Peer to Peer Lending for Frugal Investors Comments28 Comments


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I had been part of the online frugality movement for a few years before I ever encountered peer to peer lending. I was one of those guys who was thrilled by blogs that taught ways to create a budget, maximize in-store coupons, and get free flights with flier miles. Interestingly, within that entire scene, there really was not a frugal approach to investing. Those same people who taught me the importance of tracking my expenses down to the penny and establishing an emergency fund would then turn around and invest their 401k with Merrill Lynch.

Nothing against the major investment firms, but I was certain I could do better. Their hands-off approach to investing was what I was trying to avoid! Frugality, in contrast, had taught me how to make my finances a more involved process that valued study and patience. Surely there were investing avenues along a similar line.

I began to do a bit more research. I studied socially-responsible mutual funds and opened my first Roth IRA with one of them. I dabbled in the hands-on madness of stocks. But everything changed when, while searching the corners of the web, I happened upon peer to peer lending.

A Better More-Frugal Way to Invest

What I found amazed me. Peer to peer lending satisfied all the different requirements I was looking for and more.

  • Patient growth – Peer to peer lending is not a way to get rich quick, so it keeps away most of the crazies. Instead, what you find is a community of thoughtful people who have been slowly getting consistent positive returns of over 7%. Its volatility is so low that, at times, peer to peer lending can be a refreshingly boring way to watch your savings grow.
  • Hard work is rewarded with higher returns – Investing in the stock market can be frustrating. You can do all your homework correctly to find that perfect mutual fund, and yet if a national index like the S&P 500 drops, you will probably lose money as well. In contrast, peer to peer lending rewards its studious lenders with more positive returns, even during an economic downturn like 2008. Furthermore, you can learn how to target borrowers using statistical filters and, as a result, experience far fewer defaults (loans that fail repayment). My main Lending Club account is earning a return above 15% using a customized filter.
  • Ease of Entry – You need little cash to get started. This is because you do not fund entire loans yourself. You purchase notes, or portions of each loan, and a note can be as small as $25. This way, loans as large as $35,000 can be funded by hundreds of lenders, both well-funded and not, all working together to issue loans to people nationwide.
  • Social Responsibility – One thing I loved about the frugal movement was how it emphasized that relationships and experiences (not cash) are what make life worth living. Helping others out is a deeply rewarding way to spend our time. Interestingly, the majority of loans in peer to peer lending help people get out of credit card debt, giving them a single payment with a lower interest rate. Everybody wins.
  • Tax-free Options – I often struggled to figure out the Schedule D forms involved with an active stock portfolio each tax season. With peer to peer lending, both major platforms offer IRA accounts options. It is hard for me to believe that I am earning so high of a return at Lending Club tax-free; the compounding really gains momentum within an IRA.


There are some risks in peer to peer lending, so people need to consider these carefully before getting involved:

  • Peer to peer lending is new and unfamiliar - This industry did not even exist ten years ago, so people are understandably hesitant to invest their hard-earned savings in something they hardly understand. But there really is no risk-free investment, and I feel the years of loan history averaging a 7% return is proof of its validity. Plus, while the lending process might seem complicated at first, it is actually quite easy to understand with a bit of time given to it.
  • People might lose money – This happens daily on these sites. However, if you diversify your account among two hundred loans or more, a negative return is extremely rare. When I studied the importance of peer to peer lending diversification last month, I found that, out of 3800 lenders who invested in at least 200 different loans, only four lost money. In contrast, filtering the platforms with a few simple filters (like not lending to those with a past bankruptcy) can mean a diversified account almost certainly earns at or above the 7% average.
  • The platforms may go bankrupt – This is a valid concern. There really is no precedent for what might happen if a peer to peer lending company goes bankrupt. Do the lenders keep their loans? Do they get swallowed up by the bankruptcy settlement? Nobody knows for sure. However, Lending Club (the industry leader) is experiencing such tremendous success for the past few years that a bankruptcy looks extremely rare these days. Furthermore, Prosper (the other option) just came out with a protection vehicle that should save borrowers in the event of a bankruptcy.
  • Interest Rates May Rise – If savings account rates climb out of the gutter they are in today and rise substantially in the coming years, say to 7%, you will be hard pressed get lenders to invest in A-grade borrowers (those with the best credit). These peer to peer loans have a return of around 6-7% and do not have FDIC protection like a savings account. That said, I do not see rates climbing too dramatically, and believe that the peer to peer industry will adjust, even if this happens

Having looked at the benefits and drawbacks of peer to peer lending, having poured over websites and statistics for hours on end, I can honestly say that I am thrilled for what is happening. I transferred my Roth IRA over to Lending Club and recently began a peer to peer lending blog to teach people how to get involved themselves. Today, I have accounts with both Lending Club and Prosper, and each month leaves me more and more convinced that this is a healthy breakthrough that the country needs to hear.

Slowly Making Headlines

What amazes me is that, despite my enthusiasm, I have yet to meet anybody who knew about peer to peer lending before I explained it to them. Most people still think I am talking about micro loans to the third-world through sites like Kiva.

But this situation is changing, and quickly. The industry recently crossed the $2 billion mark in total issued loans, having crossed $1 billion mark just nine months ago. That kind of growth has not been seen since the introduction of ETFs in 1993, an industry that grew to more than a trillion dollars in 20 years. If this momentum stays the same, people are bound to hear more about peer to peer lending in the coming years.

My hope is that it eventually becomes a mainstream practice that gets people out of the volatile stock market and into the peace of lending money to one another. Imagine this financial connection spreading beyond personal loans, for instance into loans to businesses. There is so much debt around the country that could be eased through socially-responsible crowd funding. The party is barely getting started.

Learn more about peer to peer lending at the LendingMemo website. I have a free 35-page eBook guide available that explains the entire process in detail so that just about anybody can get involved.

If you enjoyed this post, please consider or you are welcome to leave a comment below.
By : Adam | 14 May 2013
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28 thoughts on “Peer to Peer Lending for Frugal Investors

    1. Simon Cunningham

      Thanks Cat! It’s interesting how well known Kiva is in contrast to Lending Club. They’re both great companies, but we’re trying to make them both equally well known.

  1. Chris @ Stumble Forward

    Great tips I’ve been looking at Lending Club to rollover my Roth IRA once the surrender penalty is up, but the only problem with it is I don’t think they are available in Ohio. Do you know what states Lending Club is not available in?

  2. Grayson @ Debt Roundup

    I have wanted to get into P2P lending, but my state doesn’t allow it. Unfortunately, it is not available to everyone and your state controls that destiny. I guess I will have to wait to try it out until my state realizes it is a good opportunity.

    1. Simon Cunningham

      Hi Grayson :) As per the comment above, your state will be allowed in when Lending Club has their IPO, something that should happen next year.

      For what its worth, until then you can always write your congressmen.

  3. Matt Becker

    I haven’t gotten into peer-to-peer lending, but my gut feeling is that it’s volatility is somewhat similar to that of corporate bonds. Is that anywhere near accurate?

    As for other frugal ways to invest, I would put Vanguard right up there at the top of the list. Best index fund provider in the game, extremely low cost, and very solid all-in-one funds if you really don’t want to do any work. I do all my investing through Vanguard and have only extremely positive things to say about them.

    1. Simon Cunningham

      You’re welcome Kim. The IRA is an amazing thing over the long haul. With a 30% tax rate, you lose over 50% of your returns over 30 years. It’s almost compound-interest working in reverse.

      Hooray for the Roth :)

  4. Darnell Jackson

    Who tells you about the opportunity makes a big difference.

    Be careful about these middlemen companies that encourage you to “join the club” if they are not bonded then they could run off with the clubs money.

    If it happened tomorrow it wouldn’t be the first time.

    1. Simon Cunningham

      Hi Darnell. Both Lending Club and Prosper are registered with the SEC and have brick-and-morter headquarters in San Francisco. The chances of them taking the money and running is incredibly slim.

    1. Simon Cunningham

      Kiva is a great way to invest if you’re trying to do the most social good. But most people are trying to socially invest their savings for retirement at a somewhat lucrative rate, and p2p lending is exactly what they should be looking for.

  5. The Phroogie Jason

    Great article. I lived in Palo Alto, CA and drove by the old Lending Club building on 101. I had no clue what it was until one day I decided to do a search online and discovered it to be a Prosper-like platform (I knew of Prosper).

    I eventually used the platform myself both ways and encourage others to check them out as well. I’ve been a happy participant in the growth of Lending Club.

  6. Darius

    P2P is quite a norm here in my place. Despite the drawbacks and the potential to get scammed or bankrupt, people jump on it hoping to multiply their money. I don’t prefer this type of business.

    1. Simon Cunningham

      Hi Darius. There is no chance of being scammed. These are federally-registered financial institutions, and I can purport that lenders can earn a healthy return of 7-13% by learning the system and becoming involved themselves.

    1. Simon Cunningham

      After reading your article critiquing Lending Club, I have to politely disagree with you. Your main argument was that their interest rates were higher than you are comfortable paying, but I think Lending Clubs underwriting is actually quite accurate. If your credit profile was better you would have received a better rate.

  7. Mike Craig

    Peer2Peer in a great way to invest. The state limitations on Lending Club make it harder but not impossible. Foliofn is an option here in Pennsylvania that works well. Like anything in life , it could be better . But, for right now its the only game in town in Pennsylvania. another added bonus of Foliofn is that all the loans are funded already. I like it!

    1. Simon Cunningham

      Thanks Mike! Great to meet another Foliofn lender :) I sell my grace period notes on the secondary market.

    1. Simon Cunningham

      Definitely. It’s amazing how little it takes to gain entry, especially when compared to many public funds which need hundreds or thousands of dollars for access.

  8. Andy @ Land in Chennai

    I don’t think competition is a concern. In my own experience, it seems that P2P lending has yet to enter the US conscious/go mainstream. I think that Lending Club and Prosper have tons of room for growth.

  9. Chloe

    Great post! I’ve no idea regarding how P2P lending really works but I think I’ve read something about the Lending Club from the mr money mustache website recently. Are they the same? The $25 for an investment is really tempting.


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