Awful. Very displeased. Unacceptable change. Canceling my account. These were some of the comments from my post of 10 days ago about the new changes to the question and answer process on Lending Club (Prosper also changed at the same time). I had no idea the passionate responses the post would generate.
Long time Lending Club investor, Matt from Steadfast Finances announced he would be quitting p2p lending for good. Several others indicated they would do the same. Others, like Investor Junkie, thought the change was no big deal. I am in this latter camp.
The main reason I love p2p lending so much is because of the ROI on my investment. I have been averaging about 9% on my money since I started investing almost two years ago now and I continue to add new money on a regular basis. As I have learned more I am confident that my total ROI will continue to move upwards. But if it never gets much past 10% I will still be a happy camper. Where else can I get close to 10% on my money year after year, particularly in this low interest rate environment?
Three Types of Peer to Peer Investors
By reading all the comments from this and other posts, I have ascertained there are really three kinds of investors in p2p lending:
- Autopilot investors – these are people who like the concept of p2p lending but don’t want to do any of the work. They signup for an automated plan and then sit back and let the plans do the work.
- Quantitative investors – people who want to do some data analysis to see if they can beat the averages by looking at the performances of past loans. I am in this camp.
- Qualitative investors – people who might do some data analysis but their primary method for investing would be to read each note (especially the questions and answers) carefully. These are the investors who are hopping mad with this change.
So, how do these qualitative investors adapt to the new rules for questions and answers? They must either change and become an autopilot or quantitative investor or reduce their expectations as to what qualitative knowledge they will be able to use. They can focus on the loan description (or lack thereof) and the answers to the existing questions that are available. I know this is small consolation to the many qualitative investors out there but times have now changed. You can either throw in the towel or adapt.
Does Analyzing Q&A Help Your ROI?
Many of the people who dislike this change are quitting on principal. But the question I have for everyone is this: will this change really impact your ROI that dramatically? Unfortunately we can’t answer this question definitively. I know of no investor who has run a qualitative versus quantitative or autopilot test over an extended time period. But I know for a fact that some notes with wonderful answers in the Q&A have gone into default after just a payment or two. I know people like Matt with Steadfast Finances will be adamant this careful analysis has helped his ROI but we can’t know for sure.
I have always maintained that there will be a small portion of borrowers on the platform who never intend to pay back their loan. I just think there are ways to catch them other than with questions and answers (which may or may not be truthful). Run a few queries on lendstats.com and you can turn up some dramatic differences in default rates for the same loan grade just based on credit data.
I expect p2p lending will go through more dramatic changes in the coming months and years as it matures. But unless someone can show me a similar investment that has the potential to earn 8-10% annually year in year out , I am sticking with it. Will I put 100% of my money into p2p lending? Of course not. But I believe a portion of everyone’s portfolio could benefit from the diversification and the consistent returns.
I have been an active investor in all kinds of investment vehicles for more than two decades and I have never seen an investment with more potential than p2p lending. This change has done nothing to alter my view.