WARNING: Why Peer To Peer Lending is a BAD INVESTMENT

Peer To Peer Lending websites such as LendingClub and Prosper seem like a great investment…however, these are some of the concerns to watch out for. Enjoy! Add me on Instagram: GPStephan

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For those of you who aren’t familiar with what Peer to Peer lending is:
These are websites like LendingClub and Prosper that act as an intermediary to match people who need to borrow money, with people who have money to lend. They’re pretty much offering YOU the opportunity to be the bank for someone else, and get paid back that interest.

However, these are my concerns:

First: Fees. As an investor, lending club charges a 1% fee on any payments you receive from the borrower…so already, whatever return you WERE getting, is now reduced by 1%.

Second: Defaults. If a borrower DOES NOT pay their loan, lending club charges a 40% fee on any amounts collected on a delinquent loan that went to litigation. According to them, they have an approximate default rate of about 7.8%. And keep in mind since the borrowers agreement is between themselves and lending club…not YOU and the borrower…you can’t do anything about it. You have no recourse.

Third: Lack of liquidity. Once you invest in a note, technically you’re tying up your money for 3-5 years until that loan matures…and that also assumes the borrower pays off the loan in time. If you need your money sooner, you’re forced to sell your loans on the secondary market…usually for a steep discount,

Fourth: Taxes then become an issue because your returns are seen by the IRS as ORDINARY INCOME, meaning they’re taxed at your highest marginal tax rate. And depending on how much you make, this could be a lot. Compare this to long term capital gains, which for most people is just a flat 15%.

Fifth: Risk of analyzing borrowers. Many P2P sites assume no risk in analyzing the credit worthiness of the borrowers. And this seems like people can easily take advantage of this.

Sixth: Default rates like this will ABSOLUTELY be going up if the economy begins to decline. The FIRST THINGS people stop paying is unsecured debt, like personal loans and credit cards…This leads me to think that whenever our economy begins to falter, the returns you’ll see on peer to peer lending websites will drop substantially, and at a time when you’ll WANT to have access to your money to invest in other opportunities, but you can’t because your money is tied up on these websites.

It’s for all of these reasons, you should do your own research to determine if peer to peer lending is right for you.

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[InvestingHustler]

Lending money to someone who couldn’t get a loan from a bank sounds like a bad idea 🤔

[Eshcole]

It's funny seeing this now cause I just finished paying off my Lending Club loan. lol I just auto paid from start to finish.

[usarmymedic]

Glad you're making this video. I have a Lending Club account. It took me over 6 years, and going from a 7% return down to 2% return before I finally came to same conclusion. The taxes were a nightmare to file until last year when they finally consolidated the forms. Anytime they collect a late fee, they will charge a higher fee to the lender so you'll never see it. Among plenty of other reasons, I finally liquidated all of my positions, which took months, and as you said at a further expense. Also, due to late payments, I also have $125 still wrapped up in loans I can't unload.

[MissDanielsonMath]

Thanks for taking the time to make this. It looks like people in Europe have a different take on peer to peer lending but I appreciate seeing two sides of any argument.

[smarteuropeaninvestors]

Allocating a small % of your portfolio to diversified p2p loans with buyback guarantee, yielding over 10% could lead to high returns with reduced risk.

[Blackworker]

looks like it works in Europe much better, Im currently between 10-20% and we have much short term possibilities 1-12 months.

[trentb]

I've done lending club for years and have gotten an average 13% return. It is about picking the right notes to invest in.
Also for an additional return and liquidity you can sell notes on a different platform.

[kevinjurkiewicz]

I watched and immediately smiled realizing avocado toast is still the best investment

[r.]

I use Mintos, a European platform. Liquidity is not a problem there, just sell your loans with a 0.1 % discount (considering 30-day loans here) on the secondary market and you get your money back in seconds. Also, the returns are superior (12%), and loans are "insured" by the issuing firm (which usually sells off 90% of each loan they originate from their balance sheet), which means bad apples only hurt your performance if the "insurance" fails i.e. the issuing firm goes bust and the loan defaults. You can also diversify among 40 different lending firms to limit this risk.

[OscarMartinez]

Investing in avocado toast is a better investment in my opinion 🤔 🥑

[Palpatine]

You know, it's funny because I was JUST ABOUT TO INVEST IN PEER TO PEER LENDING, like I had an account setup on a site and was browsing my options, and then BAM! A notification comes from Graham saying reasons why not to invest in peer to peer lending. The timing literally couldn't have been better!

[mikemeerian]

When Lending club first came to my state, I tried with $1k. Over one year, I had a ~2% return, while the s&p500 returned around 14%. I noped my way out of there.

[DonFronShow]

Looked pretty closely. Also I got a loan really fast!!! With my high level income second to Elon. It was easy! Anyway I’m heading to the Bahamas, you’re welcome to come! I’ll be going by the name of David now not Don lol

[fool]

Graham your presentation of information with micro expression and voice tonality is impeccable!

[pharaoh]

I used Prosper years ago. Even the "A" and "AA" rated loans were junk. I believe 40% of my "portfolio" went bad which suggests to me that Prosper's credit rating process was total shit. Anyway, class action suit later, I have gotten about $20 a year over the last 5 years from the settlement. BIG MONEY!!!

[bobkmak]

If the cash is locked up for 3 years, and some won’t pay you back, might as well just get a high quality CD, especially if you have 1k or 10k

[Miecuh]

It would be a much better investment to get a loan from a p2p lending company and then run off. 😏

[danman]

You should make a video on all the steps and questions to ask when looking for the perfect property manager!

[MrSwanseajames]

Its a great investment here in the UK. I have been using it for the past 8 years. Much better returns than the bank 5 to 6 percent is easily achievable. Never had any issues.

There are other peer to peer lenders that offer more but they do not offset the risk on their lending and are high risk.

[DiggerDog]

I tend to agree with Graham on this one. My experience has been that one bad borrower can damage the overall performance of your whole loan portfolio. I invested $7500 in a professionally run peer-to-peer lending platform. At first, things went very well, but in late 2019 a single fraudulent borrower destroyed my loan portfolio's returns. My best advice is to buy shares in a well-run bank instead. Right now my peer-to-peer lending has delivered only 1.57% per annum overall.