Tell me about peer to peer lending as an investor
April 3, 2017 7:22 AM Subscribe
I received a moderate amount of cash recently that is currently just sitting in my savings account. I would like to use this money towards a down payment on a house in the next 1 - 2 years (maybe longer), but have no immediate need for it. I'm looking into short-term investments that may be able to make a little money, and I'm considering peer to peer lending.
I am familiar with p2p lending, but only as a borrower. I took out a loan with SoFi a few years ago to pay off some credit cards and have been extremely happy with the service. I'm wondering if investing in someone else's loan might be a safe, short-term way to put this money to work. I've read some articles about different services and it looks like it is fairly low-risk and has moderate (5 - 9%) returns. I'd like to hear about anyone's experiences doing this with one of the more established p2p lenders (Prosper, Lending Club, Upstart, etc.).
Other relevant details: The amount in question is about $15k. I have 3 months' expenses in savings aside from this money, and contribute an additional $250 - $500 a month to savings. My monthly budget is pretty stable, and I don't have any foreseeable large expenses coming up.
If you have invested money this way, how did it work out for you? Did you receive payments monthly? Any issues with loans defaulting? Is this a really dumb idea? TIA!
I am familiar with p2p lending, but only as a borrower. I took out a loan with SoFi a few years ago to pay off some credit cards and have been extremely happy with the service. I'm wondering if investing in someone else's loan might be a safe, short-term way to put this money to work. I've read some articles about different services and it looks like it is fairly low-risk and has moderate (5 - 9%) returns. I'd like to hear about anyone's experiences doing this with one of the more established p2p lenders (Prosper, Lending Club, Upstart, etc.).
Other relevant details: The amount in question is about $15k. I have 3 months' expenses in savings aside from this money, and contribute an additional $250 - $500 a month to savings. My monthly budget is pretty stable, and I don't have any foreseeable large expenses coming up.
If you have invested money this way, how did it work out for you? Did you receive payments monthly? Any issues with loans defaulting? Is this a really dumb idea? TIA!
You can get 9% return in an index fund pretty easily.
Well, this isn't true, especially over a short period of time, but peer-to-peer lending is actually quite risky. You are relying on (at best) a handful of individual schmoes to get your loan repaid--any one of them might be struck by lightning tomorrow.
Please learn now, before someone else comes along to hustle you, that when financial institutions describe a product to you, they are selling it to you. They are not your friends and they are not your advisors. They may consider their own interests at all times above yours. Their main interest is to move their products with the greatest possible profit. So do not believe them when they tell you their product is "fairly low risk." There is no low-risk, reliable way to get a 5-9% return on your money over the short term in today's interest rate environment. You need this money in the relative short term. Put it in an online savings account returning 1% and concentrate on building up that down payment.
posted by praemunire at 7:59 AM on April 3, 2017 [8 favorites]
Well, this isn't true, especially over a short period of time, but peer-to-peer lending is actually quite risky. You are relying on (at best) a handful of individual schmoes to get your loan repaid--any one of them might be struck by lightning tomorrow.
Please learn now, before someone else comes along to hustle you, that when financial institutions describe a product to you, they are selling it to you. They are not your friends and they are not your advisors. They may consider their own interests at all times above yours. Their main interest is to move their products with the greatest possible profit. So do not believe them when they tell you their product is "fairly low risk." There is no low-risk, reliable way to get a 5-9% return on your money over the short term in today's interest rate environment. You need this money in the relative short term. Put it in an online savings account returning 1% and concentrate on building up that down payment.
posted by praemunire at 7:59 AM on April 3, 2017 [8 favorites]
There is no low-risk, reliable way to get a 5-9% return on your money over the short term in today's interest rate environment. You need this money in the relative short term. Put it in an online savings account returning 1% and concentrate on building up that down payment.
Agreed, agreed, agreed. Find yourself a nice CD and lock up your money.
posted by ThePinkSuperhero at 8:19 AM on April 3, 2017 [5 favorites]
Agreed, agreed, agreed. Find yourself a nice CD and lock up your money.
posted by ThePinkSuperhero at 8:19 AM on April 3, 2017 [5 favorites]
Any time you have a short timeline and a purpose for the money, investing it in anything risky is not really advisable. You could be forced to cash out at a particularly disadvantageous time, or have money caught up that you can't get access to and be forced to lean on credit or other higher-interest options.
I currently invest some of my "fun portfolio money" through a P2P lending company in Canada, but I keep my goal-oriented savings far away from it.
posted by one of these days at 8:32 AM on April 3, 2017
I currently invest some of my "fun portfolio money" through a P2P lending company in Canada, but I keep my goal-oriented savings far away from it.
posted by one of these days at 8:32 AM on April 3, 2017
I would like to use this money towards a down payment on a house in the next 1 - 2 years
Then a product that locks your money up for years isn't a good place to put it. P2P lending is highly illiquid AFAIK - you can attempt to sell the notes to someone else, but that depends on there being buyers for them and you might have to sell at a steep discount to get quick interest.
If I were you, I'd put it in a high quality online savings account (if you need it in as little as a year, the rates between CDs and savings is minute enough that I'd prefer to keep the flexibility) or depending on risk appetite, a relatively stable dividend stock like VZ or one of the dividend aristocrat oriented ETFs like VIG/VYM.
posted by Candleman at 8:34 AM on April 3, 2017 [4 favorites]
Then a product that locks your money up for years isn't a good place to put it. P2P lending is highly illiquid AFAIK - you can attempt to sell the notes to someone else, but that depends on there being buyers for them and you might have to sell at a steep discount to get quick interest.
If I were you, I'd put it in a high quality online savings account (if you need it in as little as a year, the rates between CDs and savings is minute enough that I'd prefer to keep the flexibility) or depending on risk appetite, a relatively stable dividend stock like VZ or one of the dividend aristocrat oriented ETFs like VIG/VYM.
posted by Candleman at 8:34 AM on April 3, 2017 [4 favorites]
Agree with all the advice above.
I was an early adopter with Prosper around... 2006? I invested a small amount (~$500) for fun and to test the waters. The service may have changed significantly since.
I lost most of my money. I thought I was building a diversified portfolio of risk (many A, AA, and AAA, fewer B, some C and only a few D's, and the lower the "rating" the more I scrutinized the borrowers proposal). Turns out most of the people who are looking for a non-traditional unsecured loan (in the US) are not in great financial shape, and your loan to hem basically has no consequences for default, so guess which obligation in their lives they will default on first...
My result was due as much to my selection process as on the borrower pool I think, but at the time they did encourage that type of thinking (lending to those you personally believed in regardless of risk rating).
By no means did everyone default, but you don't need that many to destroy any chance of profit.
Also, don't conduct a business transaction with anyone that volunteers they're a "Christian." In p2p lending, or life, really.
posted by danny the boy at 9:16 AM on April 3, 2017 [6 favorites]
I was an early adopter with Prosper around... 2006? I invested a small amount (~$500) for fun and to test the waters. The service may have changed significantly since.
I lost most of my money. I thought I was building a diversified portfolio of risk (many A, AA, and AAA, fewer B, some C and only a few D's, and the lower the "rating" the more I scrutinized the borrowers proposal). Turns out most of the people who are looking for a non-traditional unsecured loan (in the US) are not in great financial shape, and your loan to hem basically has no consequences for default, so guess which obligation in their lives they will default on first...
My result was due as much to my selection process as on the borrower pool I think, but at the time they did encourage that type of thinking (lending to those you personally believed in regardless of risk rating).
By no means did everyone default, but you don't need that many to destroy any chance of profit.
Also, don't conduct a business transaction with anyone that volunteers they're a "Christian." In p2p lending, or life, really.
posted by danny the boy at 9:16 AM on April 3, 2017 [6 favorites]
Because you’ll want to retrieve your money soon, I wouldn’t use this method. But I have had success with Lending Club. There are some defaults, but higher interest rates on the non-defaulted loans help make up for it. You only have $25 invested in each individual loan, so your risk is spread out. My net annualized return over almost four years has been a bit over 11%.
posted by metasarah at 10:35 AM on April 3, 2017
posted by metasarah at 10:35 AM on April 3, 2017
Back in 2014 I put in $10k into Prosper, but didn't add any more after that. Instead, I opted to auto-invest any payments that came in into new loans. My net annualized return is currently around 6%.
It's decent, but I wouldn't recommend it for essential money like a down payment for a house, especially when you need that money within a year or two, since these services tend to look at the long-term.
posted by curagea at 11:23 AM on April 3, 2017
It's decent, but I wouldn't recommend it for essential money like a down payment for a house, especially when you need that money within a year or two, since these services tend to look at the long-term.
posted by curagea at 11:23 AM on April 3, 2017
My story is very similar to danny the boy's. I put a few hundred dollars into Prosper in ~2006 and got back a bit less than that over the next few years. Prosper has very little leverage over a borrower who chooses not to pay.
posted by Hatashran at 11:28 AM on April 3, 2017
posted by Hatashran at 11:28 AM on April 3, 2017
If I were you* I'd open a Vanguard brokerage account and purchase some lightly managed funds.
CDs and P2P lending are going to tie up your money. CDs are safe but their return rates are lousy and you lose liquidity. Lending is not safe and you're going to lose liquidity. If you're not certain when you're going to buy but you want to grow your money until you're there, you want a more liquid investment vehicle.
Vanguard has low fees and is easy to use. And yeah, the market could take a downturn, but in a managed fund you're not going to get hit too hard by it if it does, and the growth rates are good.
*Fun fact: this is me and I do this.
posted by phunniemee at 11:43 AM on April 3, 2017 [1 favorite]
CDs and P2P lending are going to tie up your money. CDs are safe but their return rates are lousy and you lose liquidity. Lending is not safe and you're going to lose liquidity. If you're not certain when you're going to buy but you want to grow your money until you're there, you want a more liquid investment vehicle.
Vanguard has low fees and is easy to use. And yeah, the market could take a downturn, but in a managed fund you're not going to get hit too hard by it if it does, and the growth rates are good.
*Fun fact: this is me and I do this.
posted by phunniemee at 11:43 AM on April 3, 2017 [1 favorite]
I don't know if you qualify as an accredited investor, but peerstreet and yeildstreet offer better investments in that they are generally shorter term loans, that have a higher yield and are asset backed. Shorter term and asset backed reduce the risk to the investor.
I've been using peerstreet for about a year. I have not had an investment default (but have had some late payment scares). I particularly like that I can do my due diligence for a particular loan before deciding to invest and can avoid ones that do not meet my risk tolerance threshold.
posted by kookywon at 12:27 PM on April 3, 2017
I've been using peerstreet for about a year. I have not had an investment default (but have had some late payment scares). I particularly like that I can do my due diligence for a particular loan before deciding to invest and can avoid ones that do not meet my risk tolerance threshold.
posted by kookywon at 12:27 PM on April 3, 2017
There's no particularly good reason to believe p2p lending will generate excess returns and lots of reasons to believe it won't. FT's Alphaville has written quite a bit on this.
(basically the only way to make the business model work is to turn into a traditional bank)
posted by PMdixon at 5:56 PM on April 3, 2017
(basically the only way to make the business model work is to turn into a traditional bank)
posted by PMdixon at 5:56 PM on April 3, 2017
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