My Opinions on P2P Lending
February 15th, 2008 by Ana
There’s quite a bit of chatter in the PF blogosphere about P2P lending, so I thought I’d pull out my soapbox and give y’all my uninformed opinions on the whole subject. I’ll do my usual disclaimer here: I am not a financial expert, do not aspire to a high level of sophistication when it comes to personal finance, and am very biased against debt.
First up, what P2P lending is. Silicon Valley Blogger wrote a good informative introductory piece about P2P last month, and even submitted it to the Carnival of Debt Reduction. I feel bad about not being able to include it since my narrow and strict view of the phrase “Debt Reduction” didn’t let me see a connection. The short and shallow version: P2P stands for “person to person” or “peer to peer” and it is simply direct loans between individuals.
Opinion time now! I don’t think P2P lending is a good idea at all, not only for philosophical reasons but also for practical reasons. I’ll break down the practical reasons first, before I get the “fire in the belly” anti-debt philosophical reasons going. LOL
Practically speaking, I don’t see why P2P lending is even necessary. Why would you rather borrow or lend money to a total stranger? These are borrowers who can’t seem to get loans anywhere else, and in today’s American “Debt Marketing Blitz” I have trouble with that.
Each and every one of these borrowers have friends, family, and the majority have a local bank or credit union. Has anyone stopped to ask why they can’t get a loan from those sources? If thier friends and family - who know them personally - don’t feel comfortable lending them money, that says something. If their local bank or credit union, who has firsthand knowledge of their money habits and a business interest (pun intended) to lend them money won’t make a loan, that is telling. With the Fed’s interest rate dropping like a dense lead ball lately, the “better interest rate” argument isn’t holding up as well as it used to. I understand that bad things happen to good people, but my gut feeling is the majority of these borrowers on these P2P sites probably shouldn’t be borrowing money. Recent headlines indicate that the major P2P sites have needed to hire collection agencies, which reinforces my opinion.
Finally, the borrowers on the P2P lending sites don’t seem to want to get out of debt. I say this because the simple practical truth is “You can’t borrow your way out of debt.” Yes, that is a Dave Ramsey quote, for those who are keeping track. It’s why debt consolidation seldom works … you are trading many small debts for one large (and usually longer) debt. The only way to get out of debt is to pay it off completely.
Now I’ll pull the soapbox out to center stage for why I don’t think this is a good idea on principle. There’s the general problem I have with encouraging people to go into debt. Anyone who has read this blog for even a week knows I actively try to inspire people to get OUT of debt! I’ve stepped back, examined the debt system in place here in America, and decided it is too close to indentured servitude or the old sharecropping system or the mining town store business model.
Shakespeare said it best, “Neither a borrower nor a lender be.” (Hamlet, spoken by Polonious to his son Laertes, if anyone is curious.) The more Biblically-inclined folks will quote the book of Proverbs, which states, “The rich rule over the poor, and the borrower is slave to the lender.” (Proverbs 22:7)
So on the philosophical level, the lenders on the P2P lending sites are looking for borrowers to become their wage slaves, much the same way I had my son working as a wage slave the other week when he wanted to borrow against his chore money. While I might be inclined to do that as a life lesson for my child, I am not comfortable at all with the concept of doing that to total strangers! So, y’all will never see me on those P2P lending sites as a lender.
An old Army drinking buddy of mine used to wear a T-shirt to the bars that said: “Lead me not into temptation - I can find it just fine myself!” That pretty much sums up the whole P2P lending situation for me. Those borrowers who crave to be debt slaves will find someone who is willing to “own” debt slaves (or indentured servants if you’re not comfortable with the word “slave”). There will always be someone who is willing to “sell their soul” for things, just as there are always people willing to write that contract.
Not me. I am no longer willing to go back into the chains of debt myself. I am not going to encourage anyone else to go into those chains of debt. And I would not be able to sleep at night if I were the ones slapping those chains of debt onto another person as a lender, since I have worn them myself for too long. So, I do not endorse or even like these new P2P lending sites.
Posted in random stuff, debt |
February 15th, 2008 at 11:46 am
Kudos on an excellent post! First of all, people shouldn’t be borrowing money. Second, why would you loan someone else money? Especially someone you don’t know? How stupid.
February 15th, 2008 at 11:58 am
green3, I intentionally stopped short of using the word “stupid” because I know several bloggers who consider lending on P2P sites as an “investment.” I look at it as a fundamental difference in philosophies, just as some folks believe there is such a thing as “good debt.” Now, what I will say is that I don’t think it’s a *smart* idea
February 15th, 2008 at 4:24 pm
I have money invested in P2P lending.
I don’t think it’s either a bad or good borrowing situation to be in, merely one amongst many. But then, I think that debt is neither bad, nor good, simply a tool to use (on either side) as necessary. You certainly can use P2P lending as a tool in debt reduction (see www.rocketfinance.net) but it involves being the lender, not the borrower.
February 16th, 2008 at 9:29 pm
Nice writeup! I need to work on a response for you!
Like Plonkee, I look at debt as a tool, but overall, I tend to be on the conservative side of things as well. The only debt I carry is a mortgage. But if I were to have debt, I would shop around for the best terms I can!
February 16th, 2008 at 11:19 pm
plonkee and SVB: I appreciate your viewpoints on this. As I mentioned in the very first paragraph, I have an anti-debt bias (wouldn’t be “debt free revolution” without it LOL). I am actually looking forward to your response(s).
February 17th, 2008 at 7:58 am
Why would anyone be a borrower on a P2P site? Because they can’t get credit anywhere else. Their credit report/FICO is shot and it’s over. OR they are a scammer…just like scammers invaded eBay, they’ll probably happily take the lenders’ money on P2P lending sites and disappear.
Why would anyone be a lender on a P2P lending site? Because of the promise of higher returns than money markets, bonds, even stocks, and without the volatility. It’s safe! It’s guaranteed! The borrower has to pay it back! Well, as the old saying goes, only the greedy get conned. It’s stupid to lend to someone with shot credit and think that’s safe. This is a high risk “investment” because you’re lending to deadbeats.
It takes two to tango, and the P2P lending sites are playing matchmaker between deadbeats and greedy people. Tango away, friends!
Duh, no wonder they needed to get a collection agency involved!!!! Just DUH!!!!
February 18th, 2008 at 4:17 pm
When I first heard about P2P lending, I thought, “Great. Another realm of stupid.” My thoughts haven’t changed. Thanks for spreading the word, Ana.
February 21st, 2008 at 10:00 am
Ana,
This was a very interesting take on P2P loans and I appreciate where you’re coming from (and your disclosure about having an anti-debt bias). While we’re on the subject of disclosures, let me say that I contribute to the Lending Club blog and am a lender there as well. So if you want to discredit this response and call me a brainwashed part of the problem, that’s fine
I have stopped to ask myself why P2P borrowers can’t get a loan from the sources you mentioned. I think the reason people don’t get money from friends, family, and banks is three-fold.
First, people tend to learn their financial habits from their friends and family. If they are in debt and need money, chances are good that their friends and family may be in similar situations and not able to help them out.
Second, borrowing from friends and family does not help your credit score. Successful repayments to a P2P lender can.
Third, I still believe that many people turn to P2P loans not because they can’t get a loan from a bank, but they can get a better interest rate at a P2P loan site. Yes, the Fed has been slashing rates, but have you noticed that banks quickly reduce the interest rates offered on savings accounts and CDs with rate cuts but reduce loan interest rates at a much slower rate? When the Fed raises rates, they tend to raise loan rates quickly and savings interest and CD rates slowly.
As for lending and borrowing from strangers and P2P borrowers having bad credit, let me make two points about Lending Club. First, by using affiliations and harnessing existing relationships through social networks, you don’t have to be lending to strangers. In many cases, people are lending to people they know, friends of friends, or people with a common connection such as both being in the same branch of the service.
Second, In order to qualify for a loan from Lending Club, you need a credit score of at least 640. Even then, some people with scores above 640 are turned down if their Debt-to-Income ratio is too high. These are certainly not people with shot FICO scores, as kentuckyliz suggests.
Even someone with a bias towards debt will probably concede that people are going to use debt. In many cases, P2P loans are a competitive alternative to tradition funding sources and a superior alternative to shady sources, like payday loans.
To conclude my (hopefully insightful) rant on your (mild) rant, let me say that if you want to call me a debt slave owner because I lend on P2P sites, I would hope that you would concede that some of us are doing so with good intentions and attempting to be kind and gentle masters.
Thanks for listening and for your insight!
February 21st, 2008 at 11:34 am
Actually Mike I appreciate your thoughtful response, as well as your disclosure upfront
Yes, I do concede that there are people who are determined to go into debt or further into debt. I watch my mom do it to my dismay. I would like to think that she has good intentioned and “kind and gentle masters” but I know she has credit cards.
My opinions on debt come from my experience with credit cards, loans, and a history of bad money management. My personal financial picture has vastly improved since I learned how to budget properly and get out of debt. My future financial outlook is absolutely beautiful … without debt.
I won’t call you brainwashed at all. You are just looking at debt from the “other side of the fence” as a lender, so of course your perspective will be different from mine. That’s why they are called “opinions.”
February 21st, 2008 at 11:39 am
Discussions like this, and the open and honest debate that come along with it, help to unveil the mystery of money and debt that has for too long remained a taboo subject. Thanks again.
March 20th, 2008 at 3:37 pm
I am a lender on popular P2P web sites. I’ve ceased all lending activities with the turn of the new year. I realized my error a bit too late. I was attracted by the opportunity of making a higher return. I belittled the risk. Starting with 2008, I’ve been cashing out my P2P accounts slowly as borrowers pay back. Even though I lent the funds mostly to the top grade borrowers, my return is currently about equal with my losses. So I would have benefited more by stuffing my savings in a savings account.
I don’t believe borrowing and lending is always wrong. It was a great benefit for my wife and I to borrow money to purchase a home, for example. Secondly, the monies we all invest is certainly not stagnant. It is put to use by the financial institutions we trust it with. So, unless we were to all stuff our dollars in our bed’s mattress, we are all involved to some degree in “financials”. Thirdly, if we were to require lending to be interest-free, we would be sending a strong message that we do not value those who have funds to lend. They, at the very least, deserve to get interest enough to cover for inflation. It’s uncharitable to not want the lender to be compensated for their service, just as it’s not right to not give someone wages for work done. Is God not the one who gives talents? Does He want the talents back as they were, or does He not expect us to have enlarged them? Fourthly, many successful businesses have started with capital investments from outside sources. Should this be considered evil? Certainly not. Industry employs us. It pays for the food we put on our tables. Do we not thank God for our food, shelter and employment? Are we slaves because we are gainfully employed?
I sleep very well at night, even though I lent money to over 200 individuals. I did not create their debt, and I did not seek to encourage them to be in debt. A person’s bad money management is their own sin. In lending money in good faith, I was doing a service, whether it was for personal use of for starting a new business.
Finally, I would encourage anyone to stay out of debt. It is painfully obvious that so many of us are spending more than we earn. That is probably the biggest problem, the sin, so-to-speak. The eyes and the belly are never full and for some, never thankful. That is where the slavery really is. Living within our means is best it seems.
March 26th, 2008 at 10:23 am
[…] been thinking about that argument ever since I read an interesting post over at Debt Free […]
July 7th, 2008 at 4:18 am
[…] Moolanomy questions if peer-to-peer lending is ready for the big time. Cash Money Life answers Moolanomy in his post as to whether p2p lending is safe. Blueprint for Prosperity wondered last year why anyone would lend on p2p - has he changed his mind? My Two Dollars gives some logical reasons for lending with Prosper and Lending Club. Rocket Finance talks about why he choose Lending Club over Prosper to lend money on. Debt Free Revolution wrote a post which clearly indicates her strong opinion against peer-to-peer lending. […]
July 22nd, 2008 at 8:47 am
I think it’s a little unfair to say that people should go to friends and family before they try a p2p lender. It can be very uncomfortable to do business with personal acquaintances, even when everything goes smoothly. Secondly, if these people are particularly prone to default, then the market will account for it by increasing the cost of money and the upside potential for the investors. Morality of debt aside, I think peer to peer lending is a reasonably attractive investment opportunity.