Peer-to-Peer Lending

I'm not a fan of Peer-to-Peer Lending or Investing, also known as "P2P."  Let me get that clear right up front.  To me, it may turn out to be one of those areas where the Fed pushing investors into ever riskier areas ends up being regretted.

Still, I do get queries about P2P from clients and others and so thought that this report "An Advisor's Guide to Peer-to-Peer Investing" by John Caldor would be of interest (pun intended!).  The article has a lot of really good info on the subject, including websites to visit.  The best investor is an educated investor.

Some points that interested me in my cursory overview:

• idea of diversifying to the point that, even if historical default rates occur, the P2P investor still achieves a much higher yield than they would elsewhere at comparable risk.  This is an interesting point on a couple of fronts.  One is that this was the genesis, in fact, of the high yield or junk bond market.  Mike Milken found that this to be the case when doing research for a doctoral thesis.  In P2P lending, if you lend $1,000 by lending $25 to 40 different lenders at rates between 12 and 15%, say, you can still experience defaults at the highest historical rate and come out ahead.  A point of caution, though - historical default rates can be exceeded by a lot.  This was one of the key problems in the 2008 debacle with derivatives!
• a second point on diversifying.  The article mentions 5 to 8% of total assets be confined to P2P.  I agree.  Remember that diversifying goes beyond number of issuers.  It also has to do with amount in sectors.  If you lend to 1,000 borrowers using 25% of your assets and the whole sector gets hit (think of banks in 2008), you're dead meat (see picture above)!  With flies circling!
• a third point is the types of borrowers.  I winced when I saw the mention of debt consolidation and moving from 20% credit card balances to lower P2P lender rates.  Ooch!  The borrowers may have issues that lower rates won't solve.

Anyway, for those of you exploring this area, enjoy the article.  Keep in mind I am conservative in the investment arena. Your own research could very well determine P2P is an area you should participate in.