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What it is – How it works?
By TIMOTHY J. McINTOSH; MBA, MPH, CFP®, CMP™ [Hon]
Similar to private equity or venture capital, peer-to-peer lending [aka person-to-person lending, peer-to-peer investing and social lending] is the practice of lending money to unrelated individuals without the benefit a traditional financial intermediary like a bank or financial institution. P2P lending takes place online using various platforms and credit checking tools.
And, it has been in existence for about a decade.
Here are some important characteristics:
- P2PL offers a chance to get a lower interest rate than a bank, and gives investors a chance to receive higher returns. Of course, more rewards means more risk.
- The two largest P2PL companies are Prosper.com and LendingClub.com. Prosper is older, Lending Club is bigger. Prosper allows bidding on the interest rates you’re willing to provide a loan. Lending Club sets the rates.
- Initial returns on Prosper were disappointing because default rates were high; today it is better. For loans originating in the last six months of 2009, both Lending Club and Prosper have a default rate (including currently late loans) of about 13.5%. Using loans from that same time period, Prosper had overall returns of 8.3% and Lending Club had returns of 4.3%.
- Since avoiding defaults is an important part of P2PL, investors should buy many lots of notes – for as little as $25 each – which make it relatively easy to achieve broad diversification. Compared to buying index funds and rebalancing once a year, P2PL is more time-consuming as you must pick the loans to invest in individually. Filtering through the offered loans is time-consuming, but can be rewarding. Some investors sell off their notes at a discount once the borrower goes late on a payment for instance, or just because they need their money out of the investment before the term is up.
- No matter how closely watched there will be a drag on returns from the cash in your portfolio. It takes time to choose loans acceptable and then for them to be approved. Just as with a mutual fund, this will lower your returns, perhaps as much as 1%.
- One of the real benefits of P2PL is a low correlation with other investments, as it is different than other asset classes and ought to perform differently from equity and fixed income investments.
More:
Assessment
The Author
Timothy J. McIntosh is Chief Investment Officer and founder of SIPCO. As chairman of the firm’s investment committee, he oversees all aspects of major client accounts and serves as lead portfolio manager for the firm’s equity and bond portfolios. Mr. McIntosh was a Professor of Finance at Eckerd College from 1998 to 2008. He is the author of The Bear Market Survival Guide and the The Sector Strategist. He is featured in publications like the Wall Street Journal, New York Times, USA Today, Investment Advisor, Fortune, MD News, Tampa Doctor’s Life, and The St. Petersburg Times. He has been recognized as a Five Star Wealth Manager in Texas Monthly magazine; and continuously named as Medical Economics’ “Best Financial Advisors for Physicians since 2004. And, he is a contributor to SeekingAlpha.com., a premier website of investment opinion. Mr. McIntosh earned a Bachelor of Science Degree in Economics from Florida State University; Master of Business Administration (M.B.A) degree from the University of Sarasota; Master of Public Health Degree (M.P.H) from the University of South Florida and is a CERTIFIED FINANCIAL PLANNER® practitioner. His previous experience includes employment with Blue Cross/Blue Shield of Florida, Enterprise Leasing Company, and the United States Army Military Intelligence.
Conclusion
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Filed under: CMP Program, Experts Invited, Investing, Risk Management | Tagged: certified medical planner, Lending Club, Peer-to-Peer Lending, Prosper, SIPCO, Timothy J. McIntosh | 1 Comment »
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