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The Five Most Commonly Asked Reader Questions

by Peter Renton on November 21, 2012


Every day I receive emails from readers with questions. Having authored this blog now for two years I see many questions coming up again and again. So, I thought it would be useful to put some of the most frequently asked questions together in one post.

1. Should I invest in Lending Club or Prosper?

This is the most common question I receive and my answer is: Yes. You should invest in Lending Club or Prosper. Both platforms offer advantages and disadvantages. Lending Club is the clear market leader and they are close to profitability but they do not allow any kind of hands-off automated investing and their filtering capabilities are somewhat clumsy. Prosper has a flexible user interface for filtering loans as well as automated investing but is the clear number two and their financial situation is not as solid as Lending Club. Both offer the opportunity for great investor returns and a wide selection of loans. If I had to choose one to start off with I would pick Lending Club right now given their market leadership position but as I have said many times serious p2p investors should have accounts at both companies.

2. What would happen if Lending Club or Prosper were to go bankrupt?

If you read through the Lending Club or Prosper prospectus you will find many pages devoted to what would happen in the event of a bankruptcy. In fact the word bankruptcy appears 83 times in Lending Club’s prospectus and 80 times in Prosper’s – the topic is covered in great detail. The short answer is that backup loan servicing plans are in place at both companies where, in the event of a bankruptcy, a third party would take over servicing of loans for investors. Prosper is working on a bankruptcy remote vehicle that will provide protection for investors. Regardless of all this, there is no precedent in this country for the bankruptcy of a p2p lender so no one knows exactly what would happen. Here is my take: Lending Club has all but proven that p2p lending can be profitable and has huge potential. So, in the unlikely event one of these companies were to file for bankruptcy I expect another company would buy their assets. This should mean little disruption for investors.

3. How do taxes work? Will I be getting a 1099 from Lending Club/Prosper?

Now, I am not an accountant and I am certainly not qualified to give tax advice but I am happy to provide an opinion. Around tax time every year I write a post explaining how I am preparing my p2p lending taxes. That post goes into detail about the taxes questions and there is some interesting commentary from both qualified accountants and others with an opinion. Suffice it to say there is no agreement on exactly how we should report our income. But if you have money in a taxable account you should report all your income to the IRS regardless of what the 1099 says from Lending Club or Prosper.

4. How do you decide how much to invest in each note?

There are different schools of thought on this but I maintain that investors should always keep to the $25 minimum unless their account is at least $5,000 (preferably $10,000). After that I think it is up to the individual. I have spoken to investors with $1 million invested in $25 and $50 notes. If I had that much invested I would probably do $1,000 per loan. In the initial investment stage, I don’t think there is any need to have more than 1,000 notes. So, if you are investing $50,000 then $50 to $100 per loan would be a good investment amount. I think the advantages of diversification fades after you have 1,000 notes. Here is a post from last year that discusses diversification.

5. How do you find repeat borrowers at Lending Club?

At Prosper you are able to filter available loans for repeat borrowers, a strategy I have used successfully for a long time. But at Lending Club there is no such option. There are no plans to include this option either. Sometimes you will see a borrower state in their loan description that this is their second loan – that is pretty much the only way you can find out.

Let me take this opportunity to wish everyone a Happy Thanksgiving. As someone who was not born in this country but lives here by choice I am very aware of how much we have to be thankful for. The Thanksgiving holiday is a wonderful tradition and my favorite holiday of the year. I hope you enjoy it, too.

photo credit: mag3737 via photopin cc

{ 10 comments… read them below or add one }

Sean November 21, 2012 at 6:13 pm

You assert that another company would be eager to purchase either of the major peer lending platforms if they were to go bankrupt because Lending Club has shown profitability and potential. In what scenario could Lending Club declare bankruptcy, yet have their business model still remain just as attractive to investors?

Obviously some dramatic event would need to have happened for LC to fold at this point, and it seems very simplistic to assume that the event, whatever it might be, would have no bearing on the likelihood of another company being interested in buying them out.

Reply

Peter Renton November 21, 2012 at 9:07 pm

Sean, Point taken. It is a little simplistic to think that a bankruptcy would have no effect on another company buying them out. It is actually hard to wrap my mind around what kind of scenario could lead Lending Club to bankruptcy particularly with no debt on their balance sheet other than the loans.

My point is that the industry is slowly proving itself to be a sustainable one. If, at some point down the road one company stumbles badly, as long as the other company (or companies – hopefully there will be several) are doing well then there should still be interest from potential buyers in taking over the troubled company.

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FrankieC November 23, 2012 at 4:56 pm

6. Why does Folio suck so bad?
(not an actual question, just venting ;-)

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Dan B November 24, 2012 at 11:45 pm

One of these years I”m going to write a “Seller’s defense of Folio” article, Oh wait, that’s not going to happen as long as I’m an investor…………..although if & or when I leave p2p investing one day, I will do so.

I’ve sold on Folio for 3 years & have no complaints. Suffice it to say that without Folio I’d likely reduce my LC p2p investments by 80+%. Without Folio “activity” my LC return numbers would drop by 40%, perhaps more.

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FrankieC November 25, 2012 at 1:12 am

Nobody is questioning the value or necessity of a secondary market. But Folio is barely usable on good days and broken on bad days. A good example would be the status issue that happened at the beginning of the month:
http://www.lendacademy.com/forum/index.php?topic=240.0

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Dan B November 25, 2012 at 2:56 am

On a scale of 1 to 10, that particular issue was a 0.5 for me, so I’m completely comfortable with everyone maintaining their current opinions of Folio without any further discussions/comments on my part.

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Peter Renton November 25, 2012 at 10:41 am

Dan, I am surprised you are not more of a supporter of enhancements to Folio. It seems as a regular seller you would want as many buyers as possible on there. I have spoken with many Folio-only investors who have simply given up because the system is so poor from a buyer’s perspective. I think with an overhaul of their user interface we could get double the number of buyers on Folio. And if they really put some effort in to it they could market Folio as a truly viable alternative for investors.

But that is not going to happen any time soon. Why bother putting any effort into something that will be temporary anyway? I expect a Lending Club IPO will happen within three years and then investors in all 50 states will be eligible to invest in the retail platform. Then all investors will have the choice whether to participate on Folio or not.

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Dan B November 25, 2012 at 12:59 pm

Peter………… I’m a supporter of things that will enhance my personal returns. Folio is very much a zero sum game & that’s the way I like it. The fact that it isn’t the most user friendly is fine with me. The fact that there are some Folio users who think they know what they are doing (including a former blogger who we both know of)……………but really don’t know what they’re doing, is fine with me.
I understand why you wouldn’t understand why the “enhancements” you & others envision don’t enhance my returns. One day, if & when I’m no longer a p2p investor, I’ll explain it all to you, Peter. :)

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PeerLend November 26, 2012 at 9:01 am

Sounds like Dan’s got LC’s Folio game(s) figured out… Two parts to game1:

1) LC is using Folio to allow the securities into states where they’re not approved. (Great for LC, increases volume dramatically – great for lenders who feel comfortable playing that game and “flipping” notes for a quick markup to investors in un-approved states – or whomever happens to be buying them.)

2) LC’s FolioFN implementation has a MAJOR flaw in that “In Grace Period” notes (what would otherwise be called “Late”) have a 4 day lag/delay period, wherein the BUYERS ARE NOT INFORMED that the note is really “LATE”…

This “flaw” is so blatant that one has to wonder if it’s not simply intentional – after all, there’s no transparency on the secondary market. Who is buying majority of these “late” notes and taking the write-offs? What motivations?
(And what of the innocents unknowingly purchasing notes that are LATE?)

Game2:

On an individual level, the game is “keep gains in tax advantaged account” / “xfer losses into taxable accounts”. I won’t comment on institutional level…

Except to say that I don’t really believe in LendingClub’s unadjusted returns.

(Game3 is a meta-game to game2, wherein tax advantaged accounts are – shall we say – “inflated” beyond the yearly legal/statutory contribution limits.)

(As there is no transparency into secondary market, party/counterparty are unknown, ergo, anyone can do anything they like with any note at any time.)

One wonders why Prosper has forbidden the sale of LATE notes – and why Prosper has forbidden the use of Folio by investors in un-approved states – and why Prosper has put an upside limit on the percentage one may mark up a note.

Either they are stupid – and hamstringing their competitiveness with LC for no good reason – or they are smart and doing things the right way for a good one.

We’ll see…

Dan B November 26, 2012 at 3:17 pm

Peerlend………..Oh come now, don’t hold back, tell us what you really think about LC? :)

Reply

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