Lending as an investment

[kib]

I have liked the idea of peer to peer (P2P) lending in theory, and recently invested some money in Lending Club, a business that brings individual borrowers and lenders together and then allows lenders to loan money in small amounts by breaking up the loans.

Since then I've discovered a very disturbing thing that shouldn't surprise me but of course it did. Apparently, LC is targeting their own borrowers for refinancing. This basically means they're encouraging people to pay off the loans we the lenders have made, sometimes within a month or two. The standard management fee to the lender is 1% of the total payment amount, which is reasonable if the loan is going to run for a few years, but when they refinance a loan like this, they basically take that 1% out of the lender's principal without any opportunity for the lender to cover this fee through interest earned.

I find this a conflict of interest bordering on illegality, but beyond my outrage, I still think P2P lending is a good idea, it helps ordinary people and allows both the borrower and the lender a better financial outcome than they might otherwise find. Does anyone have another way of doing this that doesn't involve big banks or thieving middlemen? I have made personal loans to people in the past, twice covering mortgages for buyers, but that was a matter of chance, people I knew. I love the LC concept, I just don't love what they've become.

[ToomuchStuff]

P2P lending has been discussed here before, and a lot of us, do not view it as "investing". (from my memory of the discussions, I think more of the posters didn't view it as an investment, then did)
That said, you mentioned the Lending "club" is a BUSINESS. Well a business is in it to make money and they do off of the fee's. The club part is the misnomer to make you fall for it. The more a person uses them, the more in fee's or profit THEY make. You cut them out and start doing your own work and have your attorney go over everything (assuming more risk) and you have more potentail for more reward. But that doesn't stop those borrowers, from listening to every borrow from us to repay off x, and then repeating the process again.

[bae]

I have had some success doing P2P lending through our local community land trusts (bridge loans for construction, mortgage loans for buyers).

Also I've had some luck with loaning to local businesses for expansion, relocation, or initial startup costs - usually through personal contacts and the Chamber of Commerce.

[dmc]

I'm down $6500. No more lending from me without collateral.

[kib]

P2P lending has been discussed here before, and a lot of us, do not view it as "investing". (from my memory of the discussions, I think more of the posters didn't view it as an investment, then did)
That said, you mentioned the Lending "club" is a BUSINESS. Well a business is in it to make money and they do off of the fee's. The club part is the misnomer to make you fall for it. The more a person uses them, the more in fee's or profit THEY make. You cut them out and start doing your own work and have your attorney go over everything (assuming more risk) and you have more potentail for more reward. But that doesn't stop those borrowers, from listening to every borrow from us to repay off x, and then repeating the process again.

Not really sure why this wouldn't be seen as an investment. If I want to make a charitable contribution, I'll give it to Kiva, and do. This is a win-win situation for small investors and small borrowers alike ... or it ought to have been.

I don't have a problem with Lending Club taking the 1% cut they imply, over time. This is a reasonable business model that can bring a better deal than a bank to both borrowers and lenders, and someone has to manage it if they're going to go about it in the way that they do, cutting loans in small pieces to mitigate risk. However. Yes, they're a business, but I'm a client of that business. It's not like they're selling me a product and asking a price, they're selling me a product and then intentionally making that product worthless, using my money to do so. I have a problem with them intentionally churning notes with my capital, making the churning of notes their goal, to get all their profit up front from their clients, while hanging me out to dry in terms of any ability to make up that money, let alone profit from my investment.

I'm fine in terms of setting up contracts with borrowers, my issue is with finding these borrowers. I suppose I could post a craigslist ad ... :~)

Bae, thanks for some good leads on where to look. Sadly the other nice thing about LC is that you don't have to have hundreds of thousands to invest in order to put your money in a helpful place, and you can diversify your risk by making tiny loans, but it's starting to look like that "helpful place" is something of a scam for borrowers and lenders alike.

[kib]

I'm down $6500. No more lending from me without collateral.Are you down with an LC investment, or just from unsecured lending in general?

[jp1]

kib, that sounds like a frustrating experience. Unfortunately I don't have any advice to offer in terms of finding people to make small P2P loans to. The only loan I've ever done is more similar to bae. I was at a venture capital club meeting in the silicon valley a couple of years ago to speak on cyber security topics (work thing) and was impressed by one of the other speakers who was seeking capital to expand his business's manufacturing capabilities. After talking with him further about his biz plan and reviewing his company's financials I was comfortable enough to lend him some money (low 5 figures) at 8% interest.

[dmc]

Are you down with an LC investment, or just from unsecured lending in general?

Personal loan, loaned $12,000, got $5,500 back. Really disappointed that the guy quit paying me. I could probably get a judgement against him and garnish his wages. But not worth it to me. I was just trying to help him out during a messy divorce.

I figure if I don't do well lending to people I know, I sure don't want to lend to strangers.

[kib]

Personal loan, loaned $12,000, got $5,500 back. Really disappointed that the guy quit paying me. I could probably get a judgement against him and garnish his wages. But not worth it to me. I was just trying to help him out during a messy divorce.

I figure if I don't do well lending to people I know, I sure don't want to lend to strangers. Sigh, yeah.

I guess what it may come down to in the end is something Toomuchstuff said ... people who "do debt" as a way of life just aren't compatible with my financial belief system or goals. I want to help people get out of debt and have some assets that they truly own, not help them dig themselves into a deeper hole that winds up sucking me down too.

[kib]

Ok. So a loan paid off extremely early today - not sure if it was refi'd or just paid - and it appears they don't charge the lender for prepaid principal after all. :|( I'm still deciphering the daily statement, they make it as confusing as possible, but I see no evidence of a fee.

I'm still somewhat underwhelmed with their business model, this "investment" was at best a waste of time and at worst a very small loss of money, but my apologies for spreading a rumor, it's definitely not the quasi-criminal practice I was led to believe. Still think my money would be much better invested elsewhere.