Tom at Prosper Lending Review may have topped my compiled blogger advice for new lenders by posting advice from 11 people for someone considering peer lending. The person seeking advice is concerned about stock market returns and the low bond/CD rates and therefore is considering putting a 100K into P2P loans to earn 10%. To sum up my advice:

• Consider the fees — you can increase your returns in any investment by lowering the fees paid.
• Consider taxes — the income tax treatment of peer loans reduces your return plus the taxes can be difficult to file. The Roth IRA is a better investment than P2P loans if eligible.
• Consider the investment timeline — over the next 30 years stock returns might not be fantastic, but a few months of 30 years is not a good sample for long term evaluation.
• Consider starting peer to peer lending slowly. This was many bloggers mentioned initial mistakes in P2P lending.
• Consider the stats of the top ten lenders. In general, they are not receiving a 10% return and many are doing much worse.

The advice from several others also echoed my thoughts: 1) Invest for the long term 2) Consider fees 3) Peer-to-peer is too new to commit a large portion of an investment portfolio 4) start P2P lending small. See all the detailed advice at Prosper Lending Review.

lending advice, poll, p2p lending, investing

Technorati Tags: lending advice, poll, p2p lending, investing

• Lending Club IRA: Why it is good for your retirement
• P2P Lending: Everyone is Watching
• Blenders Borrowing-to-Lend: Earn money on good credit?
• Carnival of Peer-to-Peer Lending #10
• Lending Money via Prosper to Increase Returns

My funds arrived to Prosper Marketplace a few days ago. I planned to jump into Prosper and start carefully selecting loans for funding. I browsed a few loans, but I have cold feet.

So I opened my blog to reflect…. Why am I nervous about bidding? I had no problem lending on Lending Club for a total of about $1,000 to date. So why is Prosper Marketplace different?

My trouble in starting to bid seems to come down to the openness of the market. That same openness is great for transparency. As I have read on other blogs, browsing P2P lending is voyeurism. I think it is a bit of Voyeurism and Exhibitionism.

Peer-to-Peer lending feels voyeuristic for several reasons:

• Many loans provide interesting, entertaining, or just odd stories.
• After browsing loans, you cannot help but to feel more secure in your own financial future because you had to read so many poor quality loans.
• It can be fun to pass judgment on others occasionally and with Prosper or Lending Club, you can decide who receives funding and who does not.
• Peer-to-Peer lending allows you to feel superior to others who are not as financially savvy. That is why most of them need the money.

Peer-to-Peer lending is great fun to view the financial lives of others. I like that part of the openness.

So what about the exhibitionism? I am not calling borrowers exhibitionists. I imagine many borrowers do not like revealing their financial lives in public, but doing so helps the loan fund and at a better rate. The exhibitionism statement comes from my lack of exhibitionism. Personally, I do not like being watched.

Even as a lender, every bid you make can be viewed at Prosper statistics sites such as Lending Stats and Eric’s Credit Community. Anyone can view your return on investment and all the bad loans you extended. For example, you can see Rate Ladder’s or Lazy Man’s rate of return. Both have admitted some early mistakes in their lending, so low returns do not necessarily mean that they do not have good advice to share. They, along with some other bloggers, helped in providing advice to new P2P lenders based on their experiences.

My concern about the openness is how some people use other lenders’ low rate of return as criticism or as an attempt to end an argument — like Goodwin’s Law. I have seen this technique used in the comments on several blogs and forum posts. Essentially the unstated argument is: “Your return is low (lower than mine) therefore the information you are presenting is false (not as correct as my information).” This is flawed logic.

In most markets, no one knows individual investors’ rate of return due to there being no openly available personal data. You cannot see my personal rate of return on stock market investments. It is easy for investors to exaggerate — or outright lie about — their rate of return on the stock market. People only talk about their winning picks and not the losers. In the Prosper Marketplace, you do not need to tell anyone because everyone can see all your trades. So everyone will know if I make bad decisions in Prosper lending. In contrast to Prosper, Lending Club only currently posts loan statistics, but they will likely make similar data available in the future.

I suppose that if I am going to invest in P2P loans with Prosper, I must overcome this fear of exhibitionism. Besides, I know that all the openly available lending data is positive for the market. Time to make a few bids.

——–

Note that by the time I reviewed this post for publication, I had already placed a few bids on Prosper loans. Of course, you can see them all in detail.

• Lending Club IRA: Why it is good for your retirement
• Advice for Potential a New Peer-to-Peer Lender
• Second Peer to Peer Lending Carnival
• WSJ writes about P2P Lending
• Investment in Prosper Loans – My Next $500

Lending Club is offering a 5% ROI bonus in the form of a “Thank you!” to investors who lend more than $5,000 before February 3rd 2008. If you lend $5,000 before the deadline, you will receive a bonus of $250! If you use my Lending Club Affiliate Link and open the account with $1,000 initially, you will receive an additional bonus of $50! That will add up to an extra 1% to your P2P lending ROI. The best news is that the more you loan, the more bonus you will receive, so if you loan a total of $10,000 before the deadline, you will receive a $500 bonus payout. Even better you can take the bonus out in cash or reinvest it at Lending Club.

How would the Bonus Impact your Lending ROI?

If you lend $5,000 in $25 increments, the bonus will give you 10 “free” defaults. If you use my affiliate link to open your account, you will receive another two free defaults. This means you can select 12 bad loans at no negative impact to your P2P loan return on investment. Considering that the average reported loan portfolio ROI is about 12% (I forecast it will actually be a bit lower), this could possibly bump your returns at Lending Club up to 18% (12% + 5% + $50 affiliate bonus). That would overcome the income tax implications of P2P loans.

Even Higher Returns are Possible

To even earn even crazier returns than 18%, you can also refer people to lend which will earn you up to $50 per lender. If you refer 10 people at a $50 referral bonus each, you could possibly earn a 28% return on your investment. The S&P 500 has only toped a 28% return only one year in the last 20 years!

New to Lending Club?

I created a video of the Lending Club Portfolio creation process. It is quite easy to select loans for a risk risk level that is comfortable to you. By the way, Lending Club was my first choice over Prosper.com even before this bonus return on investment program.

Start Now!

It can take up to eight days to fund your Lending Club account and might take a week or more to find $5,000 worth of loans that you want to invest in. So if you want to earn this outstanding 5% bonus plus have the chance to earn more through recommending this program to friends, you should sign up now!

Another Suggested Promotion

According to my experience, Lending Club might have been better off offering a discount to borrowers because I found borrowers lacking. Maybe Lending Club should offer payment forgiveness on the last three payments to borrowers. Lending Club would not need to pay anything for deadbeat borrowers and the actual cash outlay would be significantly delayed which would mean a lower NPV on the promotion. Image the tag line to potential borrowers – Three Free Payments!

lending club, bonus, thank you, investment, roi, p2p lending

Technorati Tags: lending club, bonus, thank you, investment, roi, p2p lending

• Lending Club Referral Program – It’s Official!
• Prosper Referral Program Closes
• Lending Club Announces Lots of Changes
• Lending Club Referral Program is Currently Dead…
• Blenders Borrowing-to-Lend: Earn money on good credit?

Recently, I created my first loan portfolio at Lending Club. I recorded the loan portfolio creation process and decided to share it in case you have not experienced Lending Club personally. I added some narration to explain the basics of the process. The video is cropped in several places to keep it short — under three minutes total.

This video is me creating my first loan portfolio at Lending Club…

I should have mentioned in the narration that it defaulted the value of each loan to $25 but this is easy to change. By the way, I posted more information on the Lending Club Risk Score a few days ago.

Let me know what you think of the video and if you found it useful. Although, obviously it will not be that useful if you have already experienced the Lending Club loan portfolio creation process yourself.

If you are interested in investing in P2P loans with Lending Club, you can sign up here. If you sign up to lend, you will receive $25 if you fund your account with less than $1000 and $50 if you fund your account with more than $1,000. If you sign up as a borrower and your loan funds, you will receive $25.

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Technorati Tags: lending club, tutorial, loan, p2p lending

• Lending Club ROI Bonus: 5% extra return as a “Thank You!”
• Signing up for Lending Club over Prosper (at first)
• Review of My First Loans with Lending Club
• Examining the Lending Club Risk Rating Score
• Review of Lending Club Update: New Portfolio View, FICO Score, & More

Based upon my recent request, I received some useful advice from several P2P lending bloggers that I was grateful to receive before investing in my first loans with Lending Club. I am also excited to share this advice with other potential lenders. First, let me offer my own advice that I wrote on another site I just started – Five Prerequisite Investments to P2P Lending. I listed out the top five places you should put your money before even considering lending with Prosper or Lending Club.

Quick Tip: if you have not already signed up, use these links to Lending Club or Prosper for a free cash bonus upon account funding.

I received advice from the bloggers at Prosperous Land, Prosper Lending Review, Rate Ladder, Lazy Man and Money, and My Microfinance (link removed because website no longer available). So what advice did these bloggers have for newbie lenders?

Note: All the sections below are quoted directly from the bloggers responses with the exception that the italics are my questions and occasionally the blogger only mentioned the resource by name, so I added the link to the resource.

Kevin at Rate Ladder responded with a link to his newbie advice and this tidbit:

to start with I would stick to 0 current [delinquencies] and 0-1 inquiries in the last 6 months

Lazy Man and Money offered this advice:

What do you know now that you wish you knew before you started P2P lending?
- That the Experian default rate that Prosper gives as a guide really shouldn’t be used as such.
Do you use Prosper and/or Lending Club and why?
- I use Prosper. It was there first and I’ve been a member for a long time. I’m not a big Facebook user, so Lending Club rubbed me the wrong way from the get go, requiring Facebook membership at launch.
If you have a blog, what one post on your blog should someone read before investing in P2P lending and why?
- You already have it with my Revealing the Keys for Prosper Success.
What is your favorite P2P lending resource for information? (not including your own blog)
- www.rateladder.com. Brilliant writer, brilliant thoughts.
Has your overall plan been through changes since you started P2P lending? If so, how and why?
– Yes it has. I went by the Experian default guidelines, but now I go
by the guidelines that are mentioned in my Revealing the Keys to Prosper Success post. I have actually stopped adding new money to lend as P2P represents enough of my portfolio.
Any other advice you would like to include?
- I really don’t have any other new advice since [the post Revealing the Keys to Prosper Success].

Mike from Prosperous Land wrote:

What do you know now that you wish you knew before you started P2P lending?

I wish I had a better understood the risk factors for defaulted loans. If I had known then what I know now, I would’ve passed on my most troublesome loans.

Do you use Prosper and/or Lending Club and why?

I like the marketplace aspect as well as the unprecedented access to statistical information that Prosper provides. My success or failure is based on the hard work I put into understanding the statistics and risk factors associated with my bidding.

What one post on your blog should someone read before investing in P2P lending and why?

Tips for Borrowers
While the post was targeted toward borrowers, it contains great advice for lenders on what to look for in loans.

What is your favorite P2P lending resource for information? (not including your own blog)

Right now, I use the forums on prospers.org and I also use p2pnobank.com to keep track of blog posts. I used to use the official Prosper forums, but they’ve been gutted and are no longer useful for experienced lenders.

Tom and Matt, who both blog at Prosper Lending Review, both responded. First Matt’s response:

What do you know now that you wish you knew before you started P2P lending?

I always research things out pretty thoroughly before investing in them. When I started P2P lending I had a pretty good idea of the mechanics of how it worked and what the potential returns for in different credit grades. The primary thing that I have learned along the way that would have been really nice to know before starting investing is the relative importance of different items in the credit data. Early on I relied almost exclusively on Credit Grade and # of late payments in the credit history. Along the way I learned the importance of # inquiries, DTI, and % utilization. I now consider # of inquiries to be a very important figure and am considering using it as a potential way of bargain shopping in lower credit grades which I have previously avoided.

Do you use Prosper and/or Lending Club and why?
I use Prosper. I have kept my eye on Lending Club, but to date have not investing in P2P other than Prosper. There are several reasons for this. When I started P2P investing Lending Club was not around, so there wasn’t really any choices other than Prosper. Now, Prosper is the platform that has been around long enough to have a performance track record. Also, I enjoy browsing through and picking individual listings, it has evolved into a hobby as much as an investing experience.

I am looking seriously at the upcoming Zopa launch. They are partnering with Credit Unions to introduce things like FDIC insurance into P2P lending which could have an interesting impact.

What one post on your blog should someone read before investing in P2P lending and why?

For entertainment value, and interestingly enough some people are investing in P2P primarily for the entertainment and social aspects I would read: Prosper Loan scam Story of Jessica Wolcott

For an understanding of the economics of investing in P2P I would read: Prosper: Hands on Education in Risk

What is your favorite P2P lending resource for information? (not including your own blog)

For me primary sources of information are always best. Everything else is just opinion and packaging of that information. I like to go to LendingStats.com to view the raw performance information in a variety of different ways. On LendingStats you can see how others have invested and learn from the mistakes of those who have not done well while learning technique form those who have outperformed.

Although Tom added a few more than the one link requested, they were all quality, so I have included them all. Tom from Prosper Lending Review added:

What do you know now that you wish you knew before you started P2P lending?

I still consider myself new to P2P lending. I was introduced to Prosper by my brother in June so I have less than 6 months under my belt. I’ve been slow to add funds to my account and would recommend the same to all new lenders. That’s actually good advice for any investment. Go in slow until you understand the risks associated with the potential rewards.
Do you use Prosper and/or Lending Club and why?

I’m a member of both Prosper and Lending Club and have written about them both on Prosper Lending Review. In addition, I’ve recently started blogging about personal finance on Lending Club. They are both great companies and have incredible potential. The P2P lending market is growing rapidly.

What one post on your blog should someone read before investing in P2P lending and why?
First, if you are going to invest hundreds or thousands of dollars, I’d recommend you read more than one article.

My brother Matt and I co-author Prosper Lending Review. I’d recommend anyone who is going to put money into P2P lending read all his articles. He has some really great advice. In particular I’d recommend starting with these in rough order of importance:

# How does Prosper compare to other investments?
# Prosper: A hands-on education in risk management
# Borrowing money to lend on Prosper: Wise or Foolish?
# When to bid on Prosper loans
# Are all Prosper loans within a credit grade created equal?
# An analysis of pre-payment risk on Prosper loans
# Credit Scores on Prosper – Part 1 of 2
# Why would a borrower use Prosper instead of a traditional bank?

What is your favorite P2P lending resource for information? (not including your own blog)
There are a bunch of great blogs about Prosper which I reviewed here. I also recommend LendingStats.com and Eric’s Credit Community. Several have started adding information about Lending Club as well but, for now, the best Lending Club resource is their own site and blog.

Jeff from My Microfinance posted the advice on his blog (link removed 32/5/2008 because 404), which I have reproduced here:

What do you know now that you wish you knew before you started P2P lending?
How to truly assess someone’s credit risk beyond the ‘numbers’. One thing I’ve learned is that someone who cannot type a decent explanation of why they need the money with minimal spelling and grammatical errors isn’t worth investing in. I would rather have someone who is rated F4 (Lending Club) who takes the time to list the details of the request than someone who is less risky (say an A3) who gives a one sentence sales pitch. Borrowers, as I used to tell my Prosper borrowers within our group, need to treat their listing like a sales call. Put your details and passions out there and the right lenders will flow in. Trust the facts, ask questions when uncertain and let your brain work harder than your gut when lending! Your portfolio will love you for it!

Do you use Prosper and/or Lending Club and why?
Prosper doesn’t return emails, phone calls or address concerns. Not only that, they hide lies within inflated numbers they advertise to people (good old truth within a limited spectrum of time and scenarios if you read the fine print). Lending Club… Within minutes of announcing our move on our (at the time very limited and young blog) blog we heard from Rex, Renaud and Rob from Lending Club congratulating us and asking for feedback as friends of the effort! You want to talk about empowerment, get involved with Lending Club’s effort as they have a solid platform that avoids the sub-prime credit market and focuses on a reliable scope of borrowers with full credit profiles and privacy afforded to all. Prosper… They can go jump in a lake for their lack of caring about the ‘community’ and more about the profits. Prosper used to help people, used to be pro-actively communicating with people… Now they just sit in the clouds. I would never recommend Prosper to anyone based upon several testimonials about the collection process (lack thereof) and lack of service and concern they afford even the best lenders (Fred93 comes to mind) when a problem is discovered. Lending Club is highly recommended by us whether you are a ‘good credit borrower’ or a P2P lender wannabe. It’s safer, friendlier, more privacy-focused and has a far better chance of long term stability and success with it’s management team/personnel at the helm!

What one post on your blog should someone read before investing in P2P lending and why?
I would recommend the passionate example-driven notice of our ‘change of teams‘ (link removed 32/5/2008 because 404). It was a fun-filled blog in which I laid it all out in plain detail as to why we prefer and stand with Lending Club in the P2P battle. I loved giving the kick in the nuts to Prosper when I wrote it. Heather and I cracked open a good bottle of wine that night in celebration of the ‘color change’!

What is your favorite P2P lending resource for information? (not including your own blog)
P2PNoBank would definitely get the nod. Not only does it aggregate other P2P blogs, but it’s very minimalist either as a stand-alone site or RSS feed in your reader. Definitely the Grand-pappy of P2P news in my mind. Another blog that stands out would be Lending Club’s blog as Mike Smith, Maneesh Sethi and other bloggers contribute not only P2P, but Personal Finance thoughts for people to chew on.

Thank you to all the bloggers who responded. And a reminder to all potential P2P loan investors to watch out…
Beware of Bad Advice for Lending

Browsing some forums, I found several examples of poor P2P Lending advice, so be careful in your reading. For example, on WiseClerk (link to posting) I found Vinnie who gave the good advice of only lending 2-3% of your portfolio per loan and then dropped the advice bomb:

AA and A borrowers on prosper default at a significant rate, so that you cannot make a significant profit. The highest profit, after 9 months default, is on D loans.

Vinnie is talking about three year loans as near certainties after only nine months and stating that AA borrowers are a greater credit risk than D borrowers. Prosper Lending Review reports the average ROI of AA and A loans of 9.5% and an average return of 7.5% for D loans. Kevin of Rate Ladder explains why Vinnie might be seeing great returns to start out on his D loans but they might not last — due to exponential decay. Vinne is using a small sample to make generalizations, but his small sample is doing well so far. He may have picked a few winning Ds and a few lousy As but that does not create a high default rate for As nor a higher ROI for Ds in general. You can prove it yourself on LendingStats.
Good luck to all the newbies in your P2P lending. I hope that you enjoyed this collection of advice.

Anyone have any additional advice? Please post it in the comments. Thanks!

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Photo credits: Laughlin, Solo with Others, and Andrew.

Technorati Tags: lending, money, investing, Prosper, Lending Club, advice, banking

• Requesting Advice on P2P Lending
• Review My First Prosper Loans and Win a Book!
• Carnival of Peer-to-Peer Lending #10
• More Time for P2P Lending Advice
• Advice for Potential a New Peer-to-Peer Lender

I extended my first $400 worth of loans with Lending Club on Sunday night. I intended to lend $500 but could not find enough people that I wanted to extend credit at this time. I decided to give a quick report of what worked well and what could have been better about the my first Lending Club experience.

Update: I posted a video of the Lending Club Loan Portfolio Creation Process and many of these suggestions were added in the January 2007 Lending Club update.

The Good about the Lending Club Experience

1. The Lending Club website was easy to use and understand — including the pie charts in the portfolio tool.
2. The loan portfolio function was an easy way to start with a potential group of loans.
3. It was reasonably easy to change the portfolio before purchasing by adding and dropping loans.

The “Could have been Better” List

1. Lending Club did not seem to have a very large pool of borrowers. I could not even find enough decent loans to put $500 in a well-diversified portfolio — meaning $25 per loan. I extended a handful of $50 loans and my last $100 was not used. This will leave 20% of the money invested in Lending Club idle for at least another week while I try to find loans.
2. To earn a return of anything over about 8%, you must quickly drop in credit grades. If you look at the pie chart for a portfolio with a risk score of 1 of 5, all the loans are class A and B borrowers. With a risk score of only 1.5 out of 5 points on the portfolio rankings, approximately 60% of the loans (estimation based on graphic) are grades D through G and A is not included at all. That is a large difference for a potential difference of 4% in return.
3. Not enough information to quickly filter out poor credit risks on the list of loans available. Very few fields appear on main portfolio review page to quickly delete bad potential loans.
4. Titles of loans are very similar making it difficult to remember which loan details you were examining when you move back to the main portfolio page.

Ideas for Improving the Lending Club Loan Selection Process:

1. The site should allow you to select what additional fields to show on the portfolio review page. For example, credit inquiries and credit utilization would have been very helpful to add to the review without needing to drill into each detail page. I could have eliminated several loans very quickly — one person had 25 recent credit inquiries!
2. When searching for loans in the portfolio, the search returns loans already in your portfolio. I think that this should be an option to turn on or off. I imagine most people want to search to add potential loans that have not already been added.
3. More descriptive titles of the loans — maybe this is the fault of the borrowers rather than the site, but it almost seemed like the titles were selected from a drop down list. When looking at a long list, they became difficult to distinguish by much more than the dollar amount of the loan.
4. Let me add a loan to an existing portfolio. I browsed the site again tonight and found one loan to fund, but it seemed ridiculous to have a portfolio with one loan, so I did not bother funding the loan.

Verdict on First Lending Club Experience

I am not as excited as I expected to be about my first lending experience with Lending Club. The list of the potential loans to fund seemed too small and my estimated return is only slightly above 9%. I need to take on more risk to make more money, but right now I seem to be more afraid of the credit risk than enamored with the potential return.

My current portfolio will not beat the stock market on average. Purchasing $500 of the total stock market index would be a much better investment because it is more diversified, contains less credit risk, and is more tax efficient. Additionally, Lending Club loans are less liquid than an investment in a stock index. At this time, I classify my first loan portfolio as an experiment rather than a rational investment.

• Lending Club ROI Bonus: 5% extra return as a “Thank You!”
• Advice for Potential a New Peer-to-Peer Lender
• Blenders Borrowing-to-Lend: Earn money on good credit?
• Examining the Lending Club Risk Rating Score
• Where Should I Invest My Next $500? You Decide

Update 12/3/2007: Advice for new P2P Lenders has now been posted.  

If my account is funded this week, I hope to lend money for the first time using a P2P lending service by Friday. Since I will be selecting my first loans, I am requesting some advice based on readers’ P2P lending experiences. I am planning to combine that advice into a single post for newbie P2P lenders. I would prefer short answers so just a few sentences is fine and it should not take very long to write. If you have a blog, I will include at least one link back to your blog in the advice post.

I will compile the post on Thursday night this week, so please respond before Thursday about 7PM central time if you would like your answers included. I can always update the final post with your advice later if you do not have time before Thursday evening. You can respond as a comment to this post or use the contact form. I appreciate your time and advice.

What do you know now that you wish you knew before you started P2P lending?
Do you use Prosper and/or Lending Club and why?
If you have a blog, what one post on your blog should someone read before investing in P2P lending and why?
What is your favorite P2P lending resource for information? (not including your own blog)
Added: Has your overall plan been through changes since you started P2P lending? If so, how and why?
Any other advice you would like to include?

Thank you!

• More Time for P2P Lending Advice
• Where Should I Invest My Next $500? You Decide
• First Two Months Blogging P2P Lending
• Review My First Prosper Loans and Win a Book!
• Prosper and Lending Club Advice for New Lenders

Although not yet formally announced, Lending Club now has an affiliate referral program. Rex Dixon, Director of Social Media Content at Lending Club, has confirmed it in the P2PNoBank Forums. I believe the deal is the same as Prosper’s referral program — $25 for both referrer and the new person who signs up using the link. However, the details are still vague, so check back at the forum while Rex answers more questions about the affiliate program. I’ll also post a summary of the clarifications.

Update: The referral program is now $25 to $50 cash bonus. $25 for funding your account with $500 or receiving a loan and $50 for funding your account with $1000

Create your Lending Club affiliate link like the one below replacing your Lending Club ID with mine: https://secure.lendingclub.com/refer.action?referrer=PersonalLoanPortfoliocom

Please note that I do not recommend using the email system at Lending Club for referring people until they have addressed the issue of the second link to Lending Club not containing the referral code. I mentioned this issue on P2P No Bank forums. Instead you should construct your own email using the link format above to insure that both parties receive the credit.

Update (11/21/2007): Rob from lending club posted some clarifications on the Lending Club affiliate program.

• Lending Club Announces Lots of Changes
• Lending Club Referral Program is Currently Dead…
• Lending Club ROI Bonus: 5% extra return as a “Thank You!”
• Prosper Referral Program Closes
• Lending Club Quiet Period Announcement: A Blog RoundUp

I decided to sign up with Prosper at the same time I am waiting for my Lending Club account to be tied to my checking account. Interestingly, Prosper allowed me to select my collections agency. The sign up process gave a choice of two companies Penncro and Fristsource and listed their collections statistics which I have posted below. Firstsource does not have a great deal of data history yet since they have only been sent a total of 77 loans, but the results under credit ratings of B-D are promising. I have summarized some of the results in the table below for easy comparison.

Click each graphic to expand and see the full collection performance statistics.

Prosperous Land and Rate ladder have both recently mentioned the communications to existing lenders about testing a different collections agency at Prosper. The above charts must be the initial results of those tests.

Correction (11/19/2007): Mike at Prosperous Land pointed out that the letter recently received is about a new 3rd collection agency. He has more information on collections in the article just posted about adding to the collections effort.

I like how Prosper seems to be open about the data that they provide.

Edit: A few hours after posting this, I realized that the numbers are posted on Prosper’s collection agency page so maybe this is not so new.

• Prosper and Lending Club Google Advertisements
• Eric Launches LendingClubStats.com
• Video of Creating a Loan Portfolio at Lending Club
• Lending Club Announces Lots of Changes
• Poll Results: Lending Club will Survive

After doing a little tire kicking, I decided to sign up with Lending Club first. I have entered all the prerequisite data including the bank account number. The initial sign up was quick and required basics such as social security number to reduce fraud and because they will send a 1099 at the end of the year on interest earned. After a basic automated identity authentication, I entered my bank account information.

Lending Club withdraws a very small amount (under a dollar) from your account to validate the account information. To finalize registration, I must enter the amount withdrawn to validate that it is indeed my account. This process reminds me of the Paypal sign up process except Paypal deposits two very small amounts into your account rather than making a small withdrawal. Unfortunately, the process takes two to three days and it has only been 24 hours so it will be a few more days before I extend my first loans. I am growing impatient already.

So why did I pick Lending Club over Prosper for my first account? Several reasons:

• Lending Club allows loans as small as $25 which allows an initial small overall investment to be more diversified than Prosper.
• I liked how Lending Club clearly enumerated the risks.
• I like that Lending Circle lends to a group of people with a higher credit score than Prosper. Lending Club stops at a FICO score of 640 while Prosper allows down to a 559.
• The credit grades at Lending Club are smaller ranges, so a “B” at Lending Club is higher than a “B” at Prosper. The tighter ranges provide a more meaningful ranking.

I will likely also start a Prosper account just to better be able to compare, but I had to select somewhere to start and Lending Club was my choice.

• Video of Creating a Loan Portfolio at Lending Club
• P2P Lending Carnival #4
• Credit Score Advice from a Mortgage Lender: Mortgage Refinancing Experience
• Prosper.com Correlations: Late Loans and Interest Rate Caps
• P2P Borrowers Waste Time and Money with Early Payoffs

The WSJ recently wrote about P2P lending in the article “Doing Loans with Web Neighbors.” The article covers tips for both borrowers and lenders, but they are the basics such as diversify loans and factor in defaults and fees. The article also lists a great story of a borrower who saved a significant amount of money on her monthly payments and raised her credit score.

A year ago, Nicole Newberry was in a financial hole so deep that she had trouble making the minimum payments on her credit cards. Then a co-worker told her about Prosper.com, a peer-to-peer lending Web site… Within 10 days of posting on Prosper.com, Ms. Newberry received a $9,000 loan at 19% annual interest — enough to pay off all her credit cards, which at that time carried 25% to 27% interest rates. As a result, her monthly payment dropped to $330, from $800 before consolidation. Her credit score, once a subprime 580, is now 680 and steadily rising.”

With that kind of credit score increase, I would recommend that Ms. Newberry consider taking out a second loan and use it to pay off the first one. She could drop her monthly payment even further. Prosper only recently announced the option of taking out second loans that would make this strategy possible.

The WSJ article lists the big players in the P2P lending market including:

• Prosper founded in February 2006 with $90.5 million in loans and 440,000 members. (Rate Ladder says $100 million+.)
• LendingClub.com started in May 2006 for Facebook and has since opened up has 20,000 participants and more than $1 million in loans.
• Lending Circle (now virginmoneyus.com) started in May 2007 exclusively for lending among friends and family has brokered more than $200 million in loans.

The article is a good introduction to the P2P lending marketplace, but introduces no revelations. If you are new to researching P2P lending, it is a good article to read. Otherwise, you can skip it…

• The Mortgage Foreclosure Crisis and your P2P Lending Strategy
• Congress Examining Credit Card Practices
• Zopa Borrowers Receiving Negative Interest Rates on Loans
• My First Lending Club Payments All on Time
• P2P Borrowers Waste Time and Money with Early Payoffs

According to Club Lending there are several types of risks in lending using Lending Club services. The risks listed are different from the traditional financial investment risks which are foundational enough to deserve to be addressed in a separate post. Below (in the quote sections) is the risk information provided by Lending Club:

Participating in any financial transaction carries elements of risk, and online person-to-person lending is no exception. We strive to create an easy, safe and private environment for people to bypass the banks and borrow or lend money at better rates. Below, we address the main types of risks associated with online financial transactions in general, and explain the measures we have taken to reduce these risks.

I agree with that statement because every investment carries general economic condition risk and inflation risk. However, other investments, such as money market savings or US government bonds, do not carry the same risk as participating in a P2P lending network. P2P lending lenders must carry principal risk which investors in US government bonds do not carry. However, if you invest in governemnt bonds, you increase your inflation risk. (The term Inflation Risk will be linked to soon to-be published post.)

Data Security
A key area of risk to be concerned about is the degree to which a company can protect the security of the information it receives and stores from its customers. Lending Club takes strong steps to safeguard your personal and financial information through vigorous physical, electronic and operational policies and practices. We use the latest technology available to provide a safe and secure platform. We store all sensitive financial data such as Social Security numbers in encrypted form at a secure, off-site database. We help protect the security of all accounts through implementation of session time-outs, policies protecting account numbers, and a rigid ID theft policy. For more information on our security practices, please refer to our Privacy Policy, which includes all security measures.

This makes me a little nervous that a lending institution would even mention this as a risk and I suppose that there is greater risk with Lending Club (or any other smaller banking institution) in security than a traditional bank. However, that risk is likely always present.

Operational
Lending Club has established internal security procedures with real time monitoring, as well as periodic external reviews and audits. Internal operations personnel constantly monitor our systems and transactions, as well as those of our partners, to ensure that there is no compromise.

Operational risks exist in all financial institutions, but I presuppose that this is likely greater at a newer institution.

Authentication
Lending Club employs state-of-the-art authentication technologies to verify members’ identities. This process reduces the chance for identity theft by using multiple sources of information to establish the authenticity of the online user. In addition, Lending Club also tracks transactions internally and monitors potential fraud and other illegal activities.

Credit Worthiness of transaction partners

When entering into an online transaction, it is important to be able to trust the screening practices of the host platform. Lending Club uses proven methods to determine a borrower’s credit worthiness. We start with the borrower’s credit score. We don’t support any subprime loans, so anyone with a credit score below 640 will be prevented from borrowing. We also look at the borrower’s Debt-to-Income (DTI) ratio and the amount of the loan to ensure that the borrower can afford to pay back the loan. One key area of credit worthiness that separates Lending Club from any other company is the fact that most Lending Club members are also members of other trusted communities. We believe that borrowers are more likely to pay back their loans that have been extended by neighbors, fellow alumni, and friends-of-friends.

The obvious — credit risk. This is the risk of default or principal risk. That is, will the borrower pay back the loan? I am glad to hear that Lending Club does not support sub-prime loans like the mortgage industry which has created a national housing and lending issue. Most surprisingly, Club Lending does not allow people with a credit score south of 640 to participate. Compare that to Prosper’s lending grade chart, where a FICO score of less than 640 is a grade C. Prosper allows down to grade E (560-599) and HR for “high risk” (520-559). Therefore, an “A” does not always equal an “A” across lending services, so ensure that you understand the credit risk of the P2P lending service that you select. Prosper lending grades as of 11/15/2007 are posted below as an image:

Fraud
Lending Club is committed to protect its members and takes financial fraud extremely seriously. We realize that even with the strong securities measures in place, criminals might try to exploit and abuse our systems. Lending Club will work with law enforcement agencies to seek full prosecution of anyone attempting to commit illegal acts using Lending Club’s systems.

Fraud is a type of risk that I normally never carry in a traditional banking transaction. For the most part, barring certain scams, the banking institution takes on the majority of the fraud risk. The main exception that I can think of is accepting a check from a fraudster. P2P lending seems ripe for identity theft loan rip offs.

Investment/Portfolio Diversification
In general, diversification is a sound principle of investing. Lending Club encourages this safe practice by generating well-diversified loan portfolios automatically based on lenders’ chosen risk levels and affinities. Using portfolios, it is possible to lend small amounts to a large number of borrowers who present different risk characteristics (get a portfolio recommendation here). Lending Club employs a complex form of Harry Markowitz’s Modern Portfolio Theory in calculating the optimal portfolio allocation based on the number of loans selected and the amount invested. Following the diversification principles, Lending Club calculates the portfolio loss risk using statistical methods. Lending Club then constructs a recommended portfolio by identifying the degree to which lenders and borrowers are connected.

One of my favorite topics — reduce risk and increase returns by investing in a well balanced portfolio. That is the reason that a large portion of my finds will never be invested in P2P lending. Additionally, no lender should ever invest a significant portion of their P2P lending portfolio with a single loan.

Balancing Risk vs. Reward
There are seven main grades of Lending Club loans: A, B, C, etc., where A-rated loans correspond to the highest credit scores. Because loan listings can differ in risk within each of these grades, we created 35 different risk subgrades in an attempt to more accurately reflect the risk-reward proposition. Balancing risk and reward protects the portfolio because it is constructed based on the level of expected losses that can occur for a given risk grade. Lending Club continuously monitors and reviews its interest rates to ensure that they provide the right risk/reward balance.

The more risk you take on in any transaction, the greater the return on investment you should expect. The reason loans to less credit-worthy individuals pay a higher rate of return is that they are more likely to default — the principal risk.

Summary
Lending money subjects the lender to multiple types of risk, including credit risk, opportunity cost risk, and more specifically, interest rate risk.

* Credit risk is the risk that the borrower will not pay the interest or principal that he or she has promised to pay.
* Opportunity cost reflects the risk that the value that your loan portfolio will underperfom relative to the general market.
* Interest rate risk reflects the fact that the values of fixed-interest loan portfolios tend to fall as interest rates rise.

That is an excellent summary of the risks inherent at a P2p Lending site such as Club Lending or Prosper. Consider them all before getting started lending.

• Lending Club’s SEC S-1 Risks
• Prosper: Cease and Desist or Cease to Exist?
• Internet Loan Scams – Scammers Contact me for Funding
• Lending Club Secondary Market for Loans Requirements
• Signing up for Lending Club over Prosper (at first)