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Wide Spreads and Fat Returns Draw Big Money to Peer to Peer Lending


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http://www.economist.com/blogs/schumpeter/2013/01/lending-club

 

The firm concentrates on creditworthy, "prime" consumer borrowers, and the average rate that they pay on loans is 14%, well inside credit-card charges. Allowing for a default rate of 4%, and Lending Club's fees, the returns to investors are 9-10%, which isn't too shabby given where interest rates are.

 

Mr Laplanche's goal is to maintain its recent record of doubling the amount of lending being done via the site every 9-12 months. The site surpassed $1 billion in loans taken out since launch in December; this month it will do $100m in business. That puts it well ahead of rivals, and gives it the sort of heft that starts to generate network effects. A bigger marketplace attracts more borrowers and investors. It also increases liquidity: there is a nascent secondary market for Lending Club loans.

 

Institutional investors are taking notice. The largest single investor on the site has put in $60m. Family offices and credit funds are among those to have invested; Lending Club even has a bank on the books. Mr Laplanche says he was recently approached by a sovereign-wealth fund that wanted to put $250m onto the platform to fund loans. (He asked them to spread the investment over a two-year period, so that it did not account for too big a proportion of the site's origination capacity.)  It helps that the firm's board of directors features heavy hitters like John Mack, once of Morgan Stanley, and Larry Summers, once of the Treasury. This is a long way from the garage start-up.

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I have been following this company since its inception. I wish I could invest in those notes but it is not allowed in my state. Although I can buy in the secondary market (distress investing for consumer notes) but caveat emptor!!! I am hearing people can make high single digit to low teen results every year. So I can't wait and see what the future holds for this company.

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I've invested a bit on Lending Club. My portfolio has an annualized return of ~13% and I haven't had any defaults thus far (I've only been doing it for about 4 months or so). I have a portfolio of a couple hundred loans. Obviously it's too early to draw any major conclusions, but the technology is really good and the product is very intuitive.

 

 

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  • 7 months later...

Be sure to read the prospectus very carefully and think about the levels of credit risk you are actually taking. If I remember correctly from my quick read through a while ago, you don't actually own the loans. Lending Club owns the loans. So you face the credit risk of the borrower and of Lending Club. Most of these companies (Lending Club and Prosper) are not even profitable yet. So is 14% really that good of a risk adjusted return? VCs would certainly not be satisfied with those types of returns when betting on a new company like Lending Club.

 

Also, the loans are the riskiest at the beginning and at the end, because that is when defaults most likely happen. As long as more loan originations are accelerating, it will mask statistics of defaults that happen at the end in a Ponzi-like manner (because there are far more new loans, the statistics are dominated by new loans that haven't defaulted yet). It's the same trick that was done by banks towards the end of the financial crisis.

 

Peer to peer loans may be a good idea. But, as with all investments, there is no such thing as easy money. It is a very hot area and a lot of retail investors are participating (just look on forums like Reddit's /r/investing, they love it), which is usually a sign that you need to be very careful.

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