Peer-to-Peer (P2P) Lending and Bloggers Ethic
By Pinyo • Mar 10th, 2008 • Category: Credit and DebtLast week, my friend Gibble sparked a little controversy with his post “Why I think P2P lending is a bad idea.” He believes peer-to-peer lending as bad because it propagates myriad problems caused by credit and debt. In his words:
“I’m not a fan of borrowing money and couldn’t in good conscience recommend these services to my readers. I’m a firm believer that the ‘borrower is slave to the lender’ and P2P lending services just further promote the already far too popular concept of if you don’t have the money, just borrow it.”
Photo by Power to the People via Flickr
Moreover, he said peer-to-peer lending is risky:
“…the bottom line is you aren’t guaranteed to get the money you loan out back if the borrower defaults. Comparing this to the 30 year stock market history, it has a proven trend of 10%+ returns. I’m not really sure why anyone would want to do this vs. investing.”
Lastly, he said many bloggers are motivated by referral money when they recommend peer-to-peer lending. I rarely disagree with Gibble and have a good deal of respect for him, but I have to disagree this time.
Here is my blow-by-blow response:
Peer-to-peer lending is a tool. It is neither good or bad.
To think of peer-to-peer lending beyond its role as a tool is rather naive. There are many things in this world that could be used for good or evil — e.g., a hammer could be used to build or destroy, or even kill. My readers and I explored the topic of socially responsible investing recently, and I encourage you to take a read. In summary, peer-to-peer lending could be used for good or evil:
- Good for lenders – I think peer-to-peer lending is a good supplemental investment that allows for greater diversification. It has low correlation to the stock market and the average interest rate is competitive.
- Bad for lenders – Of course, it could be bad if the lender is greedy (or stupid) and only go for the highest interest loans, which are the riskiest — sub-prime meltdown anyone?
- Good for borrowers — Sure, you could just get an unsecured loan from the bank, but peer-to-peer lending gives the borrowers a few more options. Also, it’s a great way to pay interest to your peers instead of your profit-mongering bank.
- Bad for borrowers – If you think borrowing could fix your credit and debt problem, you’re wrong. Move on and don’t waste other people’s time and money.
Like I said, peer-to-peer lending is just a tool. It’s not inherently good or evil.
Peer-to-peer is risky, so is the stock market — if you don’t know what you are doing.
Yes, the stock market has a proven trend of 10%+ returns, but you could lose your shirt in the stock market too. I bought a few stocks that went all the way to worthless before I found the correct way of investing. Just like the stock market, you could do well in peer-to-peer lending, or you could lose everything.
When you invest in peer-to-peer, you could choose who you lend to. You could limit you risk by choosing borrowers with good credit score, low debt-to-income ratio (DTI), no delinquencies, low inquiries, and reasonable loan amount. This is no different than limit your stock investment risk by creating a globally diversified portfolio of investments that contains large and small, as well as growth and value stocks.
However, I do agree that peer-to-peer networks are not quite mature yet, especially when comparing the more established stock market.
Bloggers have ulterior motive
Out of the three main points that Gibble made, this one is the one I agreed the most with. I would be lying if I said my recommendations of Prosper and LendingClub weren’t partially motivated by referral income. They are part of my overall alternative income building strategy. That said, I would never recommend anything that I know is bad, or that I wouldn’t use myself. For example, I would never recommend payday loans or refund anticipation loans to anyone.
At the same time, I am sure that there are some bloggers out there that recommend things they wouldn’t use themselves.
This post was featured in:
- The Carnival of Peer-to-Peer Lending #6 hosted by Cash Money Life. For more information please visit the Carnival of Peer-to-Peer Lending.
It is a tool, but I think it is a more dangerous tool, like a chainsaw.
Use with care.
I also get a little annoyed with all the bloggers these days promoting it, because sometimes it seems that they are doing it primarily to generate referrals rather than to let people know about it. (Not pointing my finger at you, just a general thought)
As a non participant in this P2P thing, I must say that you have put up an convincing alterative view to Mr. Gibble.
Bottom line, it is a tool, much like credit cards or fire. Great servants but terrible masters.
Regards
I fall into your line of thinking, Pinyo. I believe it is a tool and nothing more. I regularly write about P2P lending as well, and I think it has its positives and negatives. It ultimately comes down to doing what you are comfortable with.
Good perspective Pinyo, but with any tool if enough get her hurt, something will be done. You are correct tools are neither good nor bad, however they can be enablers to bad choices and heavy consequences. After all, there are valid reasons drugs are illegal and guns are controlled. Some might say the two don’t compare, but in reality they do.
Anyway, while I of course disagree, I think it’s good for our readers to see the different perspectives and opinions.
@fathersez - lol…my dad is Mr. Gibble
Love the picture!
I can see things from both perspectives, but I think it’s more important to follow your own conscience. If you think it’s wrong, don’t participate, but if you see nothing wrong with it, go ahead. The key to me is to not judge another’s motives or devalue their personal viewpoint.
I think P2P differs from credit cards since you generally have a lot of individuals bidding down the interest rate and it may be an easier loan to get for some people. I know of people who have gotten behind on their credit cards and are faced with 30% APYs. Getting a P2P loan around 10% could be a big help for these people. Also, if lenders contribute only the minimum amount to each loan they choose and choose their loans carefully they can greatly reduce their risk. I’ve been a lender on Prosper for about a year now and have never had a loan default or miss payment. Overall, it has been a good experience.
A well thought-out response, Pinyo. I find myself seeing both sides and thus not acting on it. But I think it’s not necessarily evil. Like you, I see it as something which can be used in good and bad ways.
@Ron - Well said and I agree.
@James - I agree, but I wonder how many people get those loans and actually use them to payoff their cards. Or even worse get a loan bigger than their card balance and use it buy that new gizmo and just go further into debt.
In general debt consolidation isn’t real successful. Dave Ramsey addresses this issue all the time. It has this psychological feeling of making you feel like you paid off your debt when all you really did was move it. Been there done that.
@StackingPennies — true, but just like any dangerous tool, you need to learn how to use it safely before wielding it. The problem starts when people forget the safe part.
@Fathersez — thank you. (Mr. Gibble…LOL)
@Patrick — I believe we are on the same page on this topic.
@Glblguy — Thank you. I like the “more control” part, and that’s one reason why I like LendingClub.com better since borrowers have to have better credit history and FICO score to participate.
@Ron — If I were a woman, I would say that’s me giving one to Gibble.
Thank you for sharing your perspective, I think it’s great.
@James — Thank you for the supporting information.
true, I’d never recommend something I wouldn’t invest it either.
but I think for a few hundred bucks, you get an idea of how to judge investment “sales pitches”, because thats what the prosper loan requests are. in the bigger picture of things, I think that’s a very useful experience.
of course, if you don’t have discretionary investing income, then you shouldn’t be lending money to others, which is why I never lend to people to relend it on prosper. thats just dumb
I’m a bit offput by this talk of how debt consolidation is bad because you’re just moving the debt around. It really depends on what the debt is. If you’re paying off credit cards and leaving the accounts open (and you really should leave at least a couple, and then swear off using them, if you don’t want to tank your credit score–insurance companies judge you in part by how high that score is), then of course you’re just moving it. But if you’ve got flat-out loans and can reduce your interest rate, that is a Good Thing(tm).
Heh. I will qualify as a lender on Prosper long before I ever qualify as a borrower. That isn’t necessarily a bad thing. I’m 34 and need to get my butt in gear planning for retirement or I am going to be in big trouble…
I would “recommend” (I don’t generally recommend borrowing money, but if you must … ) both p2p and payday loans from the borrowing side. As an investment i.e. as a lender, I don’t like either of them. Just as being in debt sucks, being a lender to people in debt sucks. Well, at least I don’t like it.
But yeah, it’s “funny” to see when blogger’s p2p referral fees dwarf their personal p2p investment income which may even be negative. This would be considered a conflict-of-interest/unethical at least when it comes to professional investment analysts. It is essentially like hawking a poor stock because the main income is generated by commissions. Even though the broker may believe in the stock, objectively speaking, he can not have the best interest of his client in mind.
As far as unsecured loans, Prosper loans are actually rather decent ones for the borrowers. They are a fixed interest rate that never changes and there is no prepayment penalty, so if you find a loan with a lower interest, you can shift into that with no problems. If you don’t get the loan, the inquiry doesn’t show up on your credit record, so you’re not hurting your credit by just asking. Any bank that offered those features would be called a good bank.
Yes you shouldn’t borrow more than you need to, but sometimes you need to borrow.