It’s interesting to me that so many people are afraid of P2P lending platforms, yet they’re more than willing sign up for – and max out – credit cards. Credit cards that are fleecing America. I think the fear stems from many factors, but the biggest issue is that p2p lending is relatively new to the marketplace, and anything new makes investors wary. Many people have quite a few fears in common, however. Let’s look at some of the issues would-be investors have with the online peer-to-peer lending model and the truth to put those fears to bed.
Fear of an Unknown Company
Most people, investors includes, have never heard of Lending Club or Prosper. The companies are relatively unknown (as is the model itself), which causes most people write the whole thing off as some sort of Ponzi scheme. But it’s not. It’s legit; it’s just hard for us to wrap our heads around being in the driver’s seat with our money.
Think about it: When you are a P2P lending investor, you, in essence, are the bank. You have the money to dish out to potential borrowers. They jump through the exact same background and credit hoops. They have a credit grade that lenders use to assess the risk. They’re bound by the same laws that would bind them had they sought a personal loan from a traditional lending institution. How is this different from walking into a bank and asking for a loan?
Answer: it’s not.
I know it may seem hard to believe, but people with really bad credit are going to have a higher chance of defaulting whether they obtain loan funding through a regular bank or online with a P2P lending platform. It is what it is. That’s why the best strategy is to spread your risk among many different credit grades and fund a wide range of loans in micro amounts.
Fear That it’s Too Good to be True
In an era where credit cards top out at almost 30% interest and savings accounts and CDs hover from 1 – 3% on good days, it’s not hard to see why we don’t expect much from our investments. We’re conditioned, as consumers, to pay through the nose for what we want and earn meager returns when we put our own hard-earned dollars to work.
That mindset is a true shame, because we can do much better. P2P lending is like a social uprising – we’re cutting out big business altogether and lending directly to one another. Websites like Prosper and Lending Club are merely the platforms that facilitate the action. Do you see the sheer power in that? We can get rid of banks and lend to one another, make substantially more money, and still enjoy the same safeguards that regular banks have at their disposal. Now how’s that for progressive lending?
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It wasn't this way at the beginning. I started with P2P shortly after it was introduced, and I lost a fair bit of money. The risk wasn't well-estimated at all. It may be better now, which is good, but some people might still be gun-shy on this.
P2P lending is on my list of things to look into when I have some extra money lying around. You seem to be promoting Lending Club more than Prosper, do you think Lending Club is the superior site?
@Gen Y Finance Journey Lending Club is certainly doing better than Prosper. Its also available in more states than Prosper.
Here is the difference for an investor: A bank would require collateral from most of the borrowers of these loans. The investor in peer to peer lending receives no collateral. This is an unsecured high risk loan anyway you look at it.
These types of loans have never been tested through a sustain economic downturn when defaults could soar. Investing in peer to peer is the equivalent or more risky than investing in junk bonds.
@AAAMPblog That is not exactly true. Prosper started in 2006 and Lending Club in early 2007. Both companies went through the worst economic downturn in 75 years and came through it well. Prosper investors did lose money, in the mid single digits percentage wise on average and Lending Club investors made money even in 2008 and 2009. While it is not without risk, I believe it is less risky than junk bonds that performed terribly during the financial crisis.
Another good article Nell. Just one clarification, though. People with really bad credit will not be able to get a p2p loan. You need a minimum credit score of a 660 at Lending Club and 640 at Prosper to even be considered for a loan and there are many more checks on borrowers apart from just a score. So, you need decent to good credit to get a loan at Lending Club or Prosper.