Experience with Lending Club & Prosper.com
Rate Ladder is promoting a P2P loan from the blogger “The Penny Saved.”
See the loan request.
Honestly, the interest rate of 16% is rather poor considering that the Prosper lending guidance is a negative 18% due to the C credit rating.
Normally, I won’t even consider anything with a lending [Read more...]
P2P Lending has been in the mainstream media news a great deal lately. I decided to post a roundup of many of the recent news articles on Prosper.com, Lending Club, Zopa, GlobeFunder, and Virgin Money. It is unfortunate that Lending Club entered a quiet period just as they were gaining tremendous growth in loan volume.
CNBC February 5th, 2008: From Zero to Millions: Financing Your New Business:
Online Family Lending Use a lending network designed for inter-family loans, such as CircleLending.com. Tools at that site will help you and your relative come to terms on the length of the loan and the interest rate, and calculate the monthly payment amount. For $99, CircleLending issues a legally binding promissory note and a repayment schedule. For $9 per payment, the company will set up automatic repayments using electronic funds transfer.
Peer-to-peer Lending: Several websites now make it much easier to find an investor who will back your business. Check out prosper.com, lendingclub.com and zopa.com.
Lending Club’s founder financed his first company with personal loans and high-interest credit cards. He eventually sold the business to Oracle. That experience inspired his new company. Lending Club, which launched on Facebook in May 2007 and on its own site last September, uses technology to match borrowers to lenders willing to offer unsecured loans of $500 to $25,000 with three-year, fully amortizing terms.
The author, Laura Rowley, must have used some old notes because [Read more...]
This is part one of a series of what I learned by talking to a mortgage broker last week.
I stopped by my credit union to check into refinancing my mortgage last week. The rates were low and with the likelihood that the fed was going to drop rates again, I decided this might be a good time to refinance from a 30 year fixed to a 15 year fixed interest rate mortgage.
I asked the mortgage broker many questions about the current mortgage market. She passed along some interesting information including the details about [Read more...]
I often read that borrowers in one state or another are more likely to default on Prosper loans. I decided to investigate if there is any truth to the likelihood that some states are worse credit risks than others. The example that often comes to mind is Georgia which has a high default rate. Currently Georgia has nearly 8% defaults and about 10% late which is a higher than average rate of late loans, but nine states have more loans that are two or more months late than Georgia.
My interest in state by state loan default rates prompted my article Pennsylvania Loans: What were early Prosper lenders thinking? At the same time, I noticed how state interest rate caps vary widely from state to state — Pennsylvania 6% and Georgia 36%. I decided to see if the interest rate caps could partially explain the difference in Prosper loan default rates by state. My theory is [Read more...]
While browsing for articles for an academic project, I decided to browse academic journals for articles on Prosper Marketplace and related interest rates. I thought someone must have published in a peer reviewed journal something on Prosper, but I did not find any existing articles outside of newspaper fluff pieces on P2P lending.
I broadened the search for other industries and the impact that the internet has made on rates. I found an article with empirical proof that the internet lowered [Read more...]
I mentioned previously that the subprime mortgage crisis should impact your personal loan strategy because of the number of desperate people needing just a little quick cash to prolong a slow fall into bankruptcy and foreclosure on their homes. CnnMoney confers with their article on the number of people taking out Payday loans to pay the mortgage payment. In a small sample, 66% of the people in foreclosure counseling admitted to taking out payday loans to pay their mortgage payment. After fees and other payments, payday loans can reach interest rates of nearly 400% per year.
If anyone is considering lending money to a a home owner Prosper.com or Lending Club, I would ask any borrower who is a homeowner if s/he has an adjustable rate mortgage, and if so, when it will reset and what the new payment will be. There may be someone people who realize that they sitting under a time bomb of a mortgage and are trying to buy more fuse to the foreclosure bomb. The pending bailout is all the more likely to make people try desperate measures to fend off foreclosure since they are now waiting on the federal plan to save them.
Quote from the article on payday loans being used to payoff mortgages in Cleveland, Ohio:
“If you want to see what an unregulated market economy looks like,” said Rokakis, “come to Ohio.” There are now more payday lending shops in the state than McDonalds, Burger Kings and Wendy’s restaurants combined, he noted.
Lenders only require borrowers show pay stubs, checking accounts and references. They don’t credit-check, except to make sure borrowers haven’t defaulted on previous payday loans.
The lenders ask borrowers for post-dated checks for the amount borrowed, plus fees, which average $15 per $100 loan. If the loan goes un-repaid, lenders deposit the checks.
The term is usually two weeks, “Most people believe they’re just going to borrow the one time,” said Faith. Instead, when the two weeks goes by, they often go back to the shop and roll it over for another two weeks. To do that, they pay another $45 in fees…
When the CRL took the average payday loan principal as reported by state regulators and multiplied it by the average number of loan rollovers per year, it found that typical borrowers pay back $793 for a $325 loan.
At those rates, a person with a pending foreclosure [Read more...]
I returned to the Zopa lending site today for a second impression after my initial review of Zopa. I noticed something that knocked my socks off about Zopa’s business model of social lending — some borrowers are not paying interest after receiving “help” from lenders. In fact, some borrowers are “paying” negative interest at Zopa! In other words, they are receiving money for having borrowed money. This is an amazing development in P2P lending!
The proof in the Zopa homepage screen shot below. I cropped out part of the screen (red line) to make the graphic smaller and added three blue checks to show you the borrowers that I am highlighting below as examples. Click the thumbnail below to see it in more detail.
The three borrowers that I am highlighting (blue checks in graphic) are:
Note that the links are to the profile pages which do not include the loans and the help amounts. The loans, interest rates, and help amounts are listed in the graphic above.
Calculating the actual interest rates…
As I browsed Prosper loans, I was surprised at the number of community members who would like to use their good credit score to borrow money in order to reinvest the money in other P2P loans. This is called leverage and by definition it does increase risk. Is it a strategy that is likely to payoff?
The borrow-to-lend strategy was referenced before in an article on OmniNerd. As of this posting on the Prosper website, LeedsGirl (AA credit) is looking for $2,500 to reinvest in Prosper loans. Bpyatt is asking for a similar loan for $10,000 at 11%. MoneyDoc99 (AA credit) is borrowing money to reinvest as part of a Doctoral project. The list of people doing this goes on, and on and on. In fact, at least 5 of the 25 people who appeared on the first page of loans were lenders borrowing to reinvest in prosper loans. Another person on the front page is reinvesting in the Chinese stock market. The funniest part is the text of this loan request, which is already completely funded at 12%. Engle writes in his loan request:
I recommend this investment to anyone with $5,000 USD sitting around. The USD will continue to depreciate in the next few years… Since I do not have the capital to readily invest in foreign markets, I am request this loan to fund my “riskless” investment in the Chinese currency and market.
It sounds like he would also recommend this investment to anyone — even if they do not have $5,000 laying around to invest. I would certainly not call the investment without risk. If it was a “riskless” investment, it would pay the same rate of return as a US treasury bond. Maybe he forgot about the Asian financial crisis which occurred only about 10 years ago. I would question anyone’s investment acumen who calls an investment in single market on borrowed money “riskless.” Personally, I have been increasing my stock percentage in foreign funds due to the likelihood that the dollar will continue to depreciate, but it is certainly not a strategy without risk.
I am calling the strategy Borrow-t0-Lend, but many of the people on Prosper trying the strategy label the practice “Borrowing to Reinvest.” Other lenders call the people who borrow to lend “Blenders.” So is it a good idea to use your good credit score to lend to others with a lower credit score? [Read more...]
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