I Would Love to do Peer to Peer Lending but…


Our state is too good for P2P lending, but not too good for establishments like this.

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:

lending club deniedYes, 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.



  1. I didn’t realize the risk of default was so low. Now I’m definitely interested. I think the best thing about it (that I’ve heard anyway) is that you can start with such small amounts. It’s an incentive for those of us who feel like we just don’t have the money to get started.

    • Syed says

      Yes that is another great feature. It is pretty accessible to everybody, except the citizens of Maryland of course!

  2. Kate says

    Kansas now allows their residents to participate in P2P lending. Doing the happy dance!

    • Syed says

      Nice! Hopefully Maryland will allow it sometime soon. Returns still seem solid.

  3. Nichole says

    Thank you for the information. I’m looking for the best option to consolidate debt, mostly credit cards and medical bills. I’ve been considering P2P as a borrower, however, I live in Maryland. Clearly it’s not an option for my family right now.

    • Syed says

      Yeah it’s annoying. P2P is a nice little way to diversify investments. Hopefully MD will come to its senses one day.

      • Me says

        Instead of waiting, who needs to be asked to push the legislation through? I’m sure it’s not being passed because legislators don’t consider it a priority – so it’s really up to us to change that.

        Any ideas how?

  4. CRAIG says

    Hi Syed,

    I also live in MD, and *was* a Prosper lender during the time they were operating. I was a little annoyed when they were forced to suspend ops in MD.

    Here’s a pdf link to the Administrative action against Prosper. If you look at the bottom of page 5 (top of page 6) , item 14 says: ” … Prosper might have significant contingent liability for the offer and sale of unregistered securities.”:

    http://www .oag.state.md.us/securities/actions/2009/prosperco_11_09.pdf

    [added a space after ‘www’ in case the link wouldn’t post]

    So, basically, the State is saying the Prosper could be on the hook if a P2P loan defaults. MD has classified those Notes as “unregistered securities”. Rather than interpreting the Notes as a new form of capital allocation, MD is locking Prosper out by putting the assets of the “lending aggregator” at risk.

    Essentially, they’re trying to make the MD P2P market “risk-free” to the lenders. This can only be fixed by either the regulators changing their opinion (not likely), or the legislator making room for the P2P market.

    This is a MD statehouse issue.

  5. Ah yes it’s interesting how different states have different rules. One other state issue I ran into is shipping wine. I wanted to ship wine to my Uncle for his bday but you can’t ship to Iowa. Very strange.

    I haven’t invested in P2P before, but I definitely would consider it. Right now I’m more focused on putting more $ into our 401k, HSA, IRA, etc. I think if I maxed out both my wife and my 401k and IRA we’d do some P2P, but that honestly isn’t happening anytime soon.

    • Syed says

      I’m with you. P2P lending is pretty low on the totem pole for me. I have read about people getting double digit returns, but people who do well usually love reporting that stuff. Too much risk for me when we currently have student loan debt. and would like to max out 401k’s and IRA’s.

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