It seems that regulators in Pennsylvania have had some misgivings about p2p lending. So, the PA Securities Commission issued this “warning” last week. A couple of other states followed up with similar warnings and the National American Securities Adminmistartors Association (NASAA) issued a warning as well that was picked up by Investment News yesterday.
Why? Because they want investors and borrowers to be “mindful of the risks of peer to peer lending.” Let’s thank the state regulators for stating the obvious. Investing money is inherently risky, and new investment vehicles such as p2p lending should be thoroughly researched before investing. Of course, p2p lending has risk, just like investing in anything other than US treasuries or FDIC insured deposits has risk. In fact, there is even risk with those investments because inflation may eat into your returns – but presumably you will never have any principal loss.
My question is this. Where were these state regulators in 2008 when the stock market was tanking? Did they issue a warning that stock market investing contains a high level of risk. How about during the housing bubble, did they warn real estate investors that investing in real estate contains risks? Let’s not even mention Bernie Madoff, Allen Stanford or Sean Mueller. Investing involves risk. And I concede that it is important for regulators to protect consumers from companies making misleading claims that can’t be substantiated. But P2P lending has always been transparent. All the information about the loan history of these two companies is available with third party tools and on their respective websites.
Investing is Not Just About Risk
When investing money, it is important to understand the risks involved. Every investor should do their homework and understand the potential downside for any investment. But more importantly they should understand the potential rewards. Then ascertain whether this risk/reward equation is worthwhile. Sure, you can put your entire nest egg into Apple stock (and pray that Steve Jobs stays healthy), but you will be exposing yourself to a great deal of risk and a potential large loss of capital.
Why I Love Peer to Peer Lending
With peer to peer lending you can realistically get returns of 8-10% on your money. I even know of an investor getting north of 15% returns – he shares his story here. Now, the biggest risk with p2p lending is borrower defaults which is why I recommend investors diversify into as many different loans as possible. You can do this in one of two ways. Manually comb through all the loans on offer and make your own decisions about whom to invest in, or you can use one of the automated tools provided by both Lending Club and Prosper. These tools will automatically diversify your investment into as many loans as possible.
I continue to believe that peer to peer lending is the best risk/reward investment available today which is why I am an investor with both Lending Club and Prosper. I have done my due diligence and I am aware of the risks involved and I believe that I am being well compensated for taking these risks.
I think it is irresponsible of these securities regulators to just come out with a vague 500-word warning and offer p2p investors no real guidance other than “investors should proceed with caution.” P2P lending is a new industry and as such challenges the status quo. While it is always important to invest with caution I believe investors can take these vague warnings with a grain of salt.