In the summer of 2014 I started a peer-to-peer lending (P2PL) adventure as an alternative way of investing since the rent on saving accounts was between 0 and 1%. I decided to give a try to P2PL after reading 1) an article on a Dutch newspaper and 2) some blogs with positive experiences (but see this blogger who was sharing doubts on the investments’ safety in spite her projects being repaid).
P2PL is as borrowing from your neighbors. One has an idea or wish and borrow the amount to realize her idea through a platform connecting her to lenders. Other persons lend the money in exchange for a return (ranging between 5 and 15%). The return depends on the risk the platform gives to the project, but it follows the finance principle of “high-risk = high-return”. High risk corresponds to a high chance of the loan not being repaid.
I chose Lendico among the several platform facilitating P2PL for two reasons. First Lendico lends starting from 25 Euros. The Second reason is that the maximum loan is 25,000. Therefore I figured Lendico borrowers were mostly persons and not corporations. I found attractive that Lendico borrowers were people because it gave me the impression I was helping someone in need. Moreover, lending to people reminded me of the strategy of Carl, Jim Carrey, in the movie yes man. In ‘yes man’ Carl becomes successful by lending to anyone. Loans were mostly repaid fully, since they were small. Moreover, small loans yielded very good returns to the bank, in fact, the rate of return on small loans is higher than the one on a house’s mortgage. And there was Carl, the strategic investment engineer! Who was giving out loans only because he had to say yes…
Initially I was positive about the rate of return on P2PL. For example, 100 Euros invested for 5 years at a rate of return of 8.88% would yield 124.55 Euros at the end. Nice yield! However, a closer look to the numbers would reveal a different truth. In fact, 100 Euros in a bank for 5 years at 8.88% would return 153.02 Euros in the last year (first 108.88, then 118.55, 129.08, 140.54, and 153.02 the final year). Lendico return is about half (52.03/24.55 ~ 2). The two rates of return are different because Lendico’s rate-of-return is based on the loan-amortization table. The amortization table makes sure the loan repaid in full at the end by partly repaying the loan every month. Therefore the capital upon which one pays interest is smaller every month. explaining .
This discovery is not the only reason I stopped with Lendico. I find the return too small to justify the risk. For example, among the 15 investments I have, two are probably not going to be repaid. Sadly enough, the return on the other 13 will not cover the costs of the losses. I think my bad choice is partly justified by the fact the information Lendico gives on the borrower are unclear. For example, one borrower had a job with permanent contract, but the duration of his/her contract was three months. I assumed this meant s/he started working three months ago, but did s/he? Since s/he stopped paying the loan approximately four months after borrowing I am inclined to think the job was not permanent. But I have no way to check this. In other words, it is very difficult to have an idea of whom you are lending to. Another source of bad decision are emotions. It is difficult to not be empathic with some borrowers, but one doesn’t really know whether the borrower is being honest. Then when your loan is not repaid, you are left with this feeling that you have just been made a fool of.
At the moment I consider peer-to-peer lending comparable to throwing a bucket of money into a well. One then check what is (left) in the bucket when s/he pulls it back up. Also the projects of the blogger who was skeptical about P2PL are not being paid fully, thus confirming my idea that the risk is too high for the kind of return one gets.
As I said before, peer-to-peer lending has its charm, especially when reading some of the reason why people are borrowing (e.g., an unexpected surgery operation, bringing one’s parents in holiday, buying a car to visit a mother with Alzheimer, …). … but I am generally not willing to throw money to people I do not even know. And if you aren’t either you shouldn’t as well.