Why Many People are Still Hesitant About P2P Lending

Hesitant to take the plunge into p2p lendingI have been following the conversations about p2p lending on a few popular personal finance blogs in the last month or so. In the comments section I have noticed that many people claim to like the idea of investing in p2p lending but still haven’t taken the plunge.

Lazy Man and Money gave an update on his Lending Club investments that brought in several comments from prospective investors. Sam from Financial Samurai wrote this article on the Yakezie blog that also garnered many comments. Other recent blog posts that have prompted some discussion include Beating Broke, Sweating the Big Stuff and Bible Money Matters.

What is holding prospective investors back from opening an account with Lending Club or Prosper? The objections from potential investors on these blogs typically fall into one of these five categories.

1. Borrowers will just default on their loans

There is a sentiment out there that goes something like this: I wouldn’t lend my money to a stranger I just met on the street so how is it any different lending money to a stranger online? It is very different. First, these borrowers have to submit to credit checks and they have to confirm their identity in a variety of ways. Then investors have to deem the borrower a good credit risk and invest in their loan. Even with all these factors there are still defaults, that is true. But default rates are relatively low and can be mitigated somewhat by spreading your risk among a large number of loans.

2. The returns sound too good to be true

My father used to say, “if an investment sounds too good to be true, it probably is too good to be true.” In today’s investment environment people see returns of 10% and think there must be some catch, that no one can earn those kinds of returns without taking on substantial risk. Whether or not the risks of p2p lending are substantial is a subjective matter, but there certainly are risks. But with some best practices people can minimize their downside risks and quite possibly achieve double digit returns.

3. It is too time consuming

Many people hear about the need to diversify into many loans, possibly hundreds of loans, in order to protect their investment. They think they can’t possibly read and consider hundreds of loans and then keep track of them all once they are invested. I would agree with that statement. Even though I am invested in over 2,000 loans total, I can check on the status of all my existing loans as well as invest in new loans using the online tools in just a few minutes a week. Now, there was some work involved in getting to this point but the truth is you don’t have to spend a lot of time on your p2p investments unless you want to.

4. These companies aren’t making any money

This is a valid concern and one that has been discussed at length on this blog before. It is true that both Lending Club and Prosper are not profitable yet but they are growing fast and have plenty of cash on hand. Having said that, they may need further venture capital investments (this is highly likely in Prosper’s case) in order to stay in business so there is a risk that these companies may run out of cash. Now, I don’t believe that is likely – but it is a concern that potential investors need to take into consideration.

5. I am going to wait and see what happens

The wait and see approach is very common. I see many comments from people (and these are people who read personal finance blogs so they have at least a passing interest in investing) who say they keep hearing about p2p lending but they want to stay on the sidelines for now. That is fine – meanwhile these investors have to deal with stock market fluctuations and interest rates on CDs and money market accounts that are very close to zero. One day they may come back and revisit p2p lending.

I am sure there are other excuses so I would be interested to hear from readers on this one. What do you hear from your friends and family when you tell them about p2p lending? Please share in the comments.

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Carl Jensen
Oct. 5, 2011 12:46 pm

Nice article and I can relate. I have yet to convince anyone to join Prosper or Lending Club. Its always for reason #1. I try to convince people what I’m doing isn’t so different from what any credit card company does, but they just can’t seem to get past the “lending money to a stranger” idea. Many of these same people have lost gobs of money in the stock market this year.

Moe
Moe
Oct. 5, 2011 12:50 pm

I’m concerned about the class action of $45 mil against Prosper, as stated in their SEC filings (page 54) if they were to lose this could put them out of business.

Lending Club decided they could sell notes on their trading platform to all states while Prosper will not allow this. Now, what if some states will rule that Lending Club was in violation of their laws, will they need to pay for all losses like they had to repay borrower fees in MA?

Dan B
Dan B
Oct. 5, 2011 1:21 pm

Peter………I think it’s also important not to understate the amount of work & time involved in this. For example you didn’t really mean that you have DIRECT CONTROL of over 2000 notes & yet spend only a few minutes a week managing/reinvesting etc., did you? What’s your definition of a few? 5, 6, 7…………….50 minutes?
Considering that you have 6 or is it 7 different accounts total, I would have guessed that you’d spend a “few” minutes a week just logging in to these accounts, to say nothing of doing anything else. 🙂
I’m guessing that you may have forgotten to mention that a large percentage of the 2000 belong in a “hands off” automated account that you have no direct interaction with beyond logging on & staring at when the mood strikes. Or am I wrong?

Dan B
Dan B
Oct. 5, 2011 1:26 pm

Moe……..Minor detail but .Lending Club only repaid borrower fees in MA for a small subset of loans below a certain dollar figure…………………not all borrower fees in MA. It amounted to pocket change, as I recall.

Glenn
Glenn
Oct. 5, 2011 1:40 pm

It is important to note that defaults are an expected part of the process and good risk analysis includes these in setting interest rates. When people borrow from a bank, banks “bake-in” expected defaults into the interest rates they charge.

Both Prosper and Lending Club do the same thing. The question the investor has to ask is, “How good are Prosper and LC at projecting these defaults and then calculating borrower interest rates to account for defaults, while still giving investors great returns?”

Prosper uses 5 years of data to do this analysis. Prosper is very conservative and when we calculate our average investor return (currently over 10%; you can find it on the site) we do not count loans taken in the last 10 months because we don’t consider these aged yet. If we included these, the average lender return would be artificially higher and, in our belief, not accurate because few defaults happen in the first few months.

All Prosper notes are offered by Prospectus.

Glenn G. Millar
Prosper Employee

Roy S
Roy S
Oct. 5, 2011 1:53 pm

I am still cautious about p2p lending, and I have invested some money in it (albeit a trivial amount). I still have concerns about deadbeat borrowers, even after you, Peter, had blogged about how few there actually have been. So I can understand where these people are coming from. My biggest concerns, however, stem from #4 on your list and history (i.e. the early days of p2p lending). I have dipped a toe in the water, but I am still waiting to see what happens. I am one of the people who are positive about the future of p2p lending, but I have naturally conservative tendencies (and lower risk tolerances) when it comes to investing. I do not feel comfortable giving others investment advice–I prefer to keep my social and financial lives separate–so I have not proselytized for p2p lending.

Dan B
Dan B
Oct. 5, 2011 2:07 pm

Peter…………..So what you really meant to say was that you spend around 10-12 minutes per week maintaining/reinvesting etc 950+/- notes. ………not 2000+ notes. A substantial difference.

Charlie H
Charlie H
Oct. 5, 2011 5:50 pm

I’d say I spend more time on this blog posting and reading then I do managing my LC account that has over 300 notes and is about 11 months old.

Roy S
Roy S
Oct. 5, 2011 6:15 pm

@Charlie, You and me, both! I think that goes to show that this is a valuable forum for investors to interact with one another. I personally find getting an insight into others’ views, opinions and strategies to be more useful than reading “expert analysis.” There’s something to be said about discussing the battlefield, the enemy and soldier morale with those in the trenches with you rather than with the politicians.

ChasingBread
ChasingBread
Oct. 5, 2011 8:21 pm

Great blog post. I agree with everything said. I have convinced a few to invest, but mostly it took me showing my earnings so far to convince the few. Some looked and were interested, but still fear the fact that their money is unsafe.

Defaults are a reality, but what investment does not have some type of loss. I have had some defaults, but I haven’t lost thousands of dollars overnight when the dow jones plummets like it did twice a few weeks ago.

My main two reasons were already mentioned. 1) The lawsuit 2) Prosper’s profitability.

, would you mind expanding on why you believe the lawsuit will not go anywhere? I would like to hear any insight or just sole opinion you may have.

ChasingBread
ChasingBread
Oct. 5, 2011 9:51 pm

I think my post did not load.

I agree with all the reasons you posted. My main two are 1) Prosper’s lawsuit 2) Prosper’s profitability

1) I have no real insight on the lawsuit, and as Peter said, on prospers.org they seem optimistic that it is going to work out for them.
, would you mind sharing any insight you may have, or even just your opinion?

2) I, as many are a little worried about the profitability, but as originations continue to rise, my confidence does too. Prosper has a long way to go, but if orig continue to go up, I would think VCs interests to continue to invest will as well. Second, their future depends on us, so IMO if we all hold back it is just hurting our own chances of securing our investment more. The bigger and badder they get the better quality borrowers we get plus better collection efforts. Win-win to me it seems.

Mike
Mike
Oct. 6, 2011 8:42 am

Peter, do you have any concerns about committing 100k into two companies that may go bankrupt in the future? My total portfolio of investments is worth over 1 mil., but I only feel comfortable having about 20k invested with LC. I realize people of different risk appetites, but in a sense, are you breaking your rule regarding diversification?

Bilgefisher
Oct. 6, 2011 9:36 am

I have to agree with the common sentiment. The profitability of these companies is my #1 concern.

Liquidity is my 2nd concern and a big concern I hear from others. Folio is marginal at best in my opinion. Its a sloppy format that leaves plenty to be desired. Prosper is little more than a better than average saving account for me. My money is tied up in real estate and pulling out that prosper money quickly helps tremendously for stability.

People amaze me in the if it sounds to good to be true, it must be philosophy. When acquiring private money for real estate, some folks won’t consider lending when presented with a 10% note. “Its a scam, or there must be a catch” Present them with an 8% or 6% note and they open up. Emotional investing is a big mistake, and fear is the worst of the emotions.

Dan B
Dan B
Oct. 6, 2011 11:30 am

Look we’re all investors here & all have a vested interest. I don’t think it’s realistic to expect a gloves off no holds barred 100% honest discussion about the problems/risks etc. with p2p here. When I first started posting here I would be an almost constant pain in the butt & more often than not, the lone cautionary voice. But I’ve come to understand that it’s very much a thankless role.

We’re all concerned about pretty much the same issues………….Profitability, liquidity & returns. I think LC will be fine as far as profitability,with Prosper who knows.

Liquidity? It depends on your definition, time frame & note size. For a variety of reasons I’ve sold over 400 LC notes ($20-50) at an average 2% premium in the past year or so. Of course I had no time pressures but I suspect that if I did I’d have been able to unload them faster & many more as well by just offering them at a slight discount rather than slight premium. Also, earlier this year it took me a little over a month to close out my Prosper account & sell 55 Prosper notes at an effective break even to 1% premium. For my purposes all of the above suggests sufficient liquidity but I’ve heard others have more difficulty with $100 or higher notes.

And finally as for returns……………is the “average” investor going to achieve the advertised 10.5% or 9.6% numbers long term? Hell no, the average investor won’t even get close to those numbers. A good percentage of people here won’t achieve those numbers long term either. A year ago I would have gone on & on about that, but hey why do I care. The only thing that really matters is that I’m happy with my own performances & at Lending Club I’m completely satisfied.
Somebody get Peter some smelling salts, as he just passed out after reading that last sentence. 🙂

Charlie H
Charlie H
Oct. 6, 2011 12:40 pm

LOL@Dan B

Speaking of LC

Anyone notice a lower then normal number of notes on the platform?
<300 notes currently.

ChasingBread
ChasingBread
Oct. 6, 2011 1:43 pm

@Dan B,

I agree that most of us sound optimistic about the future of p2p lending, and the fact that we have a stake in it automatically makes us sound biased. You could say we are biased no matter what because we believed in it enough to invest in the first place. I think everybody here is being realistic; we recognize the problems/risks p2p poses, but also the positives
.
Will the average investor get the publicized ROI? That is a whole another issue itself; the mistake is for those that go against mass diversification. I would say those who don’t are more overconfident in the system than hesitant, and I was one of those at first. I made some huge loans at first, up to 10-15k in some loans. Luckily, the majority of them are still good 17 months later, but some have gone bad, and it is a big hit. My first thoughts were to abandon ship and pull out as soon as I could, but I realize that is the common mistake. I needed to establish a consistent loan criteria and diversify at an amount accordant with available funds. I am still far in the positive where I can wait and pull out my funds and still have a positive ROI as of today, but if I want to continue to rise my ROI I need to have a more practical system and leave emotions aside. Most investors will bail as soon as they see a default and have not even reached a high enough number notes to greatly increase their chances of a positive ROI. A good example is “IM-SHARKY”; he has one some of the biggest losses Post-SEC. He was inconsistent, and when he realized it, he pulled out. On the flip side, “Aberdeen” is the exact opposite; he lost big time in the pre-SEC era, but he recognized the flaws, corrected them and went from -3.7% ROI to 13.13%.

You are right that most investors will not reach that ROI, but it is for lack of education on the investment asset. This blog is doing exactly that, educating.

If an outsider looked at the progress p2p lending has made from day 1 until now, would you say that would bet on its success or failure based on the trends up until now? Biased or not, as of today, things are more on the outlook of success than failure. The surge of institutional investors is just the latest positive sign. At the end of the day, time will tell.

Sorry for the newspaper fellas. This is the only place to have good convos about p2p lending.

Dan B
Dan B
Oct. 6, 2011 6:22 pm

Alright I’ll bite. I think I know who you’re talking about & he’s not making 54% or anything even close. You know last year I sold I screwed up, listed & sold a note at a 12% premium………….Who knows why it was bought, but it doesn’t mean I can do that all the time. Just because someone bought 5 notes yesterday at a small discount & is able to sell them a week from now to some idiot at a 5% premium……….doesn’t mean that one can replicate the experience over & over again & get a 60% per annum return! It doesn’t mean you can do that with hundreds of notes. It just becomes one of those lab experiments that are a curiosity & don’t mean anything in the real world.

Moe
Moe
Oct. 6, 2011 6:44 pm

@Dan I know it was only for small loans, but if the trading in certain states will be seen as against state law they might face charges same to Prosper.

Dan B
Dan B
Oct. 6, 2011 7:26 pm

I’m sorry Peter, did you mean a negative 54% return? Or are you talking that guy who has a blog?

Moe…………..but trading in whatever state has nothing to do with what Lending Club’s fine in MA earlier this year. Completely different things.

Walter
Walter
Oct. 6, 2011 9:03 pm

This week in LC there has been a tremendous uptick in funding speed. I use lendstats to help filter my loans, which I check every other night as I am investing notes in an IRA (and exiting my regular account). Before this week I usually had 3-4 days after filtering, now the loans fully fund the same day. I can only guess there are some newly added big investors out there sopping these loans up. Currently less than 200 loans on LC. Very interesting development. Cue the commercials.

Dan B
Dan B
Oct. 6, 2011 10:50 pm

ChasingBread………Have you ever tried selling any of your $1000+ notes? To answer your question I’d say that an outsider would look at p2p & say that it has been a tremendous success from the borrowers standpoint & bet on it’s success.

But is that the question we really want to ask? I’d ask the outside neutral observer whether p2p has been a successful investment to the “average” investor. I think the answer is inconclusive at this time. I think an outside observer would look at p2p performance from inception to today & observe a modest return at LC but a negative return at Prosper. I think that the outside neutral observer won’t be persuaded as easily as some people here have been into allowing a subdivision of the past performances into a post SEC & pre SEC time frame, thereby creating the illusion that an investment has done much better than it really has. I’m not saying you do this, but there are many who do. I think the neutral observer will clearly see that Prosper has been an overall losing investment.

I mean let’s face it most of us here have lost money on an investment in our lifetime. I know I have………………..but I guarantee you that if you allow me to pick a starting & ending point to any of my investments, I could show you some impressive positive returns. So what, right? Well essentially this whole pre SEC results & post SEC results is just another version of that.

I’m not saying there haven’t been improvements to the process post SEC, but I’m very confident that when the final numbers are in we will realize that the performance improvements have not been as dramatic as Prosper claim or as the current numbers appear to suggest.

Charlie H
Charlie H
Oct. 7, 2011 9:30 am

Dan B
Does back testing play any role at all when you try and project what your ROI is going to be?

I find back testing useful but only if I start out with a clear strategy before looking at the “chart” or data.

I find chartist often look at a chart, and then create a strategy to match the chart.

“look if you follow this sell indicator here you would have gotten out at this point and then bought here when the price crossed this point and you would have seen a return of XX% when you got back out at this point”

Well yes, but those indicators don’t look clean an neat in real time. The only LOOK like indicators after the fact.

Lending Stats can be mis-used just like an equity chart can by a chartist. You can put in specific criteria that shows an outsides return over a specific legnth of time and say “if you do this going forward you will get XX ROI”. Which may not be true at all because the criteria might be entierly artificial.

Dan B
Dan B
Oct. 7, 2011 12:31 pm

Peter………..I don’t think they’re different companies at all. They’re still targeting the same type of high risk borrowers. How do I account for the difference in results between pre & post so far? Sure they tightened up their lending standards a little & the economy is better……………..but most of it comes from simply having raised the interest rate around 4%, pre vs post. That’s it.

And let’s not forget a very important point. 98%, maybe 99% of post SEC loans are still out there & a quite aways away from the finish line. So we should probably leave the champagne on ice for now.
Ok, how’s this for a prediction. And you know how often I’m wrong with my predictions. 🙂
ROI on post SEC loans are going to head south & 2011 loans are going to be the worst year post SEC so far Why? Because Prosper is going to have to get progressively more & more aggressive to get more borrowers through the door. And they do appear to be out of original ideas. So it’s either lower interest rates or lower standards. Either way & the result equals lower ROI. It’s not that complicated. If you look deeper into the numbers today you can see that this is likely already occurring.
Of course none of the above should be of any concern to investors concentrating on “repeat borrowers”………….except that those numbers are likely to decline as well.

Glenn
Glenn
Oct. 7, 2011 2:15 pm

@ Dan – I believe I can answer your question as to what has changed with our (Prosper’s) risk model since before and after the quiet period.

1) Prosper does not target “high-risk” borrowers as you say. Pre-quiet period we used to consider anyone who had a credit score in the 500’s or above. Today, a borrower needs a minimum credit score of 640 to even be considered. We only lend to prime and super-prime borrrowers.

2) For those over a 640 credit score, our risk matrix has changed, so overall, borrower’s Prosper scores have dropped. In other words, if a person was previously considered a “B” or “C” borrower before the quiet period, they could be a “D”, “E” or “HR” today. Thus, today, the same borrower profile would be paying a higher interest rate to account for a greater potential default rate.

3) Your prediction that we are going to lower standards has no basis in truth. If you look into our numbers today, and we are 100% transparent with our numbers, you can see that lender returns are averaging over 10% net of defaults. In addition, we are conservative and we don’t even count loans taken in the last 10 months because we feel that they are not aged enough to be able to accurately predict defaults.

Of course, you may not want to take our word for it. Both http://www.lendstats.com and http://www.nickelsteamroller.com (third party sites) have models which allow you to predict what your returns and defaults would have been had you invested in certain types of loans in the past.

P2P lending and Prosper is not the right choice for everyone, and it sounds like you are in that group. However, there’s a reason that highly sophisticated instiutional investors continue to invest in both Prosper and LC.

Prosper Notes are offered by Prospectus. http://www.prosper.com/prospectus

Glenn G. Millar
Prosper Employee

Dan B
Dan B
Oct. 7, 2011 3:09 pm

Glenn…………..I find it peculiar that the only person who ever claims that 10.6% number is real………..happens to work for Prosper. Since you bring up Lendstats let me ask you this. There isn’t a number for any of the years since Prosper started that’s even close to 10.6% & yet that’s the number you guys keep claiming. How is that possible??

And as for predictions, please forgive me for not being overly in awe of your powers in that regard. Show me a historical positive return first before trying to tell me how great of a job you’re doing for your investors.

I understand that you’re just doing your job here but frankly you should be on the phone or hitting the streets trying to get new borrowers………………….or trying to figure out how it is that Lending Club is completely kicking your collective butts, month in month out anyway you want to define that comment..

Dan B
Dan B
Oct. 7, 2011 3:37 pm

Peter…………..You see that’s the difference between us Peter. You look at 2009 & see 10% defaults & then choose to conveniently move on. I look at 2009 & see 10% defaults, another 10% or so late, the vast majority of which are heading to default. Then I look at a calendar & see that there’s another 14 months before all the loans from 2009 are done & therefore more defaults. Everyone knows that 10% number won’t hold. Why pretend that it’s anything more than a snapshot?

Glenn
Glenn
Oct. 7, 2011 3:37 pm

@Dan – There is a slight difference between how LendStats calculates ROI and how we do. Without going into detail of the difference, LendStats still shows investor returns at 8.34% for 2009, 10.01% for 2010 and 9.02% for 2011. Even if you consider LendStats’ figures as the correct numbers, they are still stellar returns and appealing to many investors in this economy.

Some investors see the data over the last 2 1/2 years and this is enough to make an investment decision. Others, like yourself, need more data. That’s fine. We hope you’ll keep an open mind and in a couple of years, with more data, you will consider investing.

Thanks,

Glenn G. Millar
Prosper Employee

Prosper Notes are offered by Prospectus. https://www.prosper.com/prospectus

Roy S
Roy S
Oct. 7, 2011 6:52 pm

@Dan, I’m wondering where you’re getting your numbers. I’m seeing about 6.5 – 10.5% (on a per month basis) that have defaulted from August 2009 – February 2010. When adding in all the loans not listed as current or paid that number goes to 10 – 15% (on a per month basis). This is a rather crude measurement as it does not take into account grade, loan value, any payments made, recovery etc. (As a side note: Taking August 2009 out of the numbers, the percentages change to 8.5% – 10.5% and 13 – 15%, respectively) To me it only looks like late notes contribute an additional 5%, not 10% as you stated. Looking at just the raw percentages is not the best of ideas anyway, as it is obvious that a loan that defaults in the first 6 months/one year will cause a greater loss than a loan that defaults in the last 6 months/one year. Thus, I think you are being overly concerned with the loans that have still not defaulted. Using Lendstats model (which also takes into account loss factors), the ROI (on a per month basis) ranges from 6.5% – 9.5%.

*when I say “on a per month basis,” I am referring to grouping all of the loans with an origination date occurring in the same month of the same year
**all data is using Lendstats as I stopped downloading the information from Prosper in August
***finally, this analysis can’t adjust for things out of Prosper’s control, such as the financial ability/willingness to lend and loan preferences of the investors (i.e. there are loans that just don’t get funded which, if they had been funded, could possibly affect the default rate for better or for worse)

You do have a valid concern, Dan, that the models are still not adequate enough to provide for the risks the investors are taking. The hope is that UW for Prosper (and LC) is continually getting better. Maybe the overall rates of default will stay the same but the models will be better at placing people into the correct grade category. We are assuming that we can compare notes issued in 2009 with those issued in 2011. With continually better–“better” being an assumption I hope I can make–underwriting, a loan issued with an A grade in 2009 might be issued with a B grade today. Or conversely, a loan that would have been issued with a D grade in 2009 may be issued with a C grade today. So everything you stated might be correct, but it would only be applicable to loans in 2009 and not loans issued in 2010, 2011, 2012, etc.

On a final note, re: “When I first started posting here I would be an almost constant pain in the butt”

Dan, you can’t write, “When I first started,” when things haven’t changed! 😉 On a more serious note, I agree that being the contrarian is a vital but thankless role. It allows for a perspective that others are too emotionally blinded to see themselves. I do think, however, that while most people on this board are optimistic about p2p lending, your views/posts come off more as pessimistic (as opposed to realistic) and a little antagonistic. I think a lot of your valid points and questions get lost in the tone of your posts. I’m not trying to speak for anyone else, I’m just letting you know my honest perception.

Charlie H
Charlie H
Oct. 9, 2011 8:34 am

R

I find lending stats very useful for backtesting and helpful for predicting.

Peter have you ever listened or read a “chartists” thoughts on equity trading? They talk about all these sophisticated sell and buy signals and will take a chart (could be for an individual equity or an ETF) and the build an entire trading strategy that just happens to fit what happened the last 6 months perfectly. They then well say hey if you do THIS over the next six months you will see outsize returns.

Well in reality, those sell and buy signals only look like signals looking backwords. In reality the market takes a pretty much wandering path.

I buy into some buy and sell signals that help me identify when to get into a stock. 200ma, bollinger bands, oversold / over bought being the ones I think have any predictive value real time. Everything else seems pretty worthless in real time. I however am I market novice with only ~5 years of investing experiance.

One can miss use lending stats in the same way and create very specific filters that show outsize returns over specific time frames. I think that the more specific of the filter you develope the more of the chance that those returns are just statistical flukes. Especially if you are looking at <1000 loans over < average loan age of 18 months.

Charlie H
Charlie H
Oct. 11, 2011 11:08 am

If you want to be entertained Peter go look at some of the sillyness google VectorVest and “power channeling”

🙂

Simon Dixon
Oct. 19, 2011 7:13 am

Very interesting to hear the common resistance points.

The question is, how can a p2p platform overcome a lot of these objections.

Hmmmm

matt feldman
matt feldman
Oct. 19, 2011 7:36 am

Some of the rates seem a little like usury; 30% is a lot.

Dan B
Dan B
Nov. 15, 2011 4:26 am

I think it’s important from rime to time to revisit past conversations, if nothing else to get a better idea of who is talking reality & who is wishful thinking. In this case we’re only looking back 5 weeks in time.

On October 7th, Glenn an employee of Prosper commented in rebuttal to my less than positive remarks about Prosper & stated “LendStats still shows investor returns at 8.34% for 2009, 10.01% for 2010 and 9.02% for 2011.” At the time, I commented vigorously that those numbers were unsustainable going forward………….. & as it turns out, haven’t had to wait that long to show that I wasn’t talking out of my other hole. Today, a mere 5 weeks later, those numbers are at 8.25% for 2009, 9.65% for 2010 & 8.35% for 2011. These are significant (some would even say alarming) declines for just a 5 week time period. And if you look deeper into the numbers you’ll see that the steepest declines are occurring in 2010 & 2011 which together account for almost 89% of the total loans originated in that 3 year time period, a period that Prosper likes to distinguish as the post SEC period So while the 2009 number is unscathed, it only amounts to a bit over 11% of total loans.

The next step is a quick visit to Prosper.com where we still see prominently displayed, the unchanged figure of 10.69% actual returns.

How much more of a decline do we need to see before someone other than myself will come out & say that the 10.69% number Prosper touts is suspect? Peter? Anyone?

Dan B
Dan B
Nov. 15, 2011 8:04 am

Peter……In that case the only thing I can say is that you might want to pay closer attention because you’re mistaken. The deterioration has been MUCH sharper at Prosper. Ken & I smoke about this very topic just 2 weeks ago & we were in agreement. In fact I would say that the decline at Lending Club has been comparatively slight, if at all.

I have the weekly Lendstats “late” numbers for both companies going back to Oct 13th. Come on, you didn’t think I would actually say the things I did without having the numbers to back it up, did you? 🙂 I’m a strong believer that the same set of numbers can be used to paint a variety of differing pictures. But in this case it would be a real stretch to paint the one you’re trying to paint.

Michael A
Michael A
Dec. 14, 2011 12:47 pm

My concern is a Madoff Ponzi type scheme. How do we know there are actually borrowers? Money still coming in, so theres plenty to go out….

Michael S
Michael S
Jan. 27, 2012 7:41 pm

Lending Club just tweeted the following:

We don’t want to be a tease, but we’re gearing up to celebrate something we’re pretty proud of next week! Any guesses?

Do you think next week is the week they are finally profitable? That would resolve concern #4. It’s always been my concern that LendingClub has lost as much money as they paid out in interest.