The Peer-to-Peer Lending Numbers They Don’t Want You to See

falling investment returns

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A few weeks ago I gave some of my thoughts on the current enthusiasm around peer-to-peer lending. My main goal with that article was to warn people against getting caught up in the “can’t miss” attitude that often surrounds something new, particularly a new investment opportunity that’s delivered promising early returns. It’s not that peer-to-peer lending can’t be part of your investment portfolio, it’s that you shouldn’t expect it to be your golden ticket.

Since I wrote that article I’ve only seen more glowing reviews of peer-to-peer lending, again extolling the high short-term returns earned by the people singing its virtues. These reported returns have always seemed a little fishy to me, so I decided to dig a little deeper. Today, I want to share some of the results I found that the peer-to-peer lending marketers hope you never see.

The peer-to-peer lending returns they don’t want you to see

In my last article, I questioned whether there were publicly reported return results for peer-to-peer lending. It turns out there are, as one of the commenters pointed out. You can see them here, and they look pretty impressive, ranging mostly from 6-11% in the last few years.

But I found another site that lets you dig into those numbers a little deeper. The main purpose it seems is to let you experiment with different filters so you can design your own personal peer-to-peer investment plan based on past results. But I was interested in one specific question: what has the return been on loans that have completed?

Why was I interested in this specific question? Well, peer-to-peer lending is a young business. As a result, most of the loans they’ve given out have yet to run their full course. This opens them up to reporting much higher returns than you should really expect, as younger loans will have had less time to default. Realistically, how likely is it that someone will default on their loan just 6 months in? It’s much more likely that they will default after a couple of years. And given that all of the loans you give out will eventually have to end one way or the other, I thought that limiting the return numbers to only the loans that have actually completed might give us a more realistic idea of what to expect over the long-term.

So I used the filters to limit to all loans that either were fully paid, had defaulted or had been charged off. I used no other filters so that I could get as complete an understanding of these completed loans as possible. You can see the exact filter I ran by clicking here, but I’ve also included a screenshot of the results below:

peer-to-peer lending returns

When limited to completed loans only, every single loan grade except for the safest grade (the grade represents the loan risk, with a higher letter indicating less risk) has produced a negative return. The total return across all completed loans is -2.68% per year. That certainly paints a different picture than the 6-11% return seen previously.

**UPDATE**: One of my commenters, Peter Renton, pointed out a flaw with my research. He made the point that by including loans issued recently and limiting to only completed loans, I was skewing my results negatively because I was including recently issued loans that had defaulted but not recently issued loans that were still in good standing. Basically, my error is the same as what I have said that peer-to-peer lending sites are doing in skewing their results positively, just on the other end of the spectrum.

The solution to this issue is to limit my search to loans that were issued long enough ago to have had a chance to complete.The problem with this in regards to peer-to-peer lending specifically is that it leaves an incredibly narrow time frame to evaluate, and also doesn’t let you properly evaluate the performance of 5-year loans, as they don’t have enough history. It also doesn’t account for the massive influx in borrowers over the past year or so. The data in the new screenshot below only accounts for 5.6% of the total amount of money Lending Club has lent out over its history, most of which has been very recently. That leaves a lot of question marks as to where this thing is really going and only time will give us more answers.

Still, applying a fairer limit does paint a different picture, with more positive returns than I initially indicated here. I have included a new screenshot below that includes only completed 3-year loans issued between January of 2007 and August of 2010. I will let you draw your own conclusions. I am letting the rest of my post stand as is so that my original message is preserved.

peer-to-peer lending returns 2


What do these numbers tell us?

First of all, I need to mention that just as with the positive returns people have experienced over the past couple of years, short-term results don’t prove anything. The poor returns earned over the past few years on completed loans cannot be used as definitive proof for what peer-to-peer lending will return going forward. It’s still in its infancy and we have much to learn.

With that said, it doesn’t bode incredibly well for the long-term prospects. After all, the loans you give out have to complete at some point. The negative success rate on such loans should give you strong pause about what will happen to your returns once you’ve spent a little bit more time with them. If peer-to-peer lending’s advocates presented these numbers instead of the return numbers that are heavily skewed towards newer loans, would people be as excited about this investment? I seriously doubt it.

Just to be absolutely clear on this topic, Lending Club itself has admitted that their reported returns are skewed in the positive direction. Allan Roth explains this in his excellent article summarizing his own experience with peer-to-peer lending. So you don’t even have to take my word for it. You can rely on the word of the very company who benefits the most from these inaccurately reported returns.


As with anything else, it’s important to take the time to do your own research before putting your money at risk. This is especially true when the thing you’re considering is being sold to you hard and even more true when the numbers presented seem a little too good to be true. I don’t honestly know the long-term prospects for peer-to-peer lending, but it will not be the magic bullet that gives you better returns for less risk. And a closer look at the numbers suggests that there may be some difficult times ahead for anyone who’s committed a significant amount of money to it.

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65 Comments... Read them below or add one of your own
  • cashRebel September 11, 2013

    Great analysis Matt. I kept trying to think of why your process was invalid, but I’ve got nothing. You’re probably right on this one. I guess the million dollar question is, will that trend continue? It’ll be fun to find out.

    • Matt @ momanddadmoney September 11, 2013

      I did make an oversight in terms of including recent loans that have defaulted but not recent loans that are still in good standing. I have updated the post to explain this.

  • Stuart Laing September 11, 2013

    A lot has been written about peer to peer lending. And there is a sense that many people are jumping on the bandwagon without researching it properly.

    The default rates for lower grade loans is chronic. If a traditional bank lent out money with default rates as high at 22% or 28%, it would either collapse or need a major bailout.

    Only time will tell as the market matures. It’s likely to be heavily cyclical like the insurance market, whereby you have to make big returns during the good times to cope with the losses during the bad times.

    • Matt @ momanddadmoney September 11, 2013

      I think you’re right in the sense that any big returns will be accompanied by periods of big losses. That’s just the way the investment world works. We’ll have to wait and see how that manifests itself specifically for peer-to-peer lending over the long term.

  • Holly Johnson September 11, 2013

    That is interesting. I put 5K in Lending Club earlier this year then took it out after realizing that I didn’t like the fact that I could only buy on their secondary market (I’m in Indiana). Anyways, it’s good to be skeptical of anything that sounds too good to be true. Negative returns don’t sound that great.

    • Matt @ momanddadmoney September 11, 2013

      I think it’s important to do your own research and make sure you get balanced insight. Anytime something has some success there are lot of people ready to jump on the bandwagon and proclaim it as the next big thing. It’s always good to be skeptical in those situations.

  • jefferson @seedebtrun September 11, 2013

    Great post, Matt.. I am so glad that I read this.. I had been considering going this route as a short-term low risk investment. But the default rates are definitely a non-starter.. Yuck!

    • Matt @ momanddadmoney September 11, 2013

      It’s definitely not a “short-term low risk investment”, but it also doesn’t appear to be quite as bad as I initially proposed. I’ve updated the post to include a more balanced view, but in any case I would categorize peer-to-peer lending as speculative at this point with its minimal history and therefore not the right place for short-term savings.

  • Grayson @ Debt Roundup September 11, 2013

    Awesome article Matt. This is one of the things that made me hold back on P2P (also my State is not very favorable on the whole thing). I realized that these returns on on things that are just too young. More data is needed and I think you are doing a great job digging in.

    • Matt @ momanddadmoney September 11, 2013

      Thanks Grayson. You should check out the update to get a more balanced view that corrects a mistake I made in my filtering. But I still 100% agree with you that more data and more time is needed before we start to have a real sense of how this investment will behave.

  • Kim@Eyesonthedollar September 11, 2013

    It does make sense. Everyone is really good in the beginning of anything, then the true colors emerge. I have read quite a bit about P2P and I think it would be fun, but I haven’t put any money into it because there are really no long term results. Thanks for pointing that out.

    • Matt @ momanddadmoney September 11, 2013

      “I haven’t put any money into it because there are really no long term results”. I think that’s a very good reason to be cautious. Things are rarely as good or as bad as they seem based on recent history. It’s best to take a long-term view and that’s something we don’t have yet with peer-to-peer lending.

  • Andrew September 11, 2013

    Interesting analysis…I like that you did some digging and research into it. I also see many glowing reviews of peer to peer lending…so it’s good to read a contrarian view, especially one that is well-researched. I also have an account with lending club, but I only put a couple hundred dollars in it…I know many who have a lot invested in it. I have about a 6-7% return. It’s kind of fun…and I do it for the same reasons that I still invest in individual stocks (also a very small portion of my portfolio). Also, on lending club, I generally only invest in the safer loans.

    • Matt @ momanddadmoney September 11, 2013

      I think that kind of approach is the right way to invest with something like this. Keep it small and take your time to learn how things work.

  • John S @ Frugal Rules September 11, 2013

    Very solid post Matt & I love your research. I would agree that the time we have to analyze the data just shows that P2P lending is simply too young to view it as a viable investment option if you’re talking a significant portion of your investment portfolio. I’ve seen the glowing reviews and it really only makes me wonder what’s below the surface and if the numbers are really as good as claimed. When many speak so glowingly I generally look the other way if not doing the research myself.

    • Matt @ momanddadmoney September 11, 2013

      Completely agree. When you see everyone hopping on a bandwagon, that’s exactly the time to be most skeptical.

  • Mrs PoP @ PlantingOurPennies September 11, 2013

    Very interesting. Are the durations of the completed loans significantly different from the duration of the loans they are currently writing?

    • Matt @ momanddadmoney September 11, 2013

      As far as I can tell, they started with 3-year loans and at some point added 5-year loans. You can check out my update for a little more detail on a mistake I made in my initial filter, but the gist is that we don’t have enough history to properly evaluate the 5-year loans and we have only a tiny piece of the history with which we can evaluate the 3-year loans. Bottom line: we simply need more time to even begin to make conclusions on how this investment might perform over the long term.

  • Michelle September 11, 2013

    Interesting! I have been thinking a lot about getting into peer-to-peer lending. I’m just nervous!

    • Matt @ momanddadmoney September 11, 2013

      As long as you keep your investment small and consider that money to be very speculative, I don’t think there’s any harm. Just don’t go into it expecting miracles. It has almost no history with which we can do a proper evaluation so it really has to be considered very speculative at this point.

  • Jack September 11, 2013

    Thanks for the thoughtful analysis. My primary concern with P2P lending has been how it will change and it becomes more popular and attracts people interested in abusing the system from the borrower side. I’ve also heard of issues with it being so popular there are too many lenders chasing too few quality borrowers.

    Still won’t keep me from testing the waters, albeit at a small scale.

    • Matt @ momanddadmoney September 11, 2013

      I think you raise a good point. The explosion in popularity certainly brings up a lot of questions. We don’t really know the quality of these borrowers, how the increased demand with affect interest rates, or really much at all about where this is going. That doesn’t mean it won’t end up as a worthwhile investment, it’s just that it’s very speculative at this point.

  • Done by Forty September 11, 2013

    Negative returns? That’s something you don’t hear about too often with P2P. I’m really glad you followed up with this article — it confirms my belief in the idea that risk and returns go hand in hand.

    • Matt @ momanddadmoney September 11, 2013

      Check out my update to see an explanation of a mistake I made in my filter that skewed results too far negative. Still, I think it’s a given that risk and return go hand in hand. There may be short periods of time where they don’t, but the market always sniffs those out pretty quickly.

  • Emily @ evolvingPF September 11, 2013

    Scary stuff! My husband and I were interested in P2P lending for some play money investing, but we were disallowed in our state. By the time we can consider it again I hope the industry will have a longer track record so we can see what the returns really are, like you have done. But we would never consider putting a large chunk of our savings in such a new type of investment.

    • Matt @ momanddadmoney September 11, 2013

      I think you’ve got the right mindset Emily. New investments like this can be fun but are not the place to put your life savings.

  • Shannon Ryan September 11, 2013

    As always Matt, a thorough and thoughtful analysis. I think my biggest concern with P2P lending has always been that fact that so many people see it as their “golden ticket”. I don’t think P2P lending is necessarily bad, but it is a infant without a long-term track record. Short-term returns are always the most volatile – sometime they are very good returns and sometimes they are awful. Neither necessarily indicate what the long-term result will be. You have to assume loan defaults will occur and I would think at a higher rate than a traditional loan since in many instances these individuals weren’t able to get traditional loans.

    • Matt @ momanddadmoney September 11, 2013

      “I think my biggest concern with P2P lending has always been that fact that so many people see it as their “golden ticket”. I don’t think P2P lending is necessarily bad, but it is a infant without a long-term track record.” Couldn’t have said it better myself. I honestly don’t know what the future of peer-to-peer lending will be, but I feel extremely confident that it’s not going to break the investment laws we’ve learned over and over again throughout history. It may end up as a useful tool, but it will not be the “golden ticket” some are claiming it to be.

  • Matt @ momanddadmoney September 11, 2013

    Thank you for your input Peter and you’re right, my filter was unbalanced. I have added an update to the post to explain this.

    • Peter Renton September 11, 2013

      Thanks Matt. I appreciate you updating this post to provide a more complete picture.

  • Slug @ SunkCostsAreIrrelevant September 11, 2013

    Alright, when you say, “peer-to-peer lending is a young business” what are you comparing it to? I mean it’s relatively young, but I joined Prosper back in May of 2006. That’s over 7 years ago. And, those were definitely the Wild West days where we as lenders had to do most of the borrower vetting because all Prosper cared about was closing loans. They misrepresented their returns for years always putting the best data forward while ignoring a raft of defaults. You are right to question the data, but honestly the P2P companies have come a huge distance over the years.

    • Matt @ momanddadmoney September 11, 2013

      I am comparing it to the traditional investment options out there. Not only is peer-to-peer lending only 7 years old, but the vast majority of their lending has happened in just the last year or so. That means we have pretty much no reliable historical return data to look at when it comes to this investment class, which means that you’re taking on a lot of risk as an investor. It may very well end up as a viable investment alternative, but we just don’t know at this point.

      • Slug @ SunkCostsAreIrrelevant September 11, 2013

        You also need to know that there are key differences in borrowers dependent upon when they entered the system. Many borrowers from the early days would have no hope of getting through the vetting that goes on today. So, historical returns may not be representative based on changes in P2P lending standards and background checking. I would posit that today’s borrowers at almost any grade are probably better than those that got in several years ago.

        • Matt @ momanddadmoney September 11, 2013

          It’s certainly possible, but impossible to know at this point with the incredible number of new borrowers for whom we have no historical data. There are reasons these people haven’t gotten loans elsewhere. It doesn’t mean it won’t work out, but it does mean we need to be cautious.

          • Slug @ SunkCostsAreIrrelevant September 11, 2013

            Couldn’t agree more. Caution is key. I wish someone had warned me more fully.

            One final thought. The main reason I don’t do the P2P thing now is the ridiculous amount of work it took to do my taxes on each individual loan. I’m very curious to know if that has gotten any easier. TurboTax was no help at all.

          • Matt @ momanddadmoney September 11, 2013

            Excellent cautionary tale. I can see parellels between those first couple of years and what we’re running into now the with explosion of the industry. I certainly hope these companies have a better handle on what’s going on now, but I wouldn’t bet anything on it.

            I have heard about the difficulty with taxes from other sources as well. I don’t have any experience with it so I can’t really relate, but if anything it sounds like there’s a business opportunity there to help people out.

          • Slug @ SunkCostsAreIrrelevant September 11, 2013

            Ha! Love the entrepreneurial spin!

  • Nick @ September 11, 2013

    Very interesting. I haven’t jumped into P2P lending yet, but this certainly gives me another way to look at things before I do.

    • Matt @ momanddadmoney September 11, 2013

      Slowly is definitely the way to get in, if at all. I certainly think you can create a great portfolio without ever including peer-to-peer lending, but I don’t fault people for being interested in trying it out.

  • Lindsey@ Sense & Sensibility September 11, 2013

    This is a nice reality check on the latest investment/lending craze. Like you say, it’s too new to be conclusive but it’s not all sunshine and rainbows. I haven’t looked into it too closely but I’m curious to know how they calculate the “Grades” for people/companies.

    • Matt @ momanddadmoney September 12, 2013

      I’m not sure of their exact formula for determining the different grades. It will be really interesting to see how they have to adjust with the huge number of new borrowers they’re getting.

  • moneystepper September 12, 2013

    It certainly seems that this form of lending is unproven. The lack of formal regulation, especially in the earlier years in P2P lending, also raises concern.

    The average 6.42% rate is much better than you could get from fixed term interest rates at banks, but it does indeed carry a much greater level of risk.

    Nice to see a balanced (even if initially not perfectly accurate) appraisal of this form of lending.

    • Matt @ momanddadmoney September 12, 2013

      Your point about the higher level of risk is the important one. It’s a completely different kind of investment than a savings account with a bank. Much closer to stocks or junk bonds.

  • DC @ Young Adult Money September 12, 2013

    Really appreciate you adding the update in this post. I’ve definitely posted something and had people point out where I might have missed something or forgotten a variable or whatnot, so it’s always nice to correct it and show a “fuller view” of the situation.

    • Matt @ momanddadmoney September 12, 2013

      Thanks DC. We all make mistakes, we just have to own up to them. Hopefully the additional info is helpful.

  • Laurie @thefrugalfarmer September 12, 2013

    Love this, Matt. Of course the peer-to-peer lending groups will try and give us the best picture. It’s so important for those looking to invest that they play “devil’s advocate” and try and see through the rose-colored glasses, and avoid any hype. Reminds me of all of the commercials, etc. that used to be run saying gold was the “golden ticket”.

    • Matt @ momanddadmoney September 12, 2013

      Yep, there’s always a “hot investment” of the day, it just changes all of the time. If nothing else, I hope people take away the fact there there is no golden ticket. Every decision involves a trade off.

  • Maverick September 12, 2013

    Makes me think that borrowers will be seeking loans with the intent to default. Really, what’s stopping this from happening? Seems like THAT is the way folks will MAKE money in peer to peer!

    • Matt @ momanddadmoney September 12, 2013

      I believe, though I’m not 100% sure, that that actually did happen in the very early days of the business. I would think the companies have figured out how to mostly weed those people out by now though.

  • Edward - Entry Level Dilemma September 12, 2013

    My major complaint continues to be with the interest rates they charge. For those with poor credit, the rates can be as high as credit cards. And then we wonder why the default rate is so high? It is just setting people up for failure.

    • Matt @ momanddadmoney September 12, 2013

      I don’t know much about the borrowing side of things. But a quick look at Lending Club’s borrower page seems to show pretty high rates. For me, this goes back to one of my points in my original article that the people borrowing here are typically unable to get loans elsewhere, which makes it very risk for both the borrower and the investor.

  • MoneySmartGuides September 12, 2013

    I invested in a few loans about 5-6 years ago. In all of the cases, I received my money back plus the interest. I only invested in higher quality loans and only invested a small amount in a handful of loans because I was skeptical. My state has outlawed me from investing in the loans anymore. I’m not 100% I still would invest if I had the opportunity or not.

    • Matt @ momanddadmoney September 12, 2013

      I won’t be investing simply because the characteristics don’t fit into my investment plan. I take my risk with stocks and use T-bonds to add stability. P2P lending just doesn’t have a place.

  • Pauline @ MakeMoneyYourWay September 12, 2013

    It is really hard to judge a new business, I am interested in p2p because it looks like a good way to diversify but haven’t done enough research yet to feel safe with my investment.

  • Free Money Minute September 12, 2013

    Thanks for presenting both sides Matt. I still like the idea of peer-to-peer lending as it cuts out the bloated middle man of the big bank with the larger markup. Over time, I see this becoming a better competitor to big banks but not returning as much as it becomes more popular. Competition is always good!

    • Matt @ momanddadmoney September 12, 2013

      I could certainly see it enduring as a viable business model, though it still has a lot to prove. But that’s a separate question from whether it’s a useful investment tool. We’ll see.

  • Pretired Nick September 12, 2013

    Interesting analysis. I’ve often wondered what the returns would look like down the stretch. I’ve often found sketchy borrowers start out with good intentions, then lose interest, start paying late and eventually disappear. So a longer term view of this market is going to be critical. I still might try a small amount at some point just to see for myself.

    • Matt @ momanddadmoney September 12, 2013

      We definitely need some more time to see how this is really going to play out. But I don’t think there’s much harm in trying it out with a small amount of money.

  • Walt@ My Wealth Desire September 12, 2013

    I have short experience in lending before. We lend money to my wife’s coworker and we asked 10% for two months. Though we earned small amount from our initial money we are happy because we help them. Usually, they need urgent cash so they come to us.

  • Alexa Mason September 13, 2013

    Peer to Peer lending does appeal to me but I think that probably because it is new and edgy. But, when I start to invest I’ll probably go the safe route.

    • Matt @ momanddadmoney September 14, 2013

      Peer-to-peer lending isn’t necessarily riskier than stocks. We really don’t know at this point. But stocks and other more traditional investments have a proven track record where you know what kind of return you’re getting for the risk. With peer-to-peer lending we just don’t yet know.

  • The Student Loan Sherpa September 14, 2013

    Matt, this is fantastic analysis. I was definitely drinking the peer-to-peer cool aid, and this is a great reminder that it isn’t a golden ticket.

    I especially appreciate the fact that you took reader’s comment, admitted a flaw, and used it to make your work more accurate/insightful. You scored some major credibility points with me today.

    • Matt @ momanddadmoney September 15, 2013

      Thank you Michael. The reader was pretty obviously right about my mistake so it was only fair to include the update. Thanks for the kinds words.

  • Matt @ momanddadmoney September 26, 2013

    Thank you Stu. I won’t argue with the possibility of it playing a role in someone’s portfolio. My main objective is to warn people against getting caught in a craze thinking that something can only go up. That just doesn’t happen. We will see what P2P’s future is over the next several decades.

I’d love to hear from you, please leave a comment