Some readers will recall us mentioning the ‘peer-to-peer’ lending site Prosper. This is simply a site where folks in need of a loan can borrow from other individuals. I am now close to ending this 12 year ‘experiment’. We are finally down to have just $106 in the account and as that closed out in the next month we are done with peer-to-peer lending.
We made our initial loan on this site in March of 2007. At first it seemed like a promising site–a reasonable return for a reasonable risk. Unfortunately the recession followed shortly after we began investing here and the losses turned from 1 here or there to somewhat of an avalanche. I think over the course of the 1st 3 years over 25% of the portfolio of loans ended up being written off–this in spite of our attention to quality–never lending to low quality borrowers–so we thought.
It turns out that the Prosper methodology let lots of risk in the door-even though the borrower might have been ‘A’ rated. This caused Prosper to tighten their standards and while there were fewer write-offs there continued to be defaults by borrowers with high credit ratings and supposedly high paying jobs.
In the end we ended up making over $13,000 worth of small loans (the actual loans were between $1000 and $25,000, but our ‘participation’ was never over $100/loan). Our annualized return ended up being 4.59%–better than a sharp stick in the eye I guess, but not worth the personal heartburn created when a loan is made to an “A” borrower for a 3 year period only to have them default within 3 months.
So our learning with this very long experiment was that we will let bankers lend to folks and sustain the losses. Personally we are not built to lend to individuals as we take the defaults too personally.
If we want to participate in peer-to-peer lending we will buy the 5.875% term preferred shares (RMPL-P) of RiverNorth Marketplace, a non public closed end fund, who has a large portfolio of peer-to-peer loans.