Update: As of February 2016, Lending Club is now open to Maryland residents! Click here for the details. I will be doing some heavy research into this before I take the plunge, so look for an update on my journey into P2P lending. Edit: Still no Prosper though 🙁
I’ve been hearing a lot about Peer to Peer Lending (also known as P2P lending). It’s one of those topics I just kind of glossed over since I had more “pressing” things to learn about like student loans, investing and trying to freelance. Before last week I had a rough idea of how it worked. Many people were reportedly getting great returns, but it seemed like a lot more work than I would have liked. It seemed complex and then some bloggers reported that they were still getting good returns, but not as high as before. I didn’t think it was worth my time.
But last week I heard an interview on the Stacking Benjamins podcast (which is a great podcast by the way). The interview was with Simon Cunningham, who runs a website called Lendingmemo. His interview pretty put P2P lending in a much clearer light for me and I was itching to learn more. I went over to LendingMemo and got some great information. Here are what I believe to be the pros of P2P lending:
- You’re loaning capital to actual people, and not a big corporation. The vast majority of borrowers on P2P sites are looking for help paying off credit card debt. I could definitely get behind that.
- It’s relatively low risk. The two big P2P sites are Lending Club and Prosper, and they each have their own algorithms they use to determine the risk that a borrower will default on their loan. According to LendingMemo, the default rate for Lending Club is around 5%, which was a lot lower than I expected. Higher risk borrowers give investors the potential for higher returns, while low risk borrowers give less a return but a good chance that you will get a return at all. It’s like a balancing act between risk and reward, which is what investing generally is.
- Returns are solid. According to Lending Club, historical returns of their lowest risk loans range from 4.91%-8.38%. That’s a very good return for what seems like a low risk investment. And it certainly beats the pants off of an online savings account or CD. While past returns don’t reflect future performance, it’s good to keep them in mind.
- It seems like fun. My preferred method of long term investing, making regular contributions to index funds, is pretty boring. The only thing I may have to do is rebalance, which takes just a few minutes. Otherwise, it’s set it and forget it. With P2P lending there are a few more decisions you have to make, and while they do have an automatic contribution system to make things super easy, you still have to check on your loans from time to time. This seems like it would be be a fun mental exercise.
I say it SEEMS like fun, because I will not be able to see if it is really fun. Here’s the notice I received when I tried to sign up for an account at Lending Club:
Yes, because I live in the state of Maryland, I can’t participate in direct P2P lending as a borrower or as an investor. As a medical professional, I’m used to the zany differences from one state to another, but this was just a little annoying. Some states allow you to use Lending Club only. Some states allow Prosper only. There are only 3 states that don’t allow any type of P2P activity (Kansas, Ohio and Maryland), and I happen to live in one of them. This would firmly fall into the category of a first world problem, but it’s still a problem. (Here is an interactive map that diagrams all the craziness between states).
So what is an aspiring P2P’er from Maryland to do? My plan is to do some more research on P2P lending until I know it front to back. In the meantime I’m still working on getting rid of a 6% student loan, so paying that off would be a pretty good use of my money. And then I’ll just wait until the curmudgeons in charge of Maryland join the P2P bandwagon.