I have written earlier about my experiences with peer to peer lending. Personally, I treat it like an investment no different from any other investment. In my experience the risk/return rates are similar to liquid junk bonds. However, peer to peer lending has a social component to it and it is a lot more intimate than putting limit orders on junk bond ETFs. You are essentially trusting a stranger with your money. This social component along with the bidding process can make peer to peer lending rather engaging. When things work out I do feel that I am directly helping somebody out. Conversely, when somebody intentionally screws me over, I do, in a sense, take it personal. Then of course there’s the bidding process. Luckily, I have been conservative here and never gone below my pre-established minimum rate. Think of it as stop loss. Nevertheless, while I personally prefer to stay out of this game (just like I prefer to stay out of forex and naked options), many people like it. The first carnival of peer to per lending just arrived. The first article in the carnival is a good summary of various tips and experiences from different PF bloggers. If I may add something. Try lending a small amount e.g. whatever amount you could comfortably loose outright for a year and see how it goes. Remember, loans have a horizon of three years, so it is wise to build positions on a time frame of three years. That is longer than most people’s patience, including mine when it comes to investing in debt. Time is really the key here since six or even nine months is not enough to tell how stable a borrower is. I think one emotionally needs to learn how to deal with defaults and delinquencies before committing more money. Personally, I have a hard time with people breaking their promises in a situation where I can do absolutely nothing, so peer to peer lending is not for me.

Originally posted 2008-01-04 18:17:26.