Dave Ramsey Doesn’t Understand Peer to Peer Lending

Dave Ramsey is one of the most famous personal finance educators in the country. He has written several books, has a nationally syndicated TV and radio show, a newspaper column, and conducts what are billed as the largest live events in the nation on personal finance. He has an extremely dedicated following of people who listen closely to his advice.

So I was curious when I noticed on the weekend this newspaper column where someone asked him about peer to peer lending as an investment. I didn’t think he would be all that positive about it but I assumed he would at least provide a reasoned answer. I was wrong. Here is an excerpt of his advice:

Sorry, but as an investment strategy I think this kind of thing is pretty stupid. Most of these kinds of loans are not collateralized, which means they’re not checked out. I mean, would you loan someone money without really getting into their business and knowing something about them first?

While everyone is entitled to their opinion this paragraph has one glaring inaccuracy. It is true that most of these loans are not collateralized (actually on Prosper and Lending Club no loans are collateralized), what is incorrect is his explanation that a collateralized loan means “they are not checked out”. I have no idea why Ramsey would say such a thing because that is just plain wrong.

What a Collateralized Loan Really Means

A collateralized loan means a secured loan. In fact, the word collateralized shouldn’t really be used here (it may confuse people with collateralized debt obligations which are different) – it should be called a collateral loan or better yet a secured loan.

Some loans, such as home or car loans are secured by assets (also called collateral). This is why if you default on your home loan a bank isn’t left with nothing, they are left with an asset that they can then sell. Same goes for car loans. It has nothing to do with whether the loan has been “checked out”. Loans on Prosper and Lending Club are like credit card loans  – they are unsecured (not collateralized) meaning if a borrower defaults on a loan then the lender can be left with nothing.

The Same Old and Tired Argument

Let’s take the last sentence in Ramsey’s response. I see this argument all the time from people who don’t understand peer to peer lending. Would you lend money to someone if you know nothing about them? Of course you wouldn’t. But if this same person has filled out a detailed loan application, gone through a sophisticated screening process, had their credit report pulled and possibly even had their income verified then what do you say? This is the reality of peer to peer lending but that, of course, is not mentioned in his response.

I am one of the first people to admit that there is risk in peer to peer lending. Unless you are very lucky you will have defaults. But the vast majority of borrowers pay their loans on time and the vast majority of investors are making good returns on their investment. Doesn’t sound that stupid to me.

I Have Nothing Against Dave Ramsey

Now, let me be clear, I know very little about Dave Ramsey, I have never read any of his books nor seen his TV shows. So I really have nothing against him at all. Most of what I know about him comes from reading other personal finance blogs and from my brother-in-law. He has read his books, been to a live event and has implemented many of Ramsey’s debt reduction principles into his life and is far better off for it. We actually had a long chat about the Ramsey philosophy just this past week.

To say an investment is “stupid” and then give an inaccurate reason to justify your opinion is irresponsible of Ramsey to say the least. I am sure that Dave Ramsey understands what a “collateralized loan” means and that it was a miscommunication between him and the person who published the column. But false information should be corrected and I hope Ramsey will do just that. I also recommend he attend my free webinar on peer to peer lending this Thursday. Sounds like he would learn something.

Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech.

LendIt Fintech conducts three conferences a year for the leading fintech markets of the USA, Europe, and Latin America. LendIt also provides cutting-edge content all year long via audio, video, and written channels.

Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.

Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.

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Peter
Jul. 11, 2011 11:13 am

I’m a big Dave Ramsey fan, and he has helped our family to better our financial situation as well. In some respects though I think Dave has some pretty strong opinions about certain topics that I tend to disagree with a bit. P2P lending is one of them, as well as the fact that he uses NO credit whatsoever – whereas i think there is such a thing as responsible use of credit. I think i understand to some degree that he has to dumb his message down to the lowest common denominator and stay consistent to it, but as far as this point I ‘ll have to agree to disagree with Dave. I’m wondering if it could just be part of the anti-p2p bias that a lot of people have after it had a rough start a couple of years ago?

Investor Junkie
Jul. 11, 2011 11:20 am

Dave Ramsey, while might be decent for debt reduction, is NOT a good investor. His main advice for investing is hiring an expensive professional.

For some additional insight into some of his bad advice visit:

https://badmoneyadvice.com/category/dave-ramsey

Glenn
Glenn
Jul. 11, 2011 11:31 am

Peter. Great response. I hope you post your response as a comment on his posting as well.

Bilgefisher
Jul. 11, 2011 12:00 pm

I have to agree with Investor Junkie. His principles are very elementary and great for folks who don’t know how to control their spending. Beyond that, his advice can lead to a veeerry slow path to wealth in my opinion. I don’t want to die wealthy. I will become wealthy while I still have the life to enjoy it. His books tell you to put your money in a good 12% return money market account. First, find me a solid 12% return money market account and I’ll find you a leprechaun or a ponzi scheme. 2nd you have zero control over how that money is invested. I have a heck of a lot more control in p2p than any money market run by some guru manager who predicts the future about as well as the weatherman can predict the next snowfall.

I have no illusions of getting rich through p2p. My money is there because it offers a far better return than any bank, stock fund, or cd can provide. I can actually beat inflation with p2p. When the time comes to reinvest that money, it will go into my business where I can get far better returns.

Here’s my simple question for Dave, “Did you make your money off putting x dollars away, or did you make your money of selling books?”

I guess that’s a bit of a rant, but I am tired of the Dave, Robert and Suze’s of the world that make their money off marketing while telling everyone else an entirely different way to invest. Then they have the gall to criticize any form of investment that doesn’t fit into their perfect little world. Follow guru’s at your own risk and peril.

Jason

RadicalCenter
RadicalCenter
Jan. 24, 2019 11:01 am
Reply to  Bilgefisher

Read Dave’s books, attended two events, met him, followed his principles and we are nearly done paying off large debts.

Dave Ramsey has never made the absurd claim that you can earn 12% in a money market account. Give us a citation. He says you can, and he HAS, earned that annual rate of return on stock mutual fund investments.

gharkness
Jul. 11, 2011 12:03 pm

I also think Dave is good at what he does – but giving advice on P2P lending just isn’t one of those things.

It appears that public figures like Mr. Ramsey tend to get “stuck” on a patter, and in his case, that “patter” lacks information on P2P lending (though why he is so misinformed, I can only guess).

Most of the people who use Dave’s advice do so because they are deep in debt. Really, they are not the kind of person who should be utilizing a somewhat risky form investment. Yes, I said it: Risky.

You KNOW it’s risky, else the prospective returns would be low. It’s the oldest rule on the books: If you want a high return investment, you MUST accept risk. I’m down with that, but some people aren’t (and shouldn’t be). I just think Dave was answering a question that is really out of his normal realm of advice, and it bit him.

Moe
Moe
Jul. 11, 2011 12:32 pm

I think Dave’s system is realy brilliant, like if your’e in debt stop spending money you don’t have and pay off your debt… duuuuu. And first pay down the loan with the highest interest rate, wow who would have thunk…

RadicalCenter
RadicalCenter
Jan. 24, 2019 11:58 am
Reply to  Moe

If it’s so obvious, “duh”, wise guy, then why are most Americans chronically unable or unwilling to even make a serious, concerted attempt to do it?

People prove every day that they need to hear this advice.

It’s also “duh” obvious that people in debt shouldn’t buy new cars on credit, yet they do so by the tens of millions — including “educated” and “sophisticated” people.

It’s also “duh” obvious that someone shouldn’t spend hundreds of dollars per month on toscco, marijuana, alcohol, lattes, television, etc., instead of investing for their retirement or their children’s college. Yet that’s what tens of millions of people in the USA do. Then they complain that they “can’t afford” to retire or “can’t afford” college.

Moe
Moe
Jul. 11, 2011 12:48 pm

Peter, I think you left out a major point. In my eyes the main difference between P2P lending and lending to a stranger or even family, is that the borrower is fully aware that his non-payment will get reported to the credit bureaus, and will also eventualy be turned over to collections further ruining his credit score. Just like people pay the credit card companies just to maintain good credit, so will they pay these loans. In other words, the collateral of the loan is the borrowers credit score.

Shawn
Shawn
Jul. 11, 2011 1:10 pm

Since Dave typically handles debt reduction advice and not investments, I would be curious to hear his advice on using P2P to get loans and if he would recommend any of his listeners/readers get a loan through P2P.

Moe
Moe
Jul. 11, 2011 4:24 pm

, the people who don’t care about their credit score, mess it up way before they get to a score that will let them borrow. Someone who has a good score is only because he cares about it.

Dan B
Dan B
Jul. 11, 2011 6:20 pm

Dave Ramsey is 90% marketing & 10% product. Therefore he is a perfect fit for his target audience……………..need I say more.

RadicalCenter
RadicalCenter
Jan. 24, 2019 11:10 am
Reply to  Peter Renton

He doesn’t let people buy his books etc from his company with debt, I.e. he doesn’t accept credit cards. Go to an event or to his website and see: only checks and debit cards. He is not a hypocrite in this regard.

Many people become rich doing evil or socially harmful things — dealing drugs, including the legal opioid epidemic, selling tobacco, spreading perversion and pornography, encouraging people to damage their bodies with horrible food and sweet drinks, encouraging people to use credit cards, and much more — Ramsey got rich by giving overwhelmingly sound and proven advice and encouragement. Good for him.

KenL
Jul. 11, 2011 8:53 pm

The only things I’ve read about Dave Ramsey have been in Prosper and LendingClub loan descriptions. In many of those descriptions the borrowers seem pretty excited about getting the “snowball” rolling. It seems these are people who know very little about personal finance and would be very unlikely to invest anyway. So actually, I partially agree with Ramsey, p2p lending is a bad idea for his core audience. However, if they can ever pay off their dept [sic] and gain a better understanding of personal finance, only then should they consider p2p lending.

Charlie H
Charlie H
Jul. 11, 2011 9:33 pm

In Daves defense the 12% number is NOT a money market yield number. The 12% number is a 30 year average yield of a good growth fund.

I still think that 12% is just a tad bit of a high expectation… then again being 30 I started investing in my 401k ~ 8 years ago. 8% seems to be a more reasonable growth target.

Bilgefisher
Jul. 12, 2011 7:38 am

Dan, you summed it up perfectly.

KenL
Jul. 12, 2011 10:23 am

Charles,
Your absolutely right, at least for now a 12% long term return on any fund seems ridiculous (but with P2P lending a 12% return is very possible 🙂 ).

Charlie h
Charlie h
Jul. 12, 2011 3:54 pm

What have the cities and capital ones of the world managed for gross margins on their consumer debt portion of their lending portfolio? That number will like give the upper bound range for roi for p2p lending. Thoughts?

S. Mart Erthanu
S. Mart Erthanu
Jul. 15, 2011 10:25 pm

I think it’s interesting that you all are so brilliant when it comes to investing, and that Dave just, “doesn’t get it,” when it comes to P2P lending.

And for the smart guy that asked whether or not he’d advise P2P as a way to get a loan, you’re one dense SOB.

“He’s all wrong on investments. He should stick to debt reduction.”

The blind leading the blind. I’m glad to see you all fully understand the principles Dave offers before you make ignorant statements in their regard (PLEASE READ WITH INTENDED SARCASTIC TONE). It’s too bad Dave isn’t beyond a decamillionaire to prove that he has a little understanding when it comes to investing. Wait…

If I had a dollar for every time some jack wagon made a statement about how not using credit is right for 75% of everyone – excluding your, because you’re so freaking smart – I’d be more loaded than I already am. I digress… the line is very simple: if you play with snakes, you will get bitten. You’re a slave to your lender. I don’t use credit. At all. I’m not missing out on anything but risk.

If you don’t fully understand the words that are coming out of Dave’s mouth, you really don’t have the credibility to make judgement against him. Good luck, suckers.

Eimi
Jul. 16, 2011 9:58 am

I adore Dave Ramsey, and followed his advice and got out of debt. I am a little sad to hear this news. I still will stand by his words, but in my opinion, Peer to Peer lending is a great way to re-establish your faith in borrowing. Banks have burnt me out, and I hardly trust them to put my paycheck in their business. We have a great APR with Lending Tree and convenient low payments to make. I am confident that when we pay off or first business loan in the next year and a half, we will be getting another loan to better our home business and even help us get our down payment for a home!

Investor Junkie
Jul. 16, 2011 11:33 am

@S. Mart Erthanu Dave like Suze has made most of his money from his books, seminars and shows, not from investing. Suze herself has most of her investments in US bonds (not stock).

His recommendation to use investment professionals (in which he also gets a referral fee) is at best OK advice. Investing in no load index funds is much better and cheaper. Investing is NOT rocket science and with limited expertise can have a well balanced portfolio.

While I have no issue of someone making money in educating someone about investing, there are MUCH better “gurus” to take your investment advice from. IMHO I would put Dave close to the bottom of the investment advice list. Jack Bogle is a much better person to take investment advice from. Even then none are perfect because they cannot speak for your personal situation and goals.

In an entirely different aspect of Dave is his advice to be completely debt free. While I’m NOT suggesting buying boat loads of stuff on credit, there can be some advantage of having low rate fixed debt (ie home mortgage) if we get a period like we saw in the 70’s. Instead his mantra is all debt is bad.

RadicalCenter
RadicalCenter
Jan. 24, 2019 11:52 am
Reply to  Peter Renton

Dave would say yes, take the lower-rate loan and pay off the credit card, but ONLY if you are going to cut Up the credit card. That is the only way to completely eliminate the risk of running the card up again and then having both a credit card and a personal loan.

He has said some version of this hundreds of times on the air. Makes sense.

Keith Anon
Keith Anon
Apr. 14, 2012 9:03 am

I listen to Dave Ramsey frequently, and I find his advice on debt reduction and financial problems to be top-notch. As he would say, most of it is common sense. However, common sense is built up from a lifetime of experiences. His ability to dispense advice on my local radio station for three hours per day, a local newspaper column, books, tapes, and events is amazing. His motivational factor, book recommendations, and other wisdom are invaluable to those looking to get out of debt or improve their life.

However, I have found his investment advice to be lacking. Mr. Ramsey would be the first to tell you that he only invests in two things: growth stock mutual funds, and cash-bought real estate. Indeed, I believe that these are two of the best investments out there! However, he recommends A class shares (ignoring no-fee funds), ignores the advantages of a high-interest checking account (instead, opts for a CD), favors investment planning services over do-it-yourself services, frowns upon value-based investing, and ignores index funds, ETFs, REITs, single stocks, and other standard investment vehicles.
(https://www.daveramsey.com/articles/article/articleID/daves-investing-philosophy/category/lifeandmoney_investing/)

Dave Ramsey is a SAVER, rather than an INVESTOR. He prefers to invest in himself and his business, instead of various investing options. There is great value in this strategy! He is a millionaire, and I am not. However, I consider his investment advice to be sub par, and would urge others (as would he) to consult a financial adviser on matters of investment.