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Thread: Peer-to-Peer Lending and LendingMemo

  1. #1
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    Peer-to-Peer Lending and LendingMemo

    I just heard a podcast (www.stackingbenjamins.com) about Peer to Peer lending. The podcast was an interview with the guy who runs a website called LendingMemo (www.lendingmemo.com) which explains how Peer to Peer lending works. It's aimed at people who might want to invest in Peer-to-Peer lending and has very detailed info about how to filter for your level of risk, how to diversify, and how to use this as a way to generate decent returns that fit your risk profile.

    I thought I would share this info here for anyone who is interested.

  2. #2
    Senior Member kib's Avatar
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    I have an account with Lending Club, and I love the concept. Thank you, I'm going to check out your links. Sometimes this feels like a great idea, and sometimes it does feel quite shaky. Probably the most nerve wracking thing is that there's no way to just "get out" for a reasonable penalty, like you can do with most other investments. You may be able to sell loans you don't like for a huge discount, but otherwise you just have to wait for them to pay off or charge off.


    I do need to do a little mini rant, though: lending club has gone public. Seriously? Set up a business based primarily on trust so the little guy can lend to the little guy, and then invite wall street directly between them?

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    I hear you kib. I'm curious to know what you think once you go through the educational materials on LendingMemo. I am not at all smart about money, but even I felt that I was able to understand the concepts as they are explained on LendingMemo.

    True, you cannot get your cash out of a Peer-to-Peer group before its mature date without a penalty, but it's the same with a CD. You commit to a longer period of time in return for a higher rate of return.

    I see the risk as low if you diversify within the P2P. LendingMemo recommends at least 200 notes (or loans)--and if you are willing to put some energy into the learning curve. It's not insured the way a bank is, but then again my insured cash in the bank is still not safe from inflation and it is making zip in interest.

    I'm not sure that "trust" is the main focus of a Peer to Peer business -- it is all about the money, from beginning to middle to end. They have data to show what kinds of loans are more or less "trustworthy." The higher the trust value the lower the risk and also the lower the interest.

    Listen to me---I should not be lecturing anyone, I am really new to this! What do I know! I do think it is worth looking at for someone who has an interest in going through the education and learning curves involved. I hope your investment works out well, kib.

  4. #4
    Senior Member kib's Avatar
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    Yeah, I realize that it is about money, but still, it's a quid pro quo arrangement: I get a better deal, the borrower gets a better deal, and we basically agreed between each other with a little help from LC what constituted that "better deal". Now all of a sudden anyone and everyone including entities with more money than god can step into the middle of this agreement and demand that something about this arrangement make a profit for them? (formerly MY profit, and the Lender's "profit" and our arrangement with my money is still on the line.) Gotta be kidding me, this is exactly what P2P was seeking to avoid. Bleh!!

    As far as liquidity, the difference is that you can get out of a cd, you just have to pay a portion of the interest. Getting out of a loan is sort of like cheating on a spouse and then looking for a divorce - the decision does not lie in your hands at all. You might have to sell a bad loan for half what you paid, or a quarter, and even then there's no guarantee. You basically commit for life - or in this case, 3-5 years..

    All this said, I'm into it and so far I'm having fun micromanaging the account - so far, it's making me money and teaching me things. I honestly didn't learn anything new about filtering loans or picking good ones from the article, but I think the tutorial is basic but fine, I just already figured this out from my own experience. If you get in, you'll figure out where your comfort zone is over time.

    One more thing - not all states allow you to invest directly. I have to go through foliofn.com to purchase loans, which usually means the owner of the loan is making a little profit on selling it, or I'm buying a loan they didn't feel comfortable holding - maybe it's "old" or the borrower hasn't always paid on time - for a bit of a discount with a lot of risk on my end. Even with this ... it's still interesting and fun, just don't invest more than you can afford to lose. Start with a few hundred dollars, go slowly and see how you like it, is my advice.

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    Thanks for this response, kib. It seems like you know more about this I do for sure. I'll keep your points in mind, much appreciated.

  6. #6
    Senior Member kib's Avatar
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    Rachel, I would be interested to hear how it works out for you, too. So far my experience has been positive, I just have some trust issues. It feels a bit out of control, this risk / fear of being "taken" and watching the train wreck in slow motion, which I didn't realize til it was too late to change my mind. As I ssy, so far groundless.

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    REAL peer-to-peer lending

    It seems that every good idea for a real "sharing" economy gets co-opted by VC and/or Wall Street these days. (sigh)

    But I will share that my community has implemented a true peer-to-peer lending network, with no middle-man-takings, and it's working extremely well. Over $1/2 million has been loaned in my small community in the past 2 years. In the promissory notes for our loans, the loans are collateralized to some extent, and throughout the network there have been no defaults as of yet -- though certainly terms have been modified when businesses run into difficulties. The system is truly infused with both trust and social capital -- which is the key to really keeping the system working. The model has been reviewed by the state regulators, and as long as borrowers are revealing all the risks and doing full disclosure, it is legal to do this type of peer-to-peer lending. I'd say there are about 50 people/couples on the lender list at this point, though perhaps only 25 or so have made loans. But the result is that lenders and borrowers become partners in creating shared prosperity, not competitors trying to "get what they can" out of the deal.

    Since it's inception, I've loaned to two businesses in my community and its been a great experience. [eta: I was friends with the business owners prior to the Local Lending group, but would not have thought to make a personal loan to them - personal loans seem so fraught with social risk. But this provided a structure, based on their business goals, which formalized things just enough to make sure all the "underwriting" steps happened and we truly understood their situations, potentials and risks.]

    When one of those people had to have surgery (and subsequent blood clots in lungs), I allowed them to suspend payments until they were up on their feet again, and we just extended the loan term. With the other one, I helped them to revise a three-year cash flow that enabled them to also land some free cash - a entrepreneurial grant for $12,000. In the beginning of that one, we took merchandise in lieu of cash payments, in the interim while the business was ramping up. They are doing GREAT now, and we get multiple levels of satisfaction for supporting a local business we believe in.

    These types of models are proliferating all over the USA and the world. Look to see what's in your area, and if you can't find anything, use these resources/models and see if you can start something up with your community:
    https://www.local-investing.com/

    Another model which is really great in building local businesses and social capital (but doesn't earn an interest-type return) is:
    https://www.communitysourcedcapital.com/
    Last edited by RoseFI; 3-11-15 at 11:54am. Reason: Add better title

  8. #8
    Senior Member kib's Avatar
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    Rose, thank you. I will look at the site you mentioned, because that's exactly the sort of thing I mean when I say that p2p lending should be a great idea, strengthening local community resources with a positive outcome for the people actually involved in the process, the borrowers and lenders. I would much rather be loaning people money to do what I consider to be valuable things, not just enabling them to get into more cc debt, which seems to be the primary focus of Lending Club.

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    This is really interesting, Rose. So good to hear that it's working for you. My understanding is that small business loans have the highest rate of failure, but it's certainly the kind of loan I would prefer to support. I'm going to take a look at those links.

    As far as where I am with the Lending Club, I found that after taxes, I would only be likely to make about 1% in interest, given that I would not be comfortable with investing in the higher risk categories. I could bump that rate up I think if I could be sure that I would actively manage the account, but I know myself and I know my life...

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