Is P2P Lending So Successful That It Doesn’t Need You Anymore?

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lcvsprBeing a peer-to-peer lender been a bumpy ride. Prosper Marketplace was first, but if you were an early investor/lender you’d have been lucky to have gotten back what you put in as most people had negative returns. Then came LendingClub with stricter credit standards and preset interest rates. Both companies operate with similar structures now and appear to have created a viable business model. In fact, LendingClub is planning an IPO with their last funding valuation at $3.8 billion. That’s pretty rosy considering they made just $7 million of profit in 2013, their first year of profitability in 7 years.

I’m not a big lender but I have invested over $15,000 of my own money into P2P loans. In the beginning, I would read every single loan listing as it usually included a story about what the borrower was going to do with the money (pay down debt, start a new business, buy a 200 sf tiny house). After a while, I started using automated software to match with loans, but it still felt like individuals lending money to other individuals. Today, a significant portion of loans are sold to institutional investors like hedge funds, pension funds, and even banks according to the New York Times article “Loans That Avoid Banks? Maybe Not“:

At Prosper, which has been courting institutional lenders over the past year, more than 80 percent of the loans issued in March went to those firms. More than a dozen investment funds have been formed with the sole purpose of investing in peer-to-peer loans. […] Santander Consumer USA, the United States arm of the Spanish bank, has an agreement to buy up to 25 percent of Lending Club’s loans.

I spoke to a LendingClub representative, and they stated that their investor base is currently “about 1/3 direct retail investors, 1/3 high-net-worth investors, and 1/3 institutional investors.”

Here’s a thought experiment: If somebody like Chase Bank goes to a P2P lender and buys a bunch of unsecured loans made to individuals, is that really much different than that same person just carrying a balance on a Chase credit card?

It used to be individuals who took the risk of lending and reaped any rewards of higher interest. The P2P company just cares about volume as it takes a fee from every loan. But if that volume comes from big financial firms that want first dibs, does that mean the individual investors will only get left with the scraps?

The loans not taken by these sophisticated investors go back to a fractional lending pool that is open to both individual investors and institutions. That doesn’t sit well with some. “The institutional investors are snapping up all the worthwhile loans,” one investor wrote on Prosper’s blog, echoing many comments. […] “By cherry-picking, almost by definition what they leave behind is not as good,” says Giles Andrews, founder and chief executive of Zopa, a British peer-to-peer lender that so far has dealt only with individual lenders.

Perhaps the best sign that P2P lending sites have become a legitimately good investment is that Wall Street and other professional investors are now crowding us out?

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  1. It is interesting that you make this observation. I went with Prosper a few years back and my loan was funded by several individuals, but then went from about 30% to 100% overnight. Turns out an institutional investor, a hedge fund, had funded the rest of my loan. I am thankful of course, but would agree with your assessment that holding a credit card balance would not be that much different.

  2. Maybe just a sign of the industry “maturing” which can be a positive, speaking as one of the “early investor/lender you’d have been lucky to have gotten back what you put in” who lent on Prosper back in 2007…or maybe Wall Street knows something we don’t.

  3. I bet all the worthwhile loans will be funded first and to 100% in a nanosecond by the big players, leaving individual investors with crumbs and rejects!

  4. Serge – that’s exactly what happens, I noticed the quality of loans decline with every announcement of “institutional” investors coming in. Eventually I stopped putting money into LC, why bother, my filter would barely find 2 decent loans a day, and then they started providing less information on each loan.

  5. The only hope now is for a company Iike Vanguard to come up with a low expense ratio etf tracking p2p investment grade loans. If you can’t compete with institutional investors -join them!

  6. Can’t wait until the institutional investors start bundling good loans w/ bad loans. Then, paying off ratings agencies to mark the bundle as good.

    On a serious note, LC could limit the amount of a loan to one lender. As a LC lender since 2009, I’ve seen the quality of loan degrade almost every year.

    • Also how about borrowers’ preferences? Maybe they would rather pay 10% to a bunch of hardworking people with some extra savings left vs big banks that pay people 0.01% interest and lend that money back at 1000 times higher interest! I know I would rather pay a 10% interest to real people vs big banks.

  7. I love P2P lending and think it is only going to get better and better. Yes, it is rather high-risk right now, but it can be high-reward too. So, I’d say it is here to stay and YES, the fact that private lenders are getting crowded out is a very good sign overall.

  8. Thanks for sharing…as in life, little guy will always have a tougher time getting ahead. 😉 regardless, we invest in both prosper and lending club and will continue to do so. We’ll just remain selective in our choices. In fact, we’ve established a set criteria and never invest in notes that simply don’t meet our criteria.

  9. I think in theory, this is exactly what should occur. As a critical mass of lenders compete for different loans on the credit spectrum, the pricing should become more competitive. When the market was inefficient, lenders held a lot of leverage and could be picky. But now that demand is fiercely competing for the different categories, the borrowers should be rewarded, which in turn should drive for borrowing. The problem will be how to balance potential volume on the platform vs. filtering borrowers to ensure requirements are kept.

  10. Sam Patel says

    In today’s economic scenario, peer to peer (P2P) lending has become rather attractive. It allows alternatives for both borrowers and investors who are seeking for ways to achieve their financial goals.

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