P2P Followup: Growing up is hard to do

June 10, 3:52 PMSF Personal Finance ExaminerBarbara Bryn Klare

Previous Next

7 comments Print Email RSS Subscribe

Subscribe

Get alerts when there is a new article from the SF Personal Finance Examiner. Read Examiner.com's terms of use.

Email Address   Include other special offers from Examiner.com Terms of Use

David G., an anti-trust lawyer in Minneapolis, is a lender through Lending Club. Overall, he rates his experience a 10 out of 10 and is pleased with his "solid return" of 13.25%, which is way better than his current stock/ETF portfolio is doing. He praises the concept of "doing well while doing good," also mentioning KIVA, the micro-loan site out of San Francisco. He enjoys helping all kinds of people with starting a business or dental work and feels that even helping with credit card debt is good "considering this economy." None of his notes have gone into default, but one went into the grace period twice - but has since gotten caught up.

But he only has a small portion of his available investment money in P2P. What's it going to take for investors to put more than a "toe in the water"?

Investor education plays a big part. DR (of doughroller.net fame), who follows both Prosper and Lending Club in his personal finance blog and invests in both, has thought a lot about this problem (he has less than 5% of his portfolio in P2P). He discusses risks and concerns in his article, "How I Overcame My Fear of Lending Money on Prosper.com." It all boils down to being able to properly assess risk, he believes, especially for Prosper. "You need to do the research, and set your rate and not be swayed downwards." Most people aren't set up to do that, or their emotions get in the way. "With social lending, there is a sympathy factor. You can give loans based completely on what someone is saying in their statement." That can make for good or bad investing. DR also recommends that potential investors view P2P as its own asset class, "unlike investors are used to, even corporate or municipal bond bond investors. P2P loans are high-yield bonds, with many of them more similar to junk bonds than anything else."

Finding out about P2P is still not that easy. For the most part, potential lenders and borrowers are younger, high income, internet-savvy and already know their way around online investing and alternative investments.  

Luckily, Mike F., an IT consultant in San Francisco, read about Lending Club in the newspaper. He needed $10K to put solar panels on his 2-unit building in the Mission, but due to his other home loans, he couldn't get another conventional loan even at his credit union. His FICO score is around 790, putting him in the super-prime category. He gives Lending Club similarly good marks, and was excited by the social lending concept and the sense of cooperation. "110 different people loaned me the money." The loan process was quick, and his panels were installed in November.

These are two success stories. But P2P is still in its infancy. Two P2P sites - Prosper and Loanio - are stuck in quiet periods, or "timeouts" you could say. Pertuity Direct, in the #3 spot, is just a few months old and its model is just finding its legs in the market. Lending Club goes back two years but their secondary market for notes is still young and needs better explanation. "Lenders need to fully understand how premiums and discounts really work, " DR comments. Lending Club's numbers are good - no, make that great - but their reputation is built on super-strict requirements for borrowers.

If P2P lending really is going to grow like predicted, it has to reach out and educate - and somehow manage to include - the mainstream. "When I can loan money to my elderly neighbor for her fence, P2P will really have grown up," says an investor. And I agree.

New to P2P? Moolanomy Personal Finance blog has a good introduction to P2P lending.