Archive for the 'Investing' Category



26
Mar
12

Peer-to-Peer lending is a bad idea for investing

Maybe we’re just old curmudgeons who fear change and new things?  We’re the same people who won’t click anything on our computer screen if we don’t know what it is for fear of our computer combusting.  And, we don’t like peer-to-peer lending.  Or “P2P” if you are a young hipster who wildly clicks everything on their computer (sans combustion).

Why you ask?

  • We can’t help but ask, why don’t these people go to a bank and take out a loan?  Why won’t the people who are professionals offer them a loan?  Is there not enough exposure through investing in a bank?
  • How quick we are to forget the credit crisis of a few years ago.  When shit hits the fan, self preservation becomes the number one priority for people.  People will go so far as to use you as a shield so they don’t get the durdy stuff on them.
  • People will say anything or do anything to make you believe they are up for sainthood…and so you give them money.
  • We also find some irony to personal finance blügs pushing P2P lending.  These loans are typically for the very thing personal finance blügs preach against.  Yet they “invest” in it?  Not to mention, blügs are often paid for you signing up with a click through their affiliate links.
  • Some of the reasons given to loan people are uncorrelated to their ability to pay the loan back.  This mainly revolves around business loans.  Their credit rating has nothing to do with their ability to run a business.  And if the business tanks, good luck collecting.
  • It is time consuming.
  • It is risky.

General consensus is for a person to use a small portion of their portfolio for P2P lending.  And that is ok in our mind if that portion is part of their equity allocation.  P2P lending should be viewed as a risky “investment.”  And since we know reaching for yield is a bad idea, P2P lending shouldn’t be part of fixed income allocation or emergency funds.  That, in our mind, is OK.

So, why don’t we use a small portion of our portfolio for P2P lending?  Two reasons: 1) it takes time and research.  In fact, it would take us a significant amount of time to understand websites like Lendstats.com.  and then we have to read through loan after loan to understand where to put our money.  Limiting exposure by investing the minimum $25 in multiple loans?  All the more reading and research.  2) if we are going to risk a small portion of our portfolio and invest time, why not invest in a hobby or something we get non-monetary gain from?  Or go on a vacation which provides us excellent utility, especially while working.

Overall, we don’t think this is a right or wrong decision as long as people are assigning the risk of P2P lending to the correct risk bucket and limiting their exposure (<5% of their portfolio).  But, it is a time consuming endeavor, which can, for some people provide them utility.  And that is a good thing, as some people may enjoy helping someone consolidate their debt and get out of their hole.  But, it shouldn’t be viewed as a serious investment, but more of a hobby.  In fact, we’ve spent less time checking our portfolio and re-allocating our investments than we did researching P2P lending.

 

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