Peer to Peer Lending
Here are some introductory pieces that help to explain what Peer-to-Peer Lending is…
CBS News Video that is a good introduction to P2P Lending.
Explanation of how the mechanics pf P2P Lending works. (Play the video)
Here is a recap of much of what I personally like about Peer to Peer Lending…
It’s also known as MicroFinance or Social Lending, there are a flood of available companies (VirginMoney, Kiva, Prosper, Lending Club, etc.) that seem to be quite adept at cutting out the middleman (banks)… and I like that.
Transparency… Utilizing the various web sites all clients can see all loans at any time they wish… There’s no taking my word or anyone else’s word about the status of any loan.
We can spread out our risk… rather than loaning to one or two friends or colleagues in one or two big chunks, we can loan out lots of little chunks to many people for many different reasons. Ultimately, we’ll experience typical default risks similar to what credit card companies might experience, rather than the giant risk of a single large default.
The loans are short term (3 years) and are being paid down every month… so, in a sense the maturity is well below 3 years.
Liquidity… We’re getting impressive returns and we’ll always have money coming due every month. So, if you personally get in a cash flow pinch, this helps. Also, there is now a secondary market that has developed and the notes can be traded for instant cash.
The secondary market… between investing in new loans to people, we can also buy “aged” loans… by combining these two techniques we can increase returns, or shorten maturities, or increase cash flow.
Available in IRA accounts… this is a new one. There are a number of P2P web sites and only recently have any of them gotten their prospectuses through the SEC and are now getting state approvals. They’ve also engaged appropriate custodians that can hold IRA assets suitable to the IRS.
I have personally been a fan of P2P Lending for a while and have some of my own money at work here.It’s because the IRA holding rules and the SEC approvals are recent developments that I am just now able to show P2P lending to clients.
I like that there are many ways that I can add value and continue to be of service as my clients’ investment manager at no additional cost to clients, while being able to venture outside of the typical stock and bond environment.
I can and will set up the accounts and handle the paperwork. I will select loans and build initial portfolios. As money comes due and principal comes back each month, I will be in a position to reinvest proceeds to keep the funds working.
I actively moniter the secondary market and can act to acquire aged loans that look especially attractive. I will also be able to include a client’s P2P portfolio as a part of their overall investment plan, including their quarterly performance reporting right alongside and a part of their other investment accounts.
Further information and third party links about Peer-to-Peer Lending:
Harvard Business Review Article
Lending Club Prospectus… A must read before becoming involved
TransCapitalist’s Interview with Lending Club
…Robust list of articles about P2P lending (Barron’s, Washington Post, CNN, Forbes, etc.)
