In the past couple of weeks I have had two emails and one conversation on Twitter about Ponzi schemes. Some people have the idea that with the returns claimed by Prosper and Lending Club p2p lending must be a Ponzi scheme.
It seems that in the era of Bernie Madoff and Allen Stanford people are more suspicious. In this low interest rate environment anyone claiming fixed interest returns of 8% or more must be viewed with skepticism. And 10%, well, there is no other explanation other than some kind of fraud must be at work.
No. No. No.
According to the SEC’s website a Ponzi scheme is “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” For p2p lending to be a Ponzi scheme new investors, not borrowers would be providing the returns for existing investors. This would imply that all or most of the loan applications that are on the platform every day are fictitious.
Lending Club and Prosper Have Transparent Audit Trails
Unlike a Madoff-like Ponzi scheme p2p lending is a simple concept. People borrow money and pay an origination fee to the p2p lender for that service. Investors lend money and pay a service fee to the p2p lender for that service. There are no complex trades going on where money can be hidden. Every loan is registered with the SEC and the details are made available for download from the websites of Lending Club or Prosper.
The other big difference between Ponzi schemes run by the infamous Charles Ponzi, Bernie Madoff or Allen Stanford, is that the financials of Lending Club and Prosper are publicly available. This completes the audit trail. Anyone can search the SEC filings of Lending Club and Prosper and look at the balance sheets and income statements from either company going back several years now.
Many People are Borrowers and Investors
Last year I decided to apply for a loan at both Lending Club and Prosper just so I could understand the process. I wrote in detail about this process and also recorded two videos showing how it worked. I know for a fact that the borrower side of both companies is real.
Many borrowers are so impressed with p2p lending that after (or sometimes even before) their loan is fully paid they become investors. Most Ponzi schemes deal with just investors – you don’t get to see where your money goes and you certainly don’t get to participate in the other side of the transaction. In p2p lending you see both sides of the investing equation and you can also participate in each.
It is good to have a healthy dose of skepticism with any new investment. But to rush to judgment and assume p2p lending is a Ponzi scheme because the returns are too good to be true just shows ignorance and laziness.
When you start digging you can see that the returns are real, the financials all add up and tens of thousands of people are benefitting from this new way of lending.