC @ Young Adult Money

    I have a friend who has been doing the p2p lending for quite some time now and has really enjoyed it…probably because they have had a really good experience with it! I have looked into it a bit and I think you are right – there is definitely risks that should be considered and it shouldn’t be more than 10% of your portfolio.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      For me, I’m getting my returns from stocks and my protection from t-bonds, so p2p really wouldn’t add anything to my portfolio and would actually take me away from my objectives. But for some it might be useful. I just hope your friend and others are ready for the negative years.

  • cashRebel

    Anyone that tells you P2P Lending is low risk is kidding themselves. You make avoid point that it hasn’t been around for long enough prove it’s legitimacy. That’s why I view my investment as an experiment with money im not relying on.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Sounds like you have a good approach trying it out with “play money”. That can be a good way to determine whether something actually might play a role in your overall investment plan. And as long as you’re going into it knowing the risks involved, you’re on good footing.

  • Laurie @thefrugalfarmer

    Love this, Matt. I’ve been studying the peer-to-peer lending market as we work to educate ourselves on investing, and I have some of those same reservations. Somebody, can’t remember who it was right now, wrote about his first default on peer-to-peer lending recently. Always educate yourself before you invest…in anything!

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      It’s always important to learn both the upsides and downsides to anything. Only paying attention to the upsides is how people get into trouble.

  • Holly Johnson

    I was excited about peer-to-peer lending at first. I even went as far as to put 5K in a Lending Club account. However, living in the state of Indiana means that I could only buy loans on the secondary market. I didn’t like the way that it was set up and I couldn’t pull the trigger to purchase any loans.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Honestly, the comments here is the first I’m learning of the geographical restrictions. I’ll have to look more into why those exist.

  • http://www.debtroundup.com/ Grayson @ Debt Roundup

    I wanted to get into P2P for some time, but my state doesn’t allow it. I can buy on the secondary market, but there is a reason those are there. There is more risk on the secondary loan market, so I am just not going to jump into it.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Why do you say there’s more risk? Is it primarily people who are dissatisfied with the payments they’re receiving from the loans? I don’t think people consider the secondary markets for things like stocks and bonds more risky, so the concept is interesting. Would love to hear your thoughts.

      • http://www.debtroundup.com/ Grayson @ Debt Roundup

        The ones on the secondary market usually are there because the original loan owner got rid of it because of increased risk factors or near default. I have talked with plenty of people that have given me some insight into why there is a secondary market.

        You can score some good deals on there, but you have to be very diligent.

        • http://momanddadmoney.com/ Matt @ momanddadmoney

          Interesting. It makes sense, especially for such a young market. I wonder if that’s something that would change if the market has a chance to develop a little more.

          • http://www.debtroundup.com/ Grayson @ Debt Roundup

            I am sure it will change, especially since there are more states that don’t allow investing in P2P yet.

      • Boo Indiana…

        also, as far as i could tell, there are more fees on the secondary market, as there are more middle men involved. Also, liquidity isnt so great, at least it wasnt a few months ago when i was considering it.

        I cancelled my lending club account for now – ill try it again when im no longer in indiana.

        • http://momanddadmoney.com/ Matt @ momanddadmoney

          Interesting points about the secondary market. I don’t know much about it but from what I’ve heard it’s a difficult place to buy. Liquidity is one of those things that people don’t often think about going into it but can make a big difference. Thanks for the input.

  • http://www.lendacademy.com/ Peter Renton

    As someone who has been an investor in p2p lending for 4+ years now and a full time blogger on this subject I have studied this new investment in depth. Much of what Matt says here is true – it is not a perfect investment and it is not without risk. But there are two points I take issue with:

    1. Risk and return do not share an exactly linear relationship. Sure there is some risk here but to state unequivocally that because returns are high risk MUST be equally just as high does your readers a disservice. There is a reason institutional investors are becoming heavily involved in this asset class now – the returns gained more than compensate for the risks taken. This may adjust in the future but today I believe the rewards far outweighs the risks involved today.
    2. Taking a short three year time horizon and comparing returns is not really a fair assessment. But if you are going to do that you should look back a couple more years to the worst financial crisis in 75 years. Both Lending Club and Prosper were operating in 2008 and both provided returns far greater than just about any other asset class. Lending Club had a positive return in the low single digits that year whereas Prosper had a single digit loss (since then Prosper has dramatically improved their underwriting).

    So, I wouldn’t so easily dismiss this investment as the latest fad. It provides investors with access to an asset class that was previously only available to the large banks and other institutional investors. I firmly believe it is here to stay.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Thanks for the input. It’s great to hear from someone with so much experience with the subject. I’m going to address your comments here in reverse order.

      My reason for comparing recent returns was simply to demonstrate that those from peer-to-peer lending haven’t been anything extraordinary. They’ve simply been in line with what other risky investments have been returning. I think that’s important for people to know. Otherwise, it’s easy to get suckered in because someone else is quoting their high recent returns in a vacuum.

      As for your figures for 2008, is there a public database where peer-to-peer lending returns can be verified or are those self-reported? I would take self-reported figures with a big grain of salt, but if there’s a public database that could be subject to rigourous scrutiny, like with mutual funds, that would be much more interesting. If that exists, I would love to be pointed in its direction. Regardless, the time period is still too short to make any conclusions, especially given that peer-to-peer lending had only really started in 2006, as far as I can tell. If you think that the investment’s upside is double-digit positive returns while the downside is low-positive or barely negative returns, then I think you are mistaken. Time will tell.

      As for risk and return, I would never argue that it’s completely linear all of the time. But over long periods of time it pretty much is. That’s been proven again and again. Where it strays from the linear relationship is on the downside, where you find investments that don’t provide enough return for the level of risk. But there are too many investors with too much access to information to let an investment provide outsized returns for the level of risk for too long. Based on all of the history we have, the future of peer-to-peer lending will be one of two things:

      1. It will prove to be a risky asset and the negative returns will show up sooner or later, or
      2. It will prove to be less risky than the market currently believes, in which case demand will increase and the returns will decrease.

      We have too much history available to us to think the outcome will be something other than one of those two choices.

      As for institutional investors entering the fray, I only have to point to the recent financial crisis to prove that they are certainly not immune to the exact same kind of thinking I’m warning against here. Can I sell anyone a mortgage derivative?

      Again, I don’t necessarily disagree that peer-to-peer lending is here to stay as an investment option. I just don’t think it’s anything special. I think it’s likely pretty comparable to investing in junk bonds, which plenty of people use but no one considers a magic bullet. Anyone who thinks it will give them more return for less risk than traditional markets over any extended period of time is mistaken.

  • http://www.livingrichcheaply.com/ Andrew

    I use Lending Club but I have very little money in there. It says that my returns are about 6%…I had a few defaults early own. I think it’s an interesting concept, but I wouldn’t put too much money in it. You make a good point that stocks have done better recently than returns on P2P lending. In my head, I always think that “at least it’s more than interest on my CDs” but you’re right that there’s much more risk with P2P lending.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Right, I don’t think you can compare P2P with CDs at all. They serve a completely different purpose with completely different levels of risk. A CD is a guaranteed return and is insured by the FDIC (at least if you buy it from a real bank). That money will be there when you need it. Your P2P money may or may not be there when you need it and comes with no guarantees and no insurance. Comparing the two is like comparing a savings account with the stock market.

  • John S @ Frugal Rules

    I think you’re spot on Matt! I think it can be a nice way to get a little extra diversity, but would not really go beyond 5% of our portfolio. We’ve not done it yet as I just have not educated myself on it much at all. If we were interested, I would make sure to do that first and put a little money at it, but not much in the grand scheme of thing.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Starting slow with a full awareness of the risks is definitely a good approach. I personally won’t be using it at all, as I already have both the return part of my portfolio and the defensive part accounted for. It just doesn’t add anything for me.

  • http://www.donebyforty.com/ Done by Forty

    “In investing, better returns only come from a higher amount of risk.” That’s a truth that never gets old. Want higher returns? You will take on more risk to achieve them. Want safety? You will live with lower returns to enjoy it.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Couldn’t agree more. People are always going to be looking for the thing that violates this rule and it’s just not going to happen. Sorry.

  • http://www.makingsenseofcents.com/ Michelle

    I have been thinking about getting into this, but need to plan it out better. There is definitely risk in it.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      If you’re new to investing (and even if you’re not, but that’s just me) I would make sure that you first have a healthy allocation towards more traditional investments like stocks, bonds and even REITs. Those have much longer track records where you truly know what kind of behavior to expect. Peer-to-peer lending still has a lot of unknowns, which can make it dangerous for someone just trying to learn the ropes.

  • http://theheavypurse.com/ Shannon Ryan

    Okay, I’m little bit embarrassed that I didn’t realize you were a CFP. Welcome to the Club! I am not well versed in P2P Lending. And like most things, there may be a place for it in your portfolio, but you definitely need to do your due diligence. It’s new and shiny with decent results so I can see why people are interested. Everything is cyclical and while it’s experiencing positive returns now, it doesn’t mean it necessarily always will. And as you said, I expect people will flee quickly at the first sign of trouble, perhaps even faster than they would with a more traditional investment.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      I actually not a CFP, since I haven’t met the experience requirement, but I have passed the exam and am currently a “candidate”. And there’s no need to apologize, as I’ve only just recently started putting that information out there.

      Anyways, your “new and shiny” phrase is exactly what gets me going about it. People tend to get caught up in whatever’s new and get carried away with the upside without realizing that there’s always a downside. It’s only a matter of time before the downside materializes. If you realize that going in, you should be fine. But if not, you’re potentially setting yourself up for serious financial trouble.

  • Student Debt Survivor

    There’s definitely risk and reward at play. It’s something I’d like to learn more about. Last I checked I can’t participate in any P2P based on my home state, but I’ll have to look because that might have changed.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Time will tell whether the risk is worth the reward here.

  • http://www.debtandthegirl.com/ Debt and the Girl

    I have been thinking of doing peer to peer lending. I have been interested in the return rate and am always interested in helping someone out. The risks are something to think about, though.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      I’m going to have a follow-up to this post on the importance of separating your desire to help people with your desire for investment returns. My personal view is that those things should be kept separate, but not all will agree.

  • http://Www.Plantingourpennies.Com/ Mrs PoP @ PlantingOurPennies

    I’m interested in peer to peer lending, but I think there’s also a risk in the lending company itself, though lending club did recently get that investment from Google, so at least that company seems as though it will be around for a while. I think it’s possible we might have a small portion of our portfolio in P2P in the future, but it’ll be considered pretty speculative.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      That’s a great point about the risk involved with the company itself. I honestly hadn’t thought about that and don’t know enough about what protections are or are not in place, but it would seem to have some validity. I think that if you do get into it, considering it to be speculative is a great approach.

    • Mr. 1500

      Consider that both Lending Club and Prosper have safeguards built in to protect investors. If either company goes belly up, investors still get paid. Also note that Lending Club is now profitable as a business.

      • http://momanddadmoney.com/ Matt @ momanddadmoney

        It does look like there are certain safeguards in place. That is definitely good news. I would still be worried with such young companies though. We’ve seen these kinds of things flame up and then out very quickly in the past (see the .com bubble). I’m in no way trying to insinuate that I think that will happen, as I really don’t have enough information to make an informed guess. But it’s certainly a possibility. The fact that it is a big deal that they are “now profitable” is, to me, slightly disconcerting if I’m thinking about trusting them with a large amount of money.

  • http://momanddadmoney.com/ Matt @ momanddadmoney

    Thanks for the link. I’ll have to do a little more research into what those return numbers do and do not include, but again I am by default skeptical of anything that originates purely from the companies who want you to see high returns. I would love to see a rigorous, independent academic study done on P2P returns when they have a little more history.

    As for your statement the returns outweighing the risk for the next 1-3 years, that’s a market timing strategy. Market timing is not something I would recommend people get involved with, as it has a very low probability for success and any success you do have is primarily luck. I believe it is much better for people to choose their investments based on how their long-term characteristics fit into their overall portfolio.

    • http://www.lendacademy.com/ Peter Renton

      The returns for all completed loans (June 2010 and before) are pretty much black and white. The data is publicly available and we know exactly which loans defaulted and which loans were paid in full. Calculating the value of loans that are not fully mature is more challenging and there are several different perspective here.

      I feel that it is a stretch to compare what I said to a market timing strategy. All I am saying is that I am earning excellent returns (11.09% for the 12 months ended June 30th) and I expect these returns to continue for 1-3 more years. After that time I expect my returns will gradually decrease and probably stabilize in the 7-9% range. I just don’t understand how those expectations can have anything to do with market timing.

      • http://momanddadmoney.com/ Matt @ momanddadmoney

        Maybe I misunderstood your 1-3 year comment, but to me the inference was that it’s best to get involved now because it might not be as great in the future. That, to me, is market timing. But maybe you meant something different.

        As for your 7-9% guess, that may or may not be correct, but if it is correct then it’s roughly in line with what investors should expect from the stock market. Is it your belief that investors can expect stock-like long-term returns from P2P lending without the stock-like downside?

        • http://www.lendacademy.com/ Peter Renton

          Exactly. That is why I am so excited about this asset class. It promises stock market like returns without the volatility of stocks. I know there will be plenty of skeptics who will say that is simply not possible. But here is the thing – banks have been enjoying these 7-10% returns with low volatility with this asset class for decades. Now, it is possible for individual investors to do the same.

          • http://momanddadmoney.com/ Matt @ momanddadmoney

            We’ll just have to disagree on this point. I think that we have more than a century’s worth of history telling us that it is foolish to expect market returns or better at lower than market risks. It just doesn’t happen for any extended period of time. When people start thinking otherwise, bubbles form and those people end up losing a lot of money.

  • Kevin Watts

    Good post. I have also looked into starting with p2p lending. I know very little about it. There is one thing I would like to point out in your post in which you mentioned, that once p2p has a long track record it will tell us more about it’s future performance. I have been reading Nassim Taleb’s Black Swan and he makes the argument that even a long track record of success tells us nothing about the future. He points out with the following example:

    A turkey, seemingly living in a secure environment. He gets fed for a
    thousand days and tells his fellow turkey analysts “with increasing
    statistical confidence” that butchers are your friends.

    All very predictable. Until Thanksgiving comes

    Something to think about

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      You make a great point. I would never assert that you can “know” what the future performance of any investment will be. It all goes back to the whole “past performance is no guarantee of future returns” refrain. With that said, I do think that an extensive track record at least gives you a better idea of what to expect. Certainly nothing is assured, but it’s better than having no information at all.

  • E.M.

    Good post Matt! I’ve read a decent amount of posts about p2p lending and it sounds interesting, but most people reporting on it had a solid investment portfolio to begin with and wanted to play around with something new. I guess that makes sense if you get bored with traditional investment vehicles. It’s not something I would conisider right now since I don’t have any other investments, and it would be too high of a risk to take on. Maybe in another five years!

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      It might be worth getting into in the future, but might not. I wouldn’t view it any differently than other non-stock market risky investments, such as junk bonds. Those things may or may not play a useful role for you.

  • Kim@Eyesonthedollar

    I think P2P can have a place in a diverse portfolio. I have considered it, but would probably only go forward when we have added more real estate investments.I think you would need to have a set of guidelines set up before hand so that you don’t fall victim to emotion if you are doing this type of investing.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Taking the emotion out of it is definitely important for any investment. If you know what to expect going in and have factored both the ups and downs into your planning, you should be alright.

  • femmefrugality

    Do you remember Kiva? I think it’s still around. But you could make small P2P loans to third world countries where your money could go real far. That’s probably as far as my interest in P2P goes: pseudo-charitable. Who knows what their returns look like over the period between now and my retirement.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      I’ve never heard of Kiva specifically, but I’ve definitely heard of the concept of micro-loans. I definitely see the interest in this kind of thing from a charitable standpoint and I think it’s really great in that sense. But I think separating your charitable desires from your investment desires is a good move.

  • http://edwardantrobus.co.cc/ Edward – Entry Level Dilemma

    I’ve written about P2P lending in the past and basically called the companies out there in this space a scam. The rates they charge to borrowers are ridiculously high. I thought the point was to offer lower rates by cutting out the middle man?

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Whether this is a good service for borrowers is a whole other question that I honestly don’t know enough about to have a real opinion on. I’ll have to look up your article though to learn a little more about it.

  • AvgJoeMoney

    I would love to get my hands on some P2P lending….but it’s illegal in Texas. Texas! The state that famously says, “Hey, gov’t, stay out of my way….limits P2P lending.” Our state’s hypocrisy makes me laugh.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      Haha, that kind of hypocrisy is exactly why I try to avoid politics as much as possible. What appeals to you about P2P? How do you view it fitting in with the rest of your portfolio? What does it give you that you can’t already get with other types of investments?

  • http://momanddadmoney.com/ Matt @ momanddadmoney

    What do you mean by “It can’t be any worse than the status quo”? Do you mean that it can’t be worse than other investment options out there? Why do you think that’s the case? I wouldn’t say necessarily say that it is worse, but I definitely think it has the potential to be worse than some of the long-established methods of investing.

    • Allen Demary

      Have you seen the stock market of late, Like with the debt ceiling looming. It has risks but I don’t see it as any more of a risk then other investments at this point.

      And far as just a credit hit if they don’t repay the loan, That is not true, not in all cases anyways. This is part of the terms of the place I’m using for peer to peer.

      9. Collection & Reporting of Delinquent Loans. In the event you do not make your loan payments on time, blank or any subsequent owner of the loan will have all remedies authorized or permitted by the Promissory Note and applicable law. In addition, if you fail to make timely payments on your loan, your loan may be referred to a collection agency for collection. Prosper or its agents may report loan payment delinquencies in excess of thirty (30) days to one or more credit reporting agencies in accordance with applicable law. Subject to limitations of applicable law, you authorize and agree that Prosper, its agents or a collection agency may contact you at any or all of the telephone numbers you provide to us at or after registration, or any of your other telephone numbers.

      In other words the place I am using or myself could take them to court to get the money back.

      • http://momanddadmoney.com/ Matt @ momanddadmoney

        I don’t invest with a short-term mindset, so the fact that the stock market takes short-term dips is unsurprising to me. It has been through many similar “crises” before and has always recovered. But in any event, I never made the argument here that investing in the stock market carries less risk. My argument is simply that peer-to-peer lending either carries a significant risk that many people are ignoring, or the long-term returns will be much more modest than what people have experienced recently. The best-case scenario is that it falls somewhere along the efficient frontier with a fair risk/return balance. The worst-case scenario is that it carries more risk than the return it delivers. Time will tell.

        As for your second point, this is merely a reality that the lenders will do what they can to collect their money. That’s to be expected and does not contradict my statement. From the borrower’s prospective, the options are to pay back the loan or take a credit hit. I’m not sure what you’ve shown to be different.

  • http://prairieecothrifter.com/ Daisy @ Prairie Eco Thrifter

    Taking any sort of loan is not the best idea, unless it’s for a business. I don’t know that I’m a fan of peer to peer lending but I’ve never done it, so maybe that’s why.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      I haven’t really formed an opinion on whether this service might be a good idea for borrowers. I’ve really just started looking into it as an investor. I do agree that it’s typically not a great idea to take out a loan unless that money will give you some kind of return that outpaces what you’re losing in interest and opportunity cost.

  • Tie the Money Knot

    The most recent returns are enticing. Like anything else though, we can’t get something for nothing. There is something that we are trading in exchange for such returns, and it’s important not to forget those risks!
    Separately, I do wonder if rates will go down in the future as this goes more mainstream.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      I think rates going down is definitely a possibility, as is more risk showing up in the form of highly negative years. Maybe both. It’s impossible to predict exactly, but as you say we are definitely not getting something for nothing.

  • http://momanddadmoney.com/ Matt @ momanddadmoney

    What about it is exciting to you?

  • Greg

    I haven’t jumped into this just yet but would like to. I’ve heard many complaints that one of the toughest parts is finding the loans to invest in. I assume this is because of the popularity. Overall, I like the idea because it takes some of the action away from the banks.

    • http://momanddadmoney.com/ Matt @ momanddadmoney

      I’ve heard the same thing about it being tough to find loans, especially once you’ve got a significant amount of money invested. As for taking action away from the banks, I can understand the appeal from a “social good” standpoint but that doesn’t necessarily make it a good investment.

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