Anyone Use Peer-to-Peer Lending?

Here's a piece from MSN Money about peer-to-peer lending -- people borrowing from other people rather than borrowing from a bank or some other organization. Here's their summary of what's in it for both the borrower and the lender:

Lenders receive better interest rates than they would in savings accounts, and borrowers pay lower rates than they would to traditional lenders.

As many of you know, LendingClub is a sponsor here at Free Money Finance, so I have a growing interest in this topic. As a lender, it makes me wonder if I can get a better return rate than my other (rather limited) options for the debt-related portion of my portfolio. But I'm not sure -- seems like defaults could be big (the guy in the story was borrowing because he was out of a job -- yikes!)

So let me have your wisdom -- anyone out there used peer-to-peer lending either as a borrower or a lender? What are the positives and negatives associated with this system?

Comments

[Traciatim]

I think the risk is too great unless you work like a bank and only lend to high credit rating people. Lets say you take 500 bucks and lend it to 10 different people at 10%. You think that in a year you will have 550 bucks. What happens if only 1 loan (10%) defaults? You earn nothing for the year. Screening these will be very difficult unless you set yourself strict rules to only look at profitability and not the neediness of the sob story from the person.

http://www.mymoneyblog.com/archives/2008/03/prosper-p2p-lending-update-2-scary-graph-and-stats.html

their conclusion:
"Even AA loans have ~10% defaulted after 1 year."

[Valerie]

I once lent a friend $300 with no interest, and then also sold him my old car for $1000. We did not have a written contract, but I was close enough with him to trust him immensely. He did not actually pay me back until I asked for the money, which he then paid immediately, and he paid for the car in two $500 installments three months apart. Based on this, though, I would not lend someone money like this again unless I had a contract; it's a little risky.

[cb]

A little risky and bad for relationships.

[Strick]

Definitely wouldn't lend to people I know for the many obvious reasons.

As far as using these sites to lend to folks I don't know, doesn't seem to be a efficient investment vehicle. Either I'm taking a lot of risk by loaning out a lot of money to one person (who may default and thus destroy my overall return), or I'm spread so thin among so many borrowers that the time it would take to do the due diligence on each of them wouldn't be worth the returns. For example, splitting my investment into just $100 per borrower would mitigate my risks, but is the extra 5%-10% of return ($5-$10/year) worth the time it takes to read their details and do the deal? Sounds like something a bank can best make work given their volume and availability of funds (and it seems like a lot of them aren't any good at it either given the failures).

[Veteran Military Wife at Life Lessons of a Military Wife]

I lend on a peer to peer site, and even those with an excellent credit rating can default...I've got only two out of 20 defaulted (which is considered more than excellent)...and that made my 21% interest rate drop to...well, you get the picture...I am now losing money. So, in my opinion...it's not worth the risk. Do it only with "play money" you can afford to lose. We have two guys on the site that have lent over a million dollars each...many of their loans at the $50 to $100 range, so you can see they have TONS of loanees...you should see their stats!

As someone doing the borrowing though...I can see where this is a great opportunity to get a better than average rate.

[Alan]

I have lent with Lending Club, but like others mentioned its only for "play money" that I'm not worried about losing.

[thomas]

If banks with millions/billions in capital don't think these people are worth the loan, I can't imagine myself sponsoring a loan to them. Clearly there are reasons they are not qualified.

[dk from lendingclub]

Lending Club is very stringent with their borrower requirements. Many people's bad experience with peer-to-peer lending was with a different company. Lending Club borrowers must have a minimum 660 FICO score, and that is just the first hurdle.

All the stats can be found here: https://www.lendingclub.com/info/statistics.action

As you can see, currently defaults are just a hair over 2.5% since launch. Obviously that number will rise some as loans age, but we are committed to making our lenders happy. And happy lenders mean positive returns.

DK
Product Ambassador
LendingClub.com

[dk from lendingclub]

Lending Club is very stringent with their borrower requirements. Many people's bad experience with peer-to-peer lending was with a different company. Lending Club borrowers must have a minimum 660 FICO score, and that is just the first hurdle.

All the stats can be found here: https://www.lendingclub.com/info/statistics.action

As you can see, currently defaults are just a hair over 2.5% since launch. Obviously that number will rise some as loans age, but we are committed to making our lenders happy. And happy lenders mean positive returns.

DK
Product Ambassador
LendingClub.com

[Jeff]

I just ran a test using LendingClub's data to test DK's claims that their results are better than Prosper's. I looked at all loans originating from June 1, 2007 through Dec 31, 2007 and looked at at their status 1 year after they originated. This is a total of 580 loans valued at just over $3.4 million. Here are the results:

88% of loans were current or prepaid (513 loans)
1.2% of loans were 15-30 days late (7 loans)
5.5% of loans were 30+ days late (32 loans)
4.8% of loans were in default (28 loans)

So using a similar comparison to the study looking at Prosper loans 1-year out which found 20% of loans to be 30+ days late or in default, LendingClub is somewhat better with only 10.3% of loans 30+ days late or in default. If you look at the amount of these bad loans, it is even worse encompassing 11.5% of the total amount lent.

However, it is worth noting that all A grade loans were current at the one-year point. The one year rate of loans being 30+ days late/defaulted at LendingClub by credit grade are:
A: 0%
B: 6.45%
C: 10.22%
D: 12.37%
E: 14.43%
F: 19.15%
G: 14.29%

So while DK is correct that their results are better than Prosper, they are nothing to be overly proud of, and the 2.5% default rate he quotes is skewed downward by loans that haven't been around for 1 year or are still hovering in the late-stage without having reached the default point yet.

Personally, the results of my own experience of investing a few hundred dollars (to have enough to obtain a good sample of loans) in LendingClub and Prosper are similar. I had 19 LendingClub loans and at the 1-year point 2 were in default (although in the following 2 months 3 more stopped paying so I'm now at above a 25% non-payment rate). I had less loans with Prosper - just 4 - although after almost 2 years they have all paid on-time, but I consider myself to be the exception rather than the rule on my good-fortunes with Prosper.

I was a huge advocate of peer-to-peer lending, and I think that in time they could grow to be a major player in banking. However, they aren't there yet - I think that borrowers don't yet have the same fear of defaulting on these loans like they do with defaulting on bank loans - and unless P2P lenders can find a way to reduce their default rates, it will be hard for them to be seen as a serious investment vehicle.

[Eve]

My husband plays around on Prosper and didn't have any issues until the economy started to tank. He now has several loans that are in default and the website has collection agencies that do all of the work for you at no cost, but it's still discouraging. He didn't put in a whole lot of money to start and has just re-invested whatever he earned back into the account, so if he loses everything, it's not that big of a deal, but it's definitely risky, especially now.

[Matt SF]

I use prosper and I've got a few "subprime loans" that are doing very well. Most are loaned to people who started their own business with credit above 650 or folks who borrowed specifically to raise their credit ratings.

I'm making about 25%, and have 1 loan that is 2 months late, but that's only 1 out of 10 loans to date. My loans were only a test run and I will probably add a few more when the quiet period is over.

To Eve's comment above - Prosper's collection services aren't free. They're about 15% of the past due amount.

[ski]

Lend with Prosper.com. Have about 12 loans open/closed within past 2 years. One has defaulted and I lost about $54 of an initial investment of $500 which is spread across 12 loans. Takes a lot of work and I really don't need another account to manage. Buy hi-yield muni's. Pulling out as 3-year loans mature.

[Leon]

I was a big fan of the concept until I got burned on Prosper. Their default rates were too high and I did not know how low to bid for a loan.

Then I tried Lending Club about a year ago. A couple of things I like about this new site: 1) No bidding, they figure out the right price for the loan and you take it or leave it, 2) Smaller amounts per loan ($25 instead of $50) and 3) Better borrowers (no sub prime, and apparently better credit review) and 4) They now have a secondary market

So far, I'm faring better on LC. After a year, I have about 5 loans (out of 100+) in default/charged off state. My target interest rate was about 13%, but considering Lending Club's fees and defaulted loans, I'm making around 8-9%, which is double what I was making at Prosper.

OVerall, it's a learning curve and proceed with caution, but if used well, it is an interesting opportunity to make money.

[Lawrence Knowlton]

I lend with LC since 3/08 and have had great luck so far (yes, knocking on wood) with no defaults/late payments. I just wish there was a calculator on the site that would show you what your effective rate of return will be. Amortization, if I'm doing my crude calculations right, is roughly making the rate of my return near half of the funded loan's interest rate (13.27 = 7.25).
A true and consistent means to do a quick effective rate of return provided by LC online would be very much appreciated. I believe this would help people get a better understanding of how it all works and allow them to make better planning decisions. Thanks!