Some People Think P2P Lending is a Ponzi Scheme

P2P Lending is not a Ponzi SchemeIn 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.


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Aug. 10, 2012 10:57 am

Good article, and a topic that probably needed to be addressed. I’ll have to admit: when I first heard of the returns possible in P2P Lending, I was extremely skeptical. You know: the too good to be true thing. Nevertheless, I figured it’d be okay to check out, and I am really glad I did. Of course, the first thing I did was make a huge mistake in my investment (put way too much money toward one loan, which promptly went bust), but that is certainly not the fault of the platform.

The concept is exceptional, and I’m really glad I found it! I intend to keep spreading the word right along with you!

Frankie C
Frankie C
Aug. 10, 2012 12:48 pm

Or maybe the lender side of the platforms is entirely fake. All the loans are fake. And Peter Renton is fake. Come to think of it, I’ve never seen Peter and Renaud Laplanche in the same room at the same time. Coincidence? I think not!

Now where the heck did I put my tinfoil hat…

Dan B
Dan B
Aug. 10, 2012 4:11 pm
Reply to  Frankie C

Rest assured that there is no way that Peter can pull off Renaud’s accent or vice versa.

Dan B
Dan B
Aug. 10, 2012 4:41 pm

Peter’s right. It’s been impossible to have a conversation about directp2p investments in the past few years without the term p*nzi or sc*m coming up. (Yes, I’m doing my small part in not giving those 2 words more exposure than they already have)

I can’t tell you how many conversations I’ve had that inevitably led to talking about those 2 terms. Once upon a time the emotions/mindset of most investors oscillated between greedy/giddy & fear. Nowadays you don’t see much of greedy/giddy. What’s out there is lots & lots of distrust coupled with fear. Unfortunately these directp2p investments are caught up in this & I suspect that it’s going to take many more years of above average returns, good press & stability to bring people around. It’s certainly understandable given the well publicized events of the last several years.

The truth is that for most new investors this whole thing is a 2 step process. First they must see, experience &/or be convinced that above average returns are probable. Then they must be convinced that it’s not happening because it’s a sc*m or a p*nzi.

Mar. 15, 2013 7:02 pm
Reply to  Dan B

I think part of the problem is that people intuitively understand how overblown the claimed returns are (because of weighting toward newer notes) and how undercounted the actual defaults are over the life of a loan but don’t know how to verbalize this.

Colin Henderson
Aug. 11, 2012 8:12 pm

There is a much simpler confirmation that these apparently aberrant returns are quite normal. Those rates were always paid by borrowers, but the recipient of the return was banks. P2P disintermediated banks and made those rates available to people other than banks.

Dan B
Dan B
Aug. 12, 2012 6:49 pm

Colin……….Very true & I doubt any regular reader here or at your blog would take issue with that seemingly self evident assertion. However, depending on your target audience you’d be surprised as to how much resistance you’ll get with even that argument.

The random person has been bombarded for years now with stories of hardship, foreclosures, defaults, closing businesses & lost jobs……………to such an extent that it is easy for them not to realize that the vast majority aren’t facing foreclosure, aren’t defaulting on anything, haven’t lost their jobs nor closed their businesses. In other words, assuming you diversify broadly, & assuming you’re compensated adequately, it’s safe to lend to the majority of people. You & I know this, but lots of people, even seemingly financially savvy ones don’t make this full connection. I think it all comes back to the lack of trust issue again.

Colin Henderson
Aug. 12, 2012 7:46 pm

@Dabn B – indeed and point taken. I was caught up in the reference to Ponzie.

The specific reference to Ponzi in the original article suggests artificially high yields that are being supported by new customer deposits. The new deposits are paid out to the original investors thus producing artificially high yields. This of course has noting to do with P2P at all. This is Bernie Madoff territory.

I think the original title could have maybe been something like:
“are P2P yields real and sustainable”

The reference to Ponzi is a particularly bad type of criminal activity that has nothing to do with the sustainability and reasonableness of P2P rates.

Dave Baker
Aug. 25, 2012 6:38 am

Great to see comments from Colin Henderson.He is our spokensman for Canada!I too live with this Ponzi allegation.I am an offline peer to peer company.I have lived through all the compliance hurdles like the big guys in the U.S.I provide a fixed yield to my investors by taking the burden of the losses.It is a twist on the current P2P model.I am currently paying 12% but will be bringing it down to 9% mostly because of all the crazy stuff being printed.Yes, I am profitable by paying an investor 12%, taking on bad debt and admin , and staying compliant with SEC(OSC) requirements!!!!!

John Brush
John Brush
Sep. 30, 2012 2:28 pm

Dave, care to e-mail me more about your business and business model? I’m a private money lender that has become interested in the P2P business model.