P2P Lending: A New Asset Class?
Posted July 27, 2013on:
Last night I was “wasting” time on Google+, when I stumbled upon Joe Udo’s blog where he had written about how he made an 11.3% annualized return with P2P lending. The next thing I knew, it was past midnight and I just had spent three hours eyeballs deep in the subject.
Let me first tell you what P2P lending is. P2P stands for person-to-person or peer-to-peer. P2P lending is the practice of lending to strangers, enabled by technology and the web.
The two leading companies in this arena are LendingClub and Prosper. Between the two of them, they’ve enabled nearly $2 billion of lending between investors and borrowers. However, that still pales to the total US consumer credit of $1 trillion.
I am super excited about P2P lending! Let me tell you why.
Nobody likes a middleman, and P2P cuts them right out of the equation! Have you noticed that banks are charging you 15% to 23% on your revolving credit card debt, while paying you a paltry 1% interest on your savings? That’s a major rip off! On top of that, they still need taxpayer bailouts from time to time – that’s our money as well.
With those big bad banks out of the picture, borrowers with good credit can borrow much more cheaply, thereby keeping way more money in their pockets.
For investors, it is even more exciting! Traditionally, there are only three fixed income asset classes: Treasuries (lending to the Fed) which pay nothing (1-2%); Municipals (lending to states) which pay peanuts (2-3%) and Corporates (lending to corporations) which pay between 4% and 7% depending on credit quality.
Now that there is P2P lending (lending directly to individuals,) investors can earn between 6% to 15% in returns! I call this a new asset class. It is riskier than corporates, but like all risks, it can be managed, and the rewards are superb.
Unfortunately, P2P lending is not yet legal in my home state of Maryland, even though it is in DC and Virginia. You can bet that I will be calling my state legislators for help with that one.
I can’t wait to dip my toes in and test the waters so that maybe one day I can add P2P to my clients’ asset mixes.