Peter Renton on P2P Lending: Are You Asking the Right Question?

By Peter Renton from Lendacademy.com

Let’s get this out of the way from the start. I am not going to say Lending Club has better returns than or vice versa. I think that is the wrong question to ask.

Obviously, we all want the best returns possible and like any investment we can study historical returns to determine which company or fund has produced the best results. But what does that mean for results going forward? Not much.

Here is one statistic that every investor should ponder. According to Lendstats, the average interest rate on all loans issued since January 1, 2010 is 13.1% at Lending Club and 20.3% at Prosper. That is a 7% spread.

So the better question to ask yourself is how much risk are you willing to take?

Obviously Lending Club has a lower risk portfolio because the average borrower there pays a lower interest rate. We also know that Lending Club has tighter underwriting standards that go along with this. A borrower must have a FICO score of at least 660 in order to even be considered for a loan at Lending Club.

Prosper has done an excellent job at producing outstanding peer to peer lending returns since they reopened from their quiet period in July 2009. They allow a higher risk borrower, on average, on to their platform and so far these borrowers are holding up very well. So, Prosper provides the opportunity for an investor to earn higher returns. But like any high risk/high reward investment there are potential downsides. If the economy goes back into recession it is possible that the borrowers on Prosper will suffer more and returns may decline from their current levels.

What I Recommend: Diversification

I believe that everyone who is serious about p2p lending should open accounts at both Lending Club and Prosper and invest in a broad cross section of borrowers. This provides diversification not just between companies but also among different kinds of borrowers.

If the economy continues to perform well investing in the higher risk borrowers should provide above average returns for investors. And if the economy tanks again investors will likely be glad they also have some low risk borrowers in their portfolio.

Over the next couple of years Prosper loans may perform better than Lending Club or vice versa. I really don’t know. But I am confident that the asset class as a whole will continue to provide excellent returns for investors.

Peter Renton is the publisher of the Lend Academy, a blog focused on the peer-to-peer lending industry.

More Articles On P2P Lending

Investing In Peer To Peer Loans From Lending Club & Prosper
Prosper vs. Lending Club Comparison
Does Prosper Or Lending Club Offer Better Returns On P2P Loans
P2P Loans: 10% Returns On Average For The Last 26 Years
Top 5 Peer to Peer Lending Sites for Investors

Articles From P2P Expert – Peter Renton

Peter Renton on P2P Lending: Are You Asking the Right Question?
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Comments

  1. Brady says

    Another benefit of diversifying across platform is to minimize risk of the unlikely event one of the p2p lending platforms experiences any financial trouble. There is a lot of uncertainty of what a note investor would be holding if LC or Prosper went bankrupt. Now, if only Prosper would open up at least the secondary market to us folks in Texas I could practice what I’m preaching here.

  2. Dan B says

    Peter…….Actually the answer you’re likely to get to your “better question” will in most cases be completely unsatisfying simply because it is very difficult for most people to answer such a question without a fix point of reference. Furthermore without knowing how much riskier one portfolio is to another in actual numbers, how is someone to figure out if he is being compensated adequately for the extra risk…………..when they really don’t know how much extra risk they’re taking?

  3. Peter Renton says

    @Brady, That is a good point. It is unclear exactly what would happen in the event of a bankruptcy at LC or Prosper although I think that is becoming a remote possibility these days.

    @Dan, I agree that the answer to my question would likely unsatisfactory for the majority of people. My point was really to keep the question alive in the minds of new investors. Because if you go ahead with the assumption that Prosper is providing better returns than LC (or vice versa) and you only invest in A and B rated notes your assumption is pretty meaningless.

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