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How to Adjust to the New P2P Lending Reality

by Peter Renton on May 22, 2013

In the last six months the landscape for investors has changed significantly at both Lending Club and Prosper.  It was just back in January when Lending Club had more than 2,000 loans available to investors and at Prosper this past November there were more than 1,000 loans. But that is no longer the case today – now both companies have typically between 50 and 200 loans available. What has happened?

A Flood of Investors Interested in P2P Lending

I think we will look back at 2013 and see this was the beginning of the mainstream acceptance of p2p lending as an investment. It certainly has caught the attention of large institutional investors. Not only that but I have been told that new retail investors are also flocking to p2p lending in record numbers.

This increased level of interest has led to a lot more competition among investors. Back in the old days (just over two years ago) at Lending Club and Prosper you could ask borrowers open-ended questions and ponder their responses for days on end as you consider whether to invest in a loan. Very few loans were fully invested in less than five days. Today, many loans are being fully funded within five minutes.

In this post I am going to share how I am adapting to this changing environment to ensure I can still put my money to work and earn a double-digit return.

New Lending Club Investment Strategies

At Lending Club the mix of loans on their platform is roughly the same as it always has been. B and C grade loans still dominate accounting for over half the loans issued so far this year. The only marked difference between this year and last year as far as loan mix goes is that there are fewer A-grade loans, which I imagine is driven by investor demand. But there is competition for all loans (with the exception of most A grade loans), so here are three things investors can do to adapt.

1. Remove Verified Income Loans from Your Filters

If you use verified income as one of your filters then you are really having a hard time, actually an impossible time, finding loans. Every loan at Lending Club is being fully funded within 48 hours these days. But it takes that long for borrower income to get verified. So, as Lending Club explained in this blog post last week they are still performing the same number of income verifications – over 60% of loans. It is just that investors don’t get to see which loans are verified any more because the loans are funded before the borrowers income is verified. Most of the time there are zero loans available that have verified income.

2. Invest Right After Loans are Added to the Platform

It is common knowledge to many investors now that Lending Club adds loans to their platform four times a day – at 6am, 10am, 2pm and 6pm Pacific time seven days a week. If you login promptly at those times and run your filters you will have plenty of loans to choose from.

3. Be Quick

This is the most important one today. If you never want to miss a loan you will have to give up on reading the descriptions and asking questions of the borrower. Popular loans can disappear within minutes, sometimes even seconds.

Now frankly, this is a pretty silly system that I expect will change soon. There is no need for Lending Club to put a strain on their servers four times a day – I think we will be moving to a more real time system some time later this year, probably after Lending Club implements their long awaited Auto Invest feature.

New Prosper Investment Strategies

While not as dramatic as Lending Club, Prosper has also had a recent surge in investor interest. And long time Prosper investors know that with large investors like Worth-Blanket2 competition for some loans has been strong for a while now. Prosper has also changed their mix of loans in recent months. Instead of being dominated by the C and D grade loans as was the case for most of 2012 now A and B grade loans are most prevalent on their platform.

1. Don’t Focus on Repeat Borrowers

If you have read my How I am Investing in 2013 post you will see that two of my four Prosper filters focus on repeat borrowers. Unfortunately, these filters now produce very few loans. In fact, my Automated Quick Invest (AQI) has only found three loans this month for my repeat borrower filters. There are plenty of repeat borrowers available at the A and B grade levels but the D, E and HR grades are few and far between now.

2. Expand Your Filters

This is something I was reluctant to do but my cash was building up in my Prosper account. So, rather than allowing my cash to just sit there I decided to add some new criteria. I now have an AQI setup for two additional filters. One is my Super Simple filter that I wrote about a few months back and the other is a broad income based filter (Grades C, D and E, Income >= $50K, Inquiries = 0, Term = 36 months). After several weeks of having my cash balance build up it is being reduced at the rate of $1,000 a week now.

3. Be Quick on the Lower Grade Loans

There are fewer low-grade loans (D, E and HR) on Prosper today than before. Those that do come onto the platform are snapped up in minutes. Prosper adds new loans at 9am and 5pm on weekdays and noon on weekends (all times Pacific). You should login at those times to have a chance at the lower grade loans. If you are focused on A and B grade then you will have plenty of selection at any time.

There is No Going Back

I know many people here complain about the dominance of institutional investors and how the small investor is getting squeezed out. While, it is certainly more difficult than before to put your money to work astute investors can still find plenty of good loans.

The large investors are here to stay. In fact, there is more interest from institutional investors in Lending Club and Prosper than ever before. We are not going back to loans staying on the platform for days on end. For some investors, that might mean they no longer want to invest. For me, I still find this a great place to put my money and I am adapting to this reality.

What about you? Have you changed your strategy at Lending Club or Prosper this year? As always I look forward to hearing from you.

{ 45 comments… read them below or add one }

Spencer May 22, 2013 at 7:48 am

As with all change, there are going to be people that resist the change and complain about the new system. “Why can’t we go back to the old days?” said the horse and buggy industry.

I think auto-lending is going to help level the playing field for the little guys. I also believe that more competition is only going to lead to better efficiency and more opportunities. When you consider the size of the mortgage, student loan, credit card, and payday loan markets, LC is just a minnow right now. But with the heavy hitters starting to move in on the lending side, it may soon become a shark.

More lenders will also mean lower interest rates offered to low risk borrowers, which I really see as a good thing. I don’t want people refinancing their 18% credit card debt with a 14% Lending Club loan. I’m happy to get 6-9% return, if that means people get lower interest rate loans.

Also, more lenders, especially those with advertising budgets, will mean more borrowers flocking to LC. I think right now we’re seeing a rush of investors, but we haven’t even tapped 1% of the total borrower market. I think the best days are yet to come. Lend on!

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Hippo387 May 22, 2013 at 8:14 am

The changes on Prosper have not bothered me at all because I think in the long run higher quality borrowers will bring more consistent performance and fewer charge-offs. Also, since institutional investors can only take 75% of a note on the Fractional side (apart from the Whole loan program), I’ve had no problem finding and investing in notes that meet my criteria as long as I log on around 9 and 5.

On the LC side, just my opinion but I find the interface and filters more difficult to use than Prosper. I also don’t like the “order in batches” system, and have had investments in notes sit for a month waiting to be issued, only to be returned. I think the site needs a major upgrade. Aside from that, I think there are plenty of decent borrowers on LC as well.

The biggest challenge going forward might be attracting enough borrowers to meet investor demand. I’m curious to see how the macro-economic environment plays into this. There’s plenty of cheap money available (0% credit card offers, low auto loan rates, etc), so I’m surprised at how many borrowers are willing to pay more than 10%.

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Anil @ PeerCube May 22, 2013 at 8:24 am

I agree since Google investment news there has been flood of new lenders in p2p lending. Even I have seen uptick in user base and daily usage on PeerCube since the news.

I don’t believe LC is adding loans at only 4 times a day at the hour specified. In last 24 hours, PeerCube detected new loans at 2:00am, 10:00pm, 2:00pm, and 10:00am. Based on my observations through peercube, this seems to be the pattern for last couple of weeks except on weekends when new loans get posted only once or twice durin 24 hour period.

New loans don’t necessarily get posted at the hour sharp. There is window of 15-20 minutes after the hour when new loans may appear.

LC is throttling the number of new loans that get released at any one time.

Most loans are being funded within 8 hours of being released. The situation is worse for whole loans. We recently tested LC borrowing process by applying for a loan. Our loan was selected as whole loan and was picked up by a whole investor right away and in less than 15 minutes afte submitting the loan, we received the notification of fully funded.

Btw, did you notice that LC has started throttling PRIME account holders. Their cash is not being redeployed as fast as it used to be?

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Peter Renton May 23, 2013 at 5:19 am

Hi Anil, You are quite right to point out that some loans are added at 10pm and 2am as well. These are the loans that went to the whole loan platform and did not get invested. Whole loans stay available for investors on a separate platform for 12 hours and if they don’t get invested then they come on to the main retail platform.

And yes, I have a PRIME account and I went from April 6th to May 17th with no investments. My cash built up to almost 15% of the account total. But in the last week there have been three orders on this account and my cash is now fully deployed.

What I haven’t seen is new loans being added at any time other than the top of the hour. I am curious about your 15-20 minute window you talk about. I will have to keep an eye out for that.

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Matthew Allen May 22, 2013 at 9:38 am

This makes me glad that I live in a state that only allows investing at Lending Club through the secondary note trading platform. My strategy there is unaffected, for the most part.

Even with one default recently, my NAR still stands above 17%!

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Jj May 22, 2013 at 8:42 pm

Ohh I want to hear this strat

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SarahV May 23, 2013 at 9:59 am

The Lending Club NAR is not very accurate for Folio traders, unfortunately. Mine is at 16.5% and my actual return is closer to 10%.

I’m not sure there’s ever a reason to be glad you’re in a restricted state. Firstly it means you can’t use a tax-advantaged account (big hit to returns) and secondly it means you have less choice and opportunity. People in other states can do both retail AND Folio investing if they choose to – and if it gets harder and harder to invest on the retail platform you can bet that they will be flocking over to the secondary market to deploy their money and giving us Folio-only folks extra competition for the good loans…

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Peter Renton May 23, 2013 at 7:32 pm

Good points Sarah. With more retail investors it will also mean more supply for the secondary market as new investors start to sell their loans for liquidity or to offload late loans. I think it is really a net-win there will be more supply than demand from these new investors at least in the short term. Now, if Folio ever improves their interface then you will see more demand from investors.

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Alex Binkley May 22, 2013 at 9:40 am

Peter & others. If you *could* go back what would you want to see returned? Q&A? No institutional investors? Longer times to make decisions?

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Simon Cunningham May 22, 2013 at 2:02 pm

I would want a slightly greater focus on catering to retail investors. But I know this is hard for the platforms to do and hit profitability.

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Peter Renton May 23, 2013 at 5:21 am

Good questions Alex. The selfish part of me would prefer no institutional investors and less competition for the loans I want. I think there is an opportunity for a true p2p retail based platform to emerge at some stage but as Simon points out the history of Prosper and LC tell us that is a difficult model to make work.

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Kowser May 22, 2013 at 11:28 am

I think my greater concern is two fold:

I use an algorithm + quick glance to select my loans. There’s no way to automate this, so an Automated Investment will probably reduce the quality of my loan selection. I am hoping it won’t fund the loans so fast that I won’t be able to continue with my manual (but very quick) process.

With EVERY loan getting funded, we’re probably going to start seeing the defaults increase whereas before, bad loans simply wouldn’t get funded at all and that was part of the weeding process. Additionally, when buying on FOLIO, anyone who’s loan was below 80% funded and they still took it, I would generally avoid as the numbers showed they were a lot more desperate (default likely). Now everyone’s 100% funded.

Means I have to get meaner! :-)

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Peter Renton May 23, 2013 at 5:26 am

Kowser, I haven’t done analysis on the performance of loans that were not fully funded, that would be interesting. While it makes logical sense that a default would be more likely in those cases for most of the last 18 months every loan has been getting fully funded at LC.

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Russ G. May 22, 2013 at 11:41 am

I recently moved some of my money from LC Prime Standard Account to Prosper because too much cash had been accumulating at LC. I’m uncertain that Prosper will be able to make good on its promises to get my money invested with any more alacrity than LC based on the dearth of loans that seem to be available there. We’ll see.

Today I withdrew a substantial sum from my other LC Prime Account, an IRA, for transfer back to my IRA at my stock broker. At least there I’ll be able to invest it in something. Even if left there as cash at least it will earn a little interest.

For my money LC has mismanaged their lender/borrower balance. If LC cannot reliably keep most of my money invested, say 95%, and avoid growing stockpiles of cash—approaching 20% of my IRA account value as of today—it’s a failed investment strategy. For now my plan is to continue to withdraw cash as it accumulates and put it to work elsewhere. My LC rep today told me that the availability of loans isn’t expected to improve until perhaps the fall. If and when it does, that’s when I’ll consider moving funds back to LC, but for all I know that expectation may never be realized.

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Simon Cunningham May 22, 2013 at 2:03 pm

“If LC cannot reliably keep most of my money invested, say 95%, and avoid growing stockpiles of cash—approaching 20% of my IRA account value as of today—it’s a failed investment strategy.”

Sounds wise to me.

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Peter Renton May 23, 2013 at 5:29 am

Russ, I think LC has made a misstep here by not keeping PRIME accounts more fully invested. In the 3+ years I have had my PRIME account these past few weeks is the longest LC has gone without deploying my cash. But as I said above that problem, for me at least, has now been rectified.

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SeanMcD May 22, 2013 at 12:47 pm

I’m surprised there’s no mention of sites that use the API to auto-invest in LC loans, like InterestRadar. Those are a pretty huge adaptation – I’m able to invest funds more quickly now than in 2012, despite the drastic reduction in loans available at any given time.

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Anil @ PeerCube May 22, 2013 at 1:28 pm

There is no third-party site that uses API to auto-invest in LC Loans. You can only invest using API in an account that is authorized for API access, that is the restriction placed by LC. So, unless you specifically requested LC to enable your account for API invest, no third-party site can use API to auto-invest on your behalf.

Most likely, third-party sites claiming auto-invest are using scripts to log in to your account using your credentials and making investments. Basically, you are giving unfettered access to the third party site to your account.

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Peter Renton May 23, 2013 at 5:33 am

Anil is right in that InterestRadar doesn’t use the API to invest but it does offer automated investing and I know several investors are using it successfully. It is a welcome development and auto investing is indeed the future I believe.

I didn’t mention that I have also been using an auto-invest tool (not Interest Radar) for both LC and Prosper. I hope to be able to talk more about this tool shortly.

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Anil @ PeerCube May 24, 2013 at 9:28 am

I hope these third-party automated investing tools request authorization from Lending Club. I believe there are strict repercussions for Lending Club, third-party tools and account holders to allow third-party automated investing. For example, look at the incidents when Prosper had to reverse transactions for account holders when its auto-invest tool invested in wrong loans.

I am sure same rules and regulations will be applicable to peer to peer lending as they are applied to stock brokerage firms with regards to third-party trading. Try going through the process of third party trading authorization through one of these brokerage firms.

The third party tools who store users’ Lending Club account information will also need to secure that information (not a trivial task, ask banks and brokerages). Such sites will also become attractive targets for blackhats. Just having SSL certificate and https doesn’t cut it.

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Simon Cunningham May 22, 2013 at 2:06 pm

I am of the belief that great returns can be earned for those of us who want to do the work and develop a slightly-more active approach to p2p lending. Gone are the easy AQI days of Prosper where we could passively shovel cash to repeat borrowers and earn 17%. Not only has the AQI been superceded by API, but Prosper’s credit model has adjusted for repeat borrowers as well.

Thankfully, these innovations coincide with larger loan pools. There will always be a cutting edge worth focusing on.

The future holds exciting times indeed.

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Jj May 22, 2013 at 8:43 pm

Sounds like a good one

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Martin May 22, 2013 at 11:13 pm

I noticed the exact same thing you are writing about. Many times I opened the platform and there was nothing to invest. So I slowly was giving up on some filters I do no longer consider that important and act quickly. So I did some things you are recommending somewhat intuitively. Now I have a confirmation that something was happening. Well, I didn’t know about the loans initiating times, so i will move my investing around those times to get in.

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Peter Renton May 23, 2013 at 5:35 am

Thanks for the comments everyone – great discussion happening here.

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Rob L May 23, 2013 at 8:14 am

This is certainly a hot topic these days! I’m only a LC member so I can’t comment about Prosper. Most importantly let me say that it is to the individual investor’s great benefit that LC release new loans in bundles at known intervals and not continuously throughout the day. Institutional investors are easily be able to run their algo’s 24/7, but if you are retail you can’t watch the web site continuously. Ignoring the fact that some loans are held back and never hit the web (whole loan program etc), at least with known intervals determined individuals have somewhat equal access to the remainder when they are posted. Continuous posting during the day would guarantee that the individual using the web site would have little or no access to newly posted loans. LC’s current method is much like the government releasing economic numbers and companies releasing earnings at pre-determined date/times so the whole world gets the information at once (inside trading and Congressional leaks aside). If LC does move to continuous posting it would be a very bad day for the individual investor. Am I wrong?

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Peter Renton May 23, 2013 at 7:22 pm

Rob, In the current environment I would agree with you. But investors are going to have some choices to do auto-investing very soon. I know of two different initiatives getting ready to launch and then there is also InterestRadar.com which has this feature already. Then LC have said they will be making the option available on their own site. So, when individual investors can auto-invest then there will be a more level playing field.

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Rob L May 23, 2013 at 9:01 am

Last night I analyzed the loans LC released onto their website at 6pm PDT. Whether this sample of one is representative I don’t know. There were 125 new loans posted. I only watched for 30 minutes since the discussion has been about how quickly loans are being funded. Of the 125 only 8 were fully funded within the first half hour. Of these 8, 5 were small dollar amount loans ($1000, $3000, $1000, $3200, $1500), 2 were modest sized ($6650, $8875), and 1 was large ($16950). All were 36 month loans. No 60 month loan was fully subscribed within the first half hour. Except for the $1000 loans, the shortest funding time was 20 minutes. At the present time and for the nimble individual investor it appears there is still a small window of opportunity to invest in most newly posted loans.

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Peter Renton May 23, 2013 at 7:26 pm

The 6am sample is the big one – I have found that to also be the most popular when it comes to filling loans quickly. You can look at the chart from NickelSteamroller for a more detailed look:
http://nickelsteamroller.com/chart/combined/availability/?platform=lendingclub

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Rob L May 24, 2013 at 1:28 am

Thanks for the tip. The NSR chart is very neat. I have the data set from 6am on 5/23 but I haven’t gotten around to analyzing yet. Maybe next on the to do list. Today I analyzed the 5/23 10am release. There were 125 new loans added and 26 were gone within the first 10 minutes. Actually I think 24 were taken within the first minute they appeared! Typically 2 to 4 lenders per loan, with some individual lenders taking large dollar amount positions. If you have lots of money to deploy you do it. Quite a different result from the 5/22 6pm release I described earlier. Seems now the only question is when Skynet will become self aware.

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Bilgefisher May 23, 2013 at 10:53 am

I think the rush of cash is a good thing. All that money attracts the attention of folks. It won’t be long before we see 5 or 6 real players in the industry. I can even see 1 or 2 niche companies that deal with retail investors only. I’ll be glad to see the competition, it should make the whole industry better for us. This will be especially true for the secondary lending market. If folio doesn’t improve their interface, they will see stiff competition in the near future. Just to much money at stake not to see more competitors.

Jason

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Peter Renton May 23, 2013 at 7:27 pm

I agree Jason. That is something that no one is talking about but I think we will have one or two new competitors in the space within 12 months. We need more competition in this industry.

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Walter May 23, 2013 at 10:29 pm

As an LC investor, I’m not optimistic that the situation is going to improve all that much for the retail investor looking to invest in individual loans. I could see a scenario in which retail investors, once the IPO is done, are progressively pushed into ETFs (or similar funds) with various risk characteristics, rather than LC trying to appease them with changes to the platform or adjusting the rules (i.e. reducing the amount of a loan that any one individual/entity can purchase).

I can hear the response of people saying that individual retail investing can coexist with such publicly traded funds, but I’m feeling cynical today. In any event, there is simply too much money screaming for yield for things to get better soon. You only have to look at some of the desperate borrowers getting fully funded in short order to know that it’s getting a little frothy in p2p world.

I’m not sure if it’s related, but it’s interesting to see how LC has significantly raised rates for C-G rated borrowers, but A-B rated borrowers have seen their rates stabilize or drop. Has this topic been addressed by LC or the blogosphere somewhere?

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Peter Renton May 24, 2013 at 2:17 pm

I don’t think those specific changes in interest rates for the C-G loans have been addressed anywhere to my knowledge. I used to cover all the interest rate changes but then it started happening so often that I stopped focusing on it. Both LC and Prosper regularly tweak their rates.

One thing I do like to keep track of is the weighted average interest rate and that has been creeping up now for 12 months or more at LC.

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dontvote May 23, 2013 at 6:40 pm

More competition then an aggregator (see Yipit for daily deals) then a multiple posting service (I’ll post your loan to all 6 companies for you) then further price compression then consolidation then oligopoly pricing then back to start.

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Todd May 25, 2013 at 9:53 pm

I’d like to request an open post on “How To Adjust The P2P Lending Reality” (rather than only how to adjust to it… :)

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Peter Renton May 26, 2013 at 9:52 am

Todd, That implies individual investors have the power to adjust the rules…something I would say is very wishful thinking.

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Simon Cunningham May 30, 2013 at 3:10 pm

lol

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Todd May 27, 2013 at 12:43 pm

Sure – call it “P2P Wishful Thinking” – that’s exactly what I’d like to hear (if only to get a pulse)!

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Stu May 29, 2013 at 3:24 am

Peter, great article like usual. One difference I have noticed in the platforms is that LC loans fund faster but sell out faster while Prosper’s loans take a little longer but more often than not I get my choice. I’m pretty sure that both the institutional piece and the Google announcement/investment have to do with this. Since I am using my own Credit methodology, I am selective and putting more into each and not just $25 or $50 across the board the way alot of investors do to spread their risk and I do almost exclusively B,C or D loans.

Keep up the great reporting.

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Peter Renton May 29, 2013 at 6:39 am

Stu, I think it is pretty clear that overall Prosper has less competition for loans than LC. But I think you will find that some of the lower grade loans on Prosper (D, E, HR) fund just as fast as popular loans on LC. And there has certainly been an uptick in investor interest on LC since the Google announcement.

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bruce klassen August 5, 2013 at 3:14 pm

So, Peter… thanks first for the illuminating article. I also received a reply to my own query back from Prosper. They said: “The new whole loan platform is a great addition for Prosper as it will help us continue to grow the business.” This leads me to ponder that either the P2P model is un-economic, and/or can’t grow to scale with only P2P, or Prosper doesn’t really have a handle on the risk it is taking by alienating it’s (current) core investors. It might be worthwhile testing them by liquidating our accounts as rapidly as possible? Or, to use some other response to test how important we P’s are versus the B’s. It is too bad that a good thing seems to be turning bad…back to junk and high dividends…whole loans we can do on our own, without a middle(man).

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Peter Renton August 5, 2013 at 3:20 pm

It is true that without the institutional investors neither Lending Club or Prosper would be anywhere close to making money. I am sure a company will create a true p2p model that is profitable at some point but we are not there yet.

My perspective is that as long as I can find loans to invest in and make good returns I will continue to invest. So, I disagree that it is turning bad but it certainly is changing.

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Morgan Johnson March 20, 2014 at 8:40 am

I am a newbie, but it seems possible that LC and Prosper could end up become nothing more than middle men to a few really big Lenders, and the small guy investors will simply be squeezed out. Maybe that is not possible?

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Peter Renton March 20, 2014 at 9:48 pm

Hi Morgan, While it is certainly possible I think it is unlikely that small investors will get completely squeezed out. Both platforms have not only said they value retail investors their actions have demonstrated that in recent months. Both LC and Prosper have made changes to make it easier for retail investors to invest to the detriment of the large investor.

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Joseph Hogue November 9, 2014 at 1:56 pm

Way to stay on top of things. The financial crisis slowed the peer lending revolution but I think it is truly hitting its growth phase now. Will be growing pains until the industry reaches maturity but the inflow of investor money will bring borrower rates down and open up new forms of lending. I can’t wait ’til we get some form of asset-backed loans, i.e. mortgages.

Joseph Hogue

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