Peer To Peer Lending websites such as LendingClub and Prosper seem like a great investment…however, these are some of the concerns to watch out for. Enjoy! Add me on Instagram: GPStephan

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For those of you who aren’t familiar with what Peer to Peer lending is:
These are websites like LendingClub and Prosper that act as an intermediary to match people who need to borrow money, with people who have money to lend. They’re pretty much offering YOU the opportunity to be the bank for someone else, and get paid back that interest.

However, these are my concerns:

First: Fees. As an investor, lending club charges a 1% fee on any payments you receive from the borrower…so already, whatever return you WERE getting, is now reduced by 1%.

Second: Defaults. If a borrower DOES NOT pay their loan, lending club charges a 40% fee on any amounts collected on a delinquent loan that went to litigation. According to them, they have an approximate default rate of about 7.8%. And keep in mind since the borrowers agreement is between themselves and lending club…not YOU and the borrower…you can’t do anything about it. You have no recourse.

Third: Lack of liquidity. Once you invest in a note, technically you’re tying up your money for 3-5 years until that loan matures…and that also assumes the borrower pays off the loan in time. If you need your money sooner, you’re forced to sell your loans on the secondary market…usually for a steep discount,

Fourth: Taxes then become an issue because your returns are seen by the IRS as ORDINARY INCOME, meaning they’re taxed at your highest marginal tax rate. And depending on how much you make, this could be a lot. Compare this to long term capital gains, which for most people is just a flat 15%.

Fifth: Risk of analyzing borrowers. Many P2P sites assume no risk in analyzing the credit worthiness of the borrowers. And this seems like people can easily take advantage of this.

Sixth: Default rates like this will ABSOLUTELY be going up if the economy begins to decline. The FIRST THINGS people stop paying is unsecured debt, like personal loans and credit cards…This leads me to think that whenever our economy begins to falter, the returns you’ll see on peer to peer lending websites will drop substantially, and at a time when you’ll WANT to have access to your money to invest in other opportunities, but you can’t because your money is tied up on these websites.

It’s for all of these reasons, you should do your own research to determine if peer to peer lending is right for you.

For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com

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