(In June 25 story, paragraph 17, corrects growth rate of
Prosper's loan volume to 15-20 percent per month instead of
15-20 percent per year)
By Amy Feldman and Beth Pinsker
NEW YORK, June 25 Less than a decade ago,
peer-to-peer lending came to the United States as an upstart
enterprise - a service that would in a very personal way link
would-be borrowers with individual lenders and bypass the
The theory was that by cutting out the middle man, online
P2P services like Lending Club and Prosper could create a
"win-win" situation: Credit-challenged borrowers who needed
money for school, to buy a car or put on a roof could obtain
loans at less-than-credit-card rates. Lenders, in turn, could
cash in on better interest rates than their bank accounts would
The start, however, was rocky. The business was marred by
high default rates that went stratospheric during the credit
crisis, and borrowers lost interest - in both senses of the
Now, P2P is reborn, busier than ever, with backing from some
brand-name investors and even the banks that were once shut out
of the business model.
Both Lending Club and Prosper say they placed a record
number of new loans in April, with the former at $140 million in
loans and the latter at $20 million. While that still may
represent only a drop in the broader consumer-finance bucket, it
is attracting attention, and more money. By acting as
intermediaries, the lending services collect fees ranging from 1
to 5 percent from borrowers.
The industry has won some high-profile endorsements of
sorts. Google Inc led a $125 million refinancing of
Lending Club in May, and former U.S. Treasury Secretary Lawrence
Summers serves on the company's board, for example. Prosper has
picked up new venture funding.
But it is not just the venture funding that is
distinguishing the new era of P2P - it is the involvement of a
new breed of lenders. With bonds disappointing and bank
instrument interest rates near record lows, professional
investors are lending through major P2P sites to bolster their
Banks like Titan Bank, in Mineral Wells, Texas, and
Congressional Bank, in the Washington, D.C., area, and hedge
funds like New York's Eaglewood Capital Management are queueing
up to lend money at rates above 6 percent and as high as 35
percent, in some cases.
Prosper and Lending Club both say that new loans get snapped
up by lenders within minutes or hours of being posted on their
sites. It is now a borrowers' market.
Does all that new respectability and high yields mean
individual investors should jump in and start lending too? Here
is what you need to consider:
THOSE PESKY DEFAULT RATES
Peer-to-peer lending sports high interest rates because the
loans are unsecured with any collateral and the risks of default
can be high.
Lending Club says its annual default rate is around 3
percent - below the 3.6 percent default rate in the credit card
industry. But default rates were as high as 13 percent in
2009-2010, according to an independent analysis by the Lend
Academy blog, an independent website that monitors the P2P
industry. And during the 2007-2009 recession, rates were even
more troubling, going over 30 percent in some months.
Prosper's head of global institutional sales, Ron Suber,
says that in 2007, the loan process worked differently and that
the vetting practices that led to high default rates have now
Lending Club says that it now has a two-step vetting process
that weeds out 90 percent of applicants, making the remaining
Both sites post credit scores for borrowers, and lenders can
use that information as well as income and home ownership
reports to pick the loans they want to supply.
You can also check third-party websites like Nickel
Steamroller (nickelsteamroller.com), which uses data
analysis to predict which loans will be successfully repaid in
Prosper's Suber adds that his company is keeping growth of
loan volume at 15 to 20 percent per month on purpose. "We all
could grow even faster than this, but we're maintaining good
quality and servicing."
All that vetting may make the loans safer, but it
contributes to the shorter supply of loans now available.
To minimize the risks of those default rates, experts
recommend that investors stay highly diversified, lending around
$25 to each borrower in their portfolio. That makes it hard for
individual investors to manage any decent-sized portfolio -
there are a lot of borrowers to check out and payments to
Furthermore, the most successful lenders have huge loan
lists. Peter Renton, publisher of the Lend Academy blog, has
$200,000 invested among 4,000 loans spread between six accounts
on Lending Club and Prosper. His rate of return is 10.8 percent,
according to his latest quarterly statements. (Renton also gets
paid when people click through from his site to one of the P2P
Lending Club notes that every investor with at least 800
loans (requiring a minimum investment of $20,000) has had
positive returns, while 94 percent of them posted annual returns
above 6 percent, and some have topped 18 percent.
Those kinds of returns are all-too-tantalizing, says Doug
Nordman, a financial advice blogger who has tried out
peer-to-peer lending and written extensively about it. "People
see ads on the sites that people are making 15 percent returns,
and they want some of that," he says. But it is extremely hard
for an untrained individual to manage the process and score that
kind of return, he said.
Los Angeles-based financial adviser Brendan Ross has been
putting 5 to 10 percent of all of high net worth clients'
portfolios into hedge funds, such as Colchis Capital in San
Francisco, Direct Lending Advisors in Oceanside, California, and
Eaglewood, that specialize in peer-to-peer loans.
"Consumer lending gives them an opportunity to earn
returns," he says, while the hedge fund approach protects his
clients from having to vet loans themselves. "It's a toe-dip."
Soon, the fund option may be available more broadly. Lending
Club is prepping its own publicly available closed-end mutual
fund and should have it ready to go in about 18 months, Chief
Executive Renaud Laplanche said at a conference last week.
(Editing by Linda Stern and Matthew Lewis; Follow us
@ReutersMoney or here)