The usual Silicon Valley "unicorn": all hype, no business model or operational skills. Venture capitalists also need to be investigated, especially the accuracy of their representations. As in Theranos, which is turning out to be pure "vapor ware" and is currently under investigation.
1
I have been long amazed that so many so-called smart people (Larry Summers, John Mack, etc.) appear to believe that this lending model can work. I am a retired finance person with considerable experience in managing loan portfolios developed by experience financial analysts. Even with extraordinary due diligence with layers of approvals by sophisticated and wizened senior lenders, many loans go bad. Depending on average terms (length of loan to non-lenders) portfolios go bad slowly as borrowers become increasingly unable to pay the balance of the loans. With P2P lending, the repayment rates inherently have to be worse as the quality of the loans are, by definition, worse because there has been very little due diligence. The entire industry will end up being a farce. The principal value added by the entire industry may be some front-end loan processing technology to which more sophisticated lenders can add better due diligence processes. The spreads that banks earn from their savings intermediation process are required to pay for the due diligence, loan loss reserves (yes, there are losses among the best of the lenders), collections and other parts of the lending process (including excessive overhead and bloated executive salary levels). There is no free lunch and there are no ways to get rich easily by lending to unsophisticated borrowers (except by credit card companies and payday lenders).
7
Everything that you stated is very clear to anybody who is looking to invest in P2P lending. It is all clearly explained on the P2P lending websites.
Whatever due diligence that you claim that the P2P lending platforms are inadequately providing (creating higher risk) is made up in higher returns. Investors know that. The Jefferies issue notwithstanding.
Whatever due diligence that you claim that the P2P lending platforms are inadequately providing (creating higher risk) is made up in higher returns. Investors know that. The Jefferies issue notwithstanding.
2
I say, Duh! A sharp high school senior with a basic understanding of economic principles could have called this one. This type of lending has to stop.
1
There's a difference between the value of Lending Club stock and the value of the service it provides for consumers on either side of a loan.
My question after this event is: is the P2P lending model broken or is it just not meant to be an overnight $100 billion dollar unicorn?
I've been a Lending Club investor for a few years now; earning about 7.5% return. Even if I eek out 2-3% I'm still killing it compared to what I can get from a CD or bank savings account.
My question after this event is: is the P2P lending model broken or is it just not meant to be an overnight $100 billion dollar unicorn?
I've been a Lending Club investor for a few years now; earning about 7.5% return. Even if I eek out 2-3% I'm still killing it compared to what I can get from a CD or bank savings account.
9
Have you heard of risk-adjusted returns?
1
As a small investor, I love Lending Club. I have invested some 10% of my retirement savings in it. My returns are running over 7% after two years - way higher than other available fixed income investments.
The interest I earn is automatically reinvested in new loans. The amount of each new loan I participate in is very small. so if it defaults i don't lose much. I write off some capital losses every year against capital gains from other investments. Granted it will take me five years to get all my money out, which I will have to do some day, but in the meantime I am earning interest that far exceeds what I can get elsewhere.
Certainly the market is waiting to see what happens to peer-to-peer lenders as they go through a full business cycle and as interest rates rise. That's why I limit my investment. But, I am surprised that these lenders are not overwhelmed by other individual investors trying to put some of their portfolios into such great alternative investments.
The interest I earn is automatically reinvested in new loans. The amount of each new loan I participate in is very small. so if it defaults i don't lose much. I write off some capital losses every year against capital gains from other investments. Granted it will take me five years to get all my money out, which I will have to do some day, but in the meantime I am earning interest that far exceeds what I can get elsewhere.
Certainly the market is waiting to see what happens to peer-to-peer lenders as they go through a full business cycle and as interest rates rise. That's why I limit my investment. But, I am surprised that these lenders are not overwhelmed by other individual investors trying to put some of their portfolios into such great alternative investments.
7
An acquaintance tried to talk us into investing with Lending Club. It sounded pretty good and we even went to an event to hear one of LC's marketing managers talk about how they provide loans to individuals and that the average rate of return for investors was 11%. He said they granted a loan within 24 hours of a borrower signing up. Most of the borrowers are trying to pay off credit cards so this is competing with the loan consolidation companies that charge high fees. It was clear from their website that the minimum investment of 2,500 was geared to individual savers. It was also apparent that you could diversify by investing as little as 25.00 per loan. We realized it still was not passive income because you can't take out your earnings on a regular basis without penalties. You need to tie up your money for 3 to 5 years. Unfortunately, that part was not obvious on the company's website. Lending Club did not have a long track record so it wasn't clear they would even be in business in 5 years. Tech companies have a way of going out of business suddenly she the venture caps pull the plug or a better company comes along. Obviously, there are not enough regulations or transparency in this industry yet.
3
It is a slap in the face to have a Lending Tree ad next to this article. Buying it must still be lucrative for "investors" who think stealing and cheating are okay. Any average American who still has their hard-earned 401K money in stocks is asking for trouble. We get the same tax breaks if the 401K money is invested in safe U.S. treasuries. Check it out with T. Rowe Price.
2
You do realize Lending TREE is NOT the same as Lending Club right?
3
nglea, yes you get the same tax breaks, but you get much lower returns by investing in treasuries. It's all about how much risk you are willing to take on in exchange for higher returns.
1
I was a "lender" at Lending Club about 6 years ago, excited by the hope of earning decent interest on my money. Not a ridiculous amount, just the 8% or so that a regular savings account used to yield. Anyone else remember those good old days?
Well, it quickly became obvious that Lending Club's sole action taken when borrowers stopped paying was to send them an email, and then maybe a follow-up email-- sternly worded I hope! That's it. They wash their hands of it, and you, the lender have no recourse, just take your lumps.
I guess after a while borrowers are smart enough to realize how toothless Lending Club is, or not caring. It's not their money at risk after all! I'm still kicking myself (a little) for falling for this scheme.
Well, it quickly became obvious that Lending Club's sole action taken when borrowers stopped paying was to send them an email, and then maybe a follow-up email-- sternly worded I hope! That's it. They wash their hands of it, and you, the lender have no recourse, just take your lumps.
I guess after a while borrowers are smart enough to realize how toothless Lending Club is, or not caring. It's not their money at risk after all! I'm still kicking myself (a little) for falling for this scheme.
17
It is unsecured lending and there are federal laws about harassing borrowers. What do you want them to do? Break into the borrower's house and take their jewelry?
All they can do is send to collections and ultimately ruin the borrower's credit score.
All they can do is send to collections and ultimately ruin the borrower's credit score.
6
It's not a scheme. There's a reason why you can barely get 1% in a bank savings account right now and through Lending Club you can get 7.5%
It's called high risk/high return.
It's called high risk/high return.
7
I would like to know what type of borrower gets a loan from these companies, and what the average amount of a loan is. Are the borrowers a type of scammer themselves? It would be an easy thing to try, if someone got a million dollars, to claim their new company was funded to that sum, and use the concept to raise money from investors.
1
I am a Lending Club borrower and I'm grateful for the loan I received. Due to unexpected medical expenses and home repairs, I needed to consolidate credit card debt at a lower interest rate. I make my final payment next month on a three-year loan.
2
I started out investing with Lending Club before they started cherry picking loans and selling them to big banks.
I've been cashing out slowly ever since.
I've been cashing out slowly ever since.
8
Not all on-line lending companies can be painted with this wide brush. PayPal Working Capital is available to qualified Ebay Power Sellers with loans as low as 3.3% of the loan. The repayment is then removed from your PayPal balance on a daily basis until the loan is repaid with no additional fees. I have used this several times and give it my highest regards.
1
"But on Monday, Lending Club announced that Mr. Laplanche had resigned after an internal investigation found improprieties in its lending process, including the altering of millions of dollars’ worth of loans. The company’s stock price, already reeling in recent months, fell 34 percent.
When are people going to learn that Wall Street in general is nothing more than the rich swindling and preying on the American middle class.
When are people going to learn that Wall Street in general is nothing more than the rich swindling and preying on the American middle class.
10
Lending Club and its ilk were started as an alternative to traditional banks. By linking lenders to borrowers, such P2P sites hope to disintermediate Wall Street.
Could it be that the P2P sites are not the saviors many critics of Wall Street claimed they were? Is it possible (just possible) that traditional big banks are not as bad as you feared?
Could it be that the P2P sites are not the saviors many critics of Wall Street claimed they were? Is it possible (just possible) that traditional big banks are not as bad as you feared?
No, not all of Wall Street. One could smell this guy and outfits like his a mile away. If it sounds too good, it is rotten. You make $ with slow steady investments and living w/ I your means. Period. Wall Street used effectively can help.
As someone who's been an investor of these services for over 5 years this is bad news. Overall Lending Club and Propser (I can't speak for OnDeck and IMHO don't like their business model) are a net positive.
One of the issues of course is the ZIRP policy by the FED for over 8 years. People are looking for returns of ANY KIND. Hence you have to go up the risk curve for any decent return. These services fit that bill and why they have been so popular.
The next recession will not be kind to investors in these services, but should be able to eek out net positive returns if the investor invests properly. Though a few will not.
One of the issues of course is the ZIRP policy by the FED for over 8 years. People are looking for returns of ANY KIND. Hence you have to go up the risk curve for any decent return. These services fit that bill and why they have been so popular.
The next recession will not be kind to investors in these services, but should be able to eek out net positive returns if the investor invests properly. Though a few will not.
5
Why should anyone expect 'decent returns' without a decent society with a decent amount of demand that comes from decent citizens earning decent wages?
1
I’ve always wondered that if a person/business cannot qualify for a traditional bank loan, there is probably a good reason for that. I suppose there might be a really tiny group of individuals/businesses that get rejected from a traditional bank loan who then go on to do great things with the cash they get from loans made by companies like these but that is probably very few and far between. This is why I would not make a loan to any person/business that cannot obtain a traditional bank loan, unless it was a VERY close family member/friend in which case I might do it as a gift, rather than as a loan. I’d leave the lending to the banks. That’s their business. I think this “peer to peer” stuff is dangerous for those doing the lending or those investing in the companies which, in turn, do the lending.
4
Most of the Lending Club applicants can and do qualify for bank loans. But they are choosing the Lending Club (or similar P2P) route because the rates are far more competitive (read: lower). Some also find the P2P crowd-sourcing model more appealing from a philosophical perspective than giving their business (and interest payments) to a traditional bank.
There are certainly high-risk applicants in these P2P platforms, as indicated by their loan rate/grade, that likely could not get a loan through a traditional bank. But those applicants with loans assigned a high-rating/grade (and lower interest rate) certainly do qualify for loans through traditional banks.
There are certainly high-risk applicants in these P2P platforms, as indicated by their loan rate/grade, that likely could not get a loan through a traditional bank. But those applicants with loans assigned a high-rating/grade (and lower interest rate) certainly do qualify for loans through traditional banks.
1
All of these too good to be true schemes coming out of the web community is the Wild West Gold Rush mentality all over again.
Next the overvaluation of Facebook will sting investors.
Politics is infected with the same problems - deregulate, defund, destroy. The voter is beginning to see the scheme.
Next the overvaluation of Facebook will sting investors.
Politics is infected with the same problems - deregulate, defund, destroy. The voter is beginning to see the scheme.
21
The true genius of the marketplace is that it all always find a novel way to separate gamblers from their money.
19
I like all the Real and Permanent Good these hedge fund folks come up with trading electrons and doing God's work.
29
I don't think this company was a creation of hedge funds, though, was it? I think it was the Real and Permanent Good of the people who aren't banks or financial institutions. Or did I miss something? (I'm genuinely asking.) I fear this is more proof that there is dishonesty in many quarters, than more proof that hedge funds are bad.
3
Oh, look: OWS is back. Final exams week must be over.
Anyway, saying that hedge funds don't do anything productive is utterly simplistic, and ignores economic reality. None of the following would exist without hedge funds:
Amazon
Uber
hi-speed internet
Facebook
the revolution in telecom that lowered the price of every phone call you make
the exposure of Enron as a fraud
the investment returns that fund every public employee pension in the US
Anyway, saying that hedge funds don't do anything productive is utterly simplistic, and ignores economic reality. None of the following would exist without hedge funds:
Amazon
Uber
hi-speed internet
the revolution in telecom that lowered the price of every phone call you make
the exposure of Enron as a fraud
the investment returns that fund every public employee pension in the US
2
"the investment returns that fund every public employee pension in the US"
You may want to do a little bit of research on this one. Large-scale studies have shown the under-performance of hedge funds and many states are beginning to divest from such options.
You may want to do a little bit of research on this one. Large-scale studies have shown the under-performance of hedge funds and many states are beginning to divest from such options.
3
I'm not surprised that these companies are in trouble. They are not much more than electronic loan sharks sans the enforcement muscle you see on TV dramas. They skirt regular banking regulations by charging flat fees rather than interest. I was approached by one who offered me $16k for my business at the "great payment rate of only $123 per day!" for 80 days. This was to be automatically withdrawn from my checking account everyday M-F. When done I would have paid them $24,500. I can't think of a faster way to go out of business. This is karma folks and well deserved.
27
The situation you described is not analogous to this industry at all. The vast majority of Lending Club borrowers are consolidating or refinancing existing debt at lower interest rates.
1
The article incorrectly states that banks rely on deposits to fund their loans.
In fact, bank loans create deposits. Banks have the unique ability to create new money. Lending Club etc. cannot--and so they aren't subject to bank regs either. They're competing w/ banks but they have a fundamentally different business model.
In fact, bank loans create deposits. Banks have the unique ability to create new money. Lending Club etc. cannot--and so they aren't subject to bank regs either. They're competing w/ banks but they have a fundamentally different business model.
14
Actually, no. The article is correct, and Mr. Genz has it backward. Traditional banks use deposits to fund loans, not vice versa. Mr. Genz's comment is further evidence of the terrible problem of economic illiteracy that we have in this country.
13
Actually, you are both right.
He's just thinking one step ahead.
Banks use a portion of the funds on deposit to fund loans. These loans are then deposited... at banks. Hence, bank lending expands the money supply. The number of times this process can be repeated depends on how much the banks are required to keep in reserves.
Banks use a portion of the funds on deposit to fund loans. These loans are then deposited... at banks. Hence, bank lending expands the money supply. The number of times this process can be repeated depends on how much the banks are required to keep in reserves.
2
These P2P lenders use the ancient Lloyd's-of-London process by soliciting loans, fractionating their creditworthiness, and sending them out to lending syndicates for participation. They are nothing more than facilitators, take no risk, and and live off servicing fees from both ends. Investors take all the losses from defaults. When they securitize loans to sell to banks, hedge funds, etc., the proceeds repay the original investors---after their fees, that is.
15
I'm not in the financial industry and curious about a statement in this article. If the loans for approximately $22 million sold to Jefferies did not meet their criteria, why did Jefferies purchase these loans?
Wouldn't any irregularities have been caught by Jefferies if they had done their homework? Unless Lending Club didn't detail all the information about the loans to Jefferies prior to the sale, which resulted in the buyback.
Wouldn't any irregularities have been caught by Jefferies if they had done their homework? Unless Lending Club didn't detail all the information about the loans to Jefferies prior to the sale, which resulted in the buyback.
4
In all likelihood, Lending Club probably misstated information to Jefferies -- i.e., Jefferies asked a question and relied on a representation or warranty that Lending Club fudged, either knowingly or inadvertently.
1
@Mark - Thanks!
"Just months ago, it seemed marketplace lenders couldn’t churn out loans fast enough. Investors like hedge funds, insurance companies and pension funds were clamoring to buy large pools of these loans, which offered an attractive return at a time of record low interest rates."
Gee, why does this sound so familiar?
Gee, why does this sound so familiar?
42
I have a small loan from Lending Club. I couldn't get one from a bank! These are needed outlets. Banks have let this country down. This, or something like this, is the future!
13
I get solicited regularly by the Lending Club, Prosper and whatever Discovery is calling their Personal Online Loans operation and after taking a look, it was obvious that they are just slightly less predatory variations on the PayDay and Title loan industries mixed with the Consumer Credit Repair scammer model. Anyone with a moderate to good FICO score can get a better APR from the traditional Credit Card provider Balance Transfer offers. They are just trying to exploit less informed consumers who may have run up a balance due to some medical or personal emergency.
Read the fine print folks, there is no free lunch there.
Read the fine print folks, there is no free lunch there.
45
Isn't that how this business works? A variation on the plumbing, mechanic general contractor as hustler who, because of access to special knowledge and terms of art , are able to make simple jobs seem like great mountains to be scaled only be the bravest and most experienced.
Is it any wonder why the Russians and Chinese glommed onto these businesses so quickly when they began the process of trying to be consumer cultures?
Is it any wonder why the Russians and Chinese glommed onto these businesses so quickly when they began the process of trying to be consumer cultures?
6
The vast majority of Lending Club borrowers are refinancing or consolidating existing debt at lower interest rates. Typically these aren't new money to a borrower.
1
Not even close. You should learn a bit more about teh subject before commenting. There are no facts or objectivity supporting your statement. The P2P loans have much more in common with a traditional bank than payday loans.
These loans have nothing to do with payday loans. Apples and oranges.
These loans have nothing to do with payday loans. Apples and oranges.
1