@Robert Muir – Nah, it was a play on the “winning on eBay” concept.

I am neither the sharpest knife in the drawer, nor am I savvy at all about the lending thing you are talking about. I read the experiences you had from your previous post as well.
So you install an amount of money into Prosper or Lending Club, and then lend it out to Joe Dokes after Joe files an application and you “bid” on it based on his application?
(I have not researched the Proper or Lending Club websites but I certainly intend to.)
Sir, you have a great deal of faith then in your fellow man! So are you saying somebody could borrow $50.00 or $100.00 from you and you simply “trust” them to pay you back? What is the recourse if they don’t? Do you just lose?
I am not sure I would make a formal loan to anybody who just needed $50.00. Even if I knew them well. If someone cannot come up with 50 bucks from somewhere, to me they are pretty well toast anyway.
In my apartment complex, I lent $20.00 a month to a certain tenant. This was usually on the 27th of each month. It was to carry him on Budweiser until he got his SS check on the 3d of the following month. I made him pay me back $21.00. He never failed, but I had him by the yang if he did not pay me.
In my experience with people—I sorrowfully could not invest in a lending program.

I use peer to peer lending as part of my forming portfolio and I like it quite a bit. Yes, people default, but, this is what banks go thru.

As a lender you have the added advantage of the site doing a lot of legwork, and can just go on stats instead of just the sob story.

Plus, if you have great credit, you can take a loan from said site @ say 6-9%, then turn around and lend for 24%+. Just like a bank, you make that spread and so far it has worked. Just like stock picks, you win some, you lose some.

Generally I like to send goons over to hang out outside their doors… but that’s not nice.

Hence, I just hope my creditworthiness checking pans out.

I’m using Zopa (in the UK) and it seems to have some advantages over Lending Club and Prosper. For a start you can lend into ‘markets’ as well as ‘listings’ (Zopa listings seem to be the same as LC and Prosper, and generally I avoid them for the same reasons).

But by lending into the markets you get a lot more ‘back up’ from the site. Zopa themselves use proper credit reference agencies to vet borrowers, and debt recovery agencies, for one thing! Default on Zopa and you get chased… to court if necessary.

So far I’ve not put much in – only £350 spread over four markets from A* down to C (and one listing, which is a special case…) About five months in everyone is paying on time, no arrears. I’m reinvesting the payments, so I now have effectively £390 out on loan at an average gross rate of 9.6% (8.6% net of fees).

If it’s still going well at the end of the year, I might up my stake a bit. Yes, it is risky, and capital is tied up for 3 years (or 5 years if you’re in the 60 month markets), but the way I’m looking at it, I could tie it up in a bank saving bond for that length of time and struggle to get 4%. I could put it into equities and face a similar risk of capital depreciation , and there aren’t many shares with current 8.6% dividend yields. With Zopa I have the choice to keep re-lending, all the while building up the monthly repayments and compounding the capital, or if I need to, I can stop re-lending and have a small monthly income by withdrawing it, over a space of three years. The longer I can go on re-lending before I need to draw the income, the larger that income will become, of course. Shares dividends don’t come monthly, and a saving bond has penalties if you take the money back before term.

So, as part of a diversified portfolio for a small proportion of my assets, I’m very happy to keep it. It should be very uncorrelated to other asset classes, after all.

I suspect – but haven’t looked into details yet – a tax advantage can be had by declaring it as a business rather than personal venture and applying for a Consumer Credit Licence – I quite like the idea of becoming a financial institution, however small 🙂

Here’s my favorite junk bond (and others) fund, EHI. It’s a closed end fund that invests in junk bonds globally. It currently yields 8.20%. There’s your no-hassle high yield option. It’s fairly unrestricted in what it can invest in.

@Kevin M – I think it’s a combination of two things.
1) Many of those who blog about it only has a handful of loans—a few hundred bucks
2) Loans tend to perform well for 3-6 months before they go bad.

So you could easily see 15% for six months and then suddenly find yourself at -5% because one of the loans is in default (in my experience, very few delinquent loans make a recovery).

I have a friend that has been investing in Lending Club for almost two years and has been doing quite well. With loans, until they run their course it is hard to tell your actual rate of return, but to this point he is making nearly 13% on his money. Even when one loan defaults, your $25 investment on that loan doesn’t take too big of a bite out of your overall gains.

I agree that you should never loan to family/friends unless you plan on the money disapeering along with the relationship. But P2P lending through Lending club seems like a good way to diversify your investment portfolio with only a small amount of capital at risk. Just think, a decade ago it would have been next to impossible to make this type of investment with less than 100K.

I have about four years experience in lending with Prosper and Lending Club and have lent something like $300K over that time, with about $45K active right now. Thousands of small loans.

The main advantages to me are its almost complete lack of correlation with other investments and the high rate of cashflow, because you are not only being paid interest, there is a considerable amount of principal coming back to you each month that can be reinvested or pulled for other things. Disadvantages are noted above — its difficult to liquidate, although you can sell loans now.

It has really evolved over time, but is still a “buyer beware” type investment. It’s notable that Prosper has gone to mimicking Lending Club in the way it operates — LC seems to have the better model for lenders.

The key is having a lot of loans and minimizing defaults. You can do stat analysis at http://www.lendstats.com for both sites.

Oh, and I have found its best to avoid lending based on the written descriptions and lend based on the numbers/stats only using the search filters provided, and only the stats you deem most important.

To understand why this is true I would have to refer you to the book “Dance With Chance”, which is a very interesting read that talks about when it is best to use rules of thumb and when it is better to have more data. Paradoxically, more information can often lead to worse decision-making.

I’ll be interested to read the articles in the “Carnival”. Thanks for posting that.

I’ve thrown about $50k into Prosper and have to say I’m pleased with the returns. I joined shortly after Prosper intensified their verification process and started vetting lenders much more carefully. The site is fairly young so it’s tough to determine the exact default rates for each type of loan, but investing with lenders who have previously held prosper loans definitely reduces default as it’s very unlikely a scammer is going to borrow money, pay it back with interest and then attempt to borrow some more. My current returns are hovering around 20% something percent, though I expect that will drop off over time.

I have been lending on Lending Club for past couple of years. It’s nothing big and even if all my loans defaulted, it would not put a dent in my financials. As a newbie, I used to browse new loans in funding stages in A or B rate. However, after many days of funding, a great number of these loans would not get funded because of investor funds not fulfilling borrower’s required amount, or loan in review would not get final approval by Lending Club. If you look at the stats, less than 10% of requested loans actually get lent. So, my funds would sit in the account accruing no interest for days, sometimes weeks.

These days, when I have funds to invest, I go to the trading account and buy the secondary loans from other investors. This has three advantages. First, obviously, is that these loans in many cases can be bought at cheaper than new loans. Initial investor would have to provide incentive with higher interest rate if he wants to sell his loan to the next investor. I have picked up A rate loans at close to 20%. Second, and more importantly, I can see the borrower’s track records before taking the leap and taking position. With seasoned loans, past performance of the borrower, along with the credit rating (which by the way is updated monthly on the trading platform), makes investment decision a lot easier and efficient (third advantage – funds invested same day or next day).