Peer-to-Peer Lending – Episode 047

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have my co-host and bestselling financial author, Kim Butler with us. Welcome Kim. Thank you, Todd. Happy to be here. We always enjoy hearing that our listeners are enjoying the podcast. I’m just so grateful that it’s helpful to you and that it helps you get to know us a little bit better. It is funny about how voice can do that. And so I’m just thrilled and we’re getting comments and we’re getting people to request

[00:51] various subjects, which is great. And we also have a request back for you. And that is that if you do like it, leave us a review on iTunes. That is most appreciated, as it does help us have iTunes be happy with the content. So super looking forward to, yeah, giving some value today. So as you mentioned, today’s show is going to be based upon some information that was requested by one of our listeners and they wanted us to discuss peer to peer lending. Relatively exciting subject. The whole industry started about 2005, 2006. The big players in the industry have done billions of dollars worth of loans. Kim, why don’t you, if you would just kind of give us a sort of a little summary of what peer to peer lending is from both the borrower and the investor side.

[01:45] Yeah, happy to. And peer to peer lending to me is a wonderful opportunity to cut out the middleman, which is typically the banks and you could even say the credit unions and even the life insurance companies and just have a borrower and a lender and have both of them benefit from that transaction. As you know, as practitioners of prosperity economics, we seek win-win investments where the seller and the buyer both win. And so in this case, you’ve got a lender and a borrower both winning. So from the investment side, you have an opportunity through a couple different large websites that have really built up some numbers to have an environment where you can earn, let’s just say seven to nine percent on your money.

[02:35] You can go a little lower than that. You can go a little higher than that. It absolutely depends on your comfort factor and your time frame. But it’s a nice solid return where you’re lending money to people that can make use of that money and you get to pick what types of things they make use of it for. If you don’t think somebody should be able to do X, Y, Z, then you don’t make that loan. And there are some automated environments, but most of the times I hear that our clients are picking their loans and having fun doing that and really know that they’re helping and then getting a monthly cash flow, which is very difficult for a lot of investors to find investments that monthly cash flow. We have a variety of them, but a lot of people are starting small.

[03:23] And this is the other thing that I love about it. Maybe you have a couple hundred bucks to work with, a couple thousand. Some of the websites do have required minimums, but you can start super, super small and get a seven to nine percent return whereby you are actually going to get the return. Now, there are some cases, of course, where the money does get lost. So you want to divide that couple thousand dollars up in like ten different loans. But as a general rule of thumb, those percentages of the loans that get lost are very, very low. So that’s the deal from the investor side. Did I need to elaborate on that more thoroughly? No, I would just say that anybody who has money in a savings account, keep in

[04:07] mind that this is exactly what is happening to your money, whether you participate in the profits or not. The banks are taking the money that’s on deposit. They’re assessing credit risk for borrowers and they’re lending your money out. The difference is, is that the percentage that you receive for the small amount of in your savings account versus the amount that they get for what they lend is what they are using to make money. So in a way, this is relatively new. But in another way, it’s really not, is it? It’s just allowing our money to pay us directly versus going through an intermediary that keeps nearly all of the profit. I love two things that you said there. They’re both so right on and accurate, and that is that this is happening to your

[05:01] money, whether you’re participating in the profits or not. And this has been around forever since time began and since money started to be used in society. People have been lending to one another. And so when we do look at it from the borrower’s standpoint, this is what’s going on. They’re going out in the marketplace and saying, I have a need for money and I don’t want to use the banks. Now it could be that they don’t want to use the banks because they have a credit score that really doesn’t give them that ability, but not always. Sometimes they just want to do a loan that is not typically processed at a bank. It might even be for something like a vacation. Nobody says there’s necessarily something wrong in borrowing for vacation.

[05:47] What matters is that you pay it back. And so these people have payment histories that you can look at on the various websites. These people have pictures of what they’re doing or how they’re using the money or what have you. And if somebody wants to borrow money for that purpose and somebody wants to lend Who’s anybody to say that that’s bad or to place a value judgment on that? Now, I know that we have some listeners that have a particular approach. It might be a biblical statement or some other thing that causes them to want to operate in a debt-free environment. And that’s fabulous. So they can, but other people don’t feel that way. And so if there’s an opportunity where a borrower and a lender can get together

[06:28] and it’s a win-win for both parties, that’s what peer-to-peer lending is. And thankfully, it’s been around long enough now on the Web that these companies have been vetted and have really proven themselves. And Todd, I know you’ve brought some statistics to our conversation today to be able to share with the listeners really how vetted this particular industry is. Well, there’s a couple of players in the industry or in the transaction. There are different parties that are involved. So one of the people that are involved in the transaction or companies or entities is a company that receives a fee to assess a risk score. So you do have professionals that are involved that are looking at things like, you know,

[07:12] the three C’s, you know, your ability, your past payment history. And in some cases, these are collateralized, but generally they’re unsecured. So there is a company who receives a fee to assess what the likelihood of getting paid back on the individual loan is. And of course, you’re better your projected ability to repay the lower interest rate. Now, this is what’s so exciting from a consumer standpoint on this, is that your interest rate is assigned by a reverse auction process. So in other words, the more people that want to lend you money, they actually compete to give you a loan. When was the last time that happened at a bank? So your interest rates tend to be lower. And because of that, the credit scores that are actually being done are higher.

[08:09] So it’s not so much the people who can’t get a loan anywhere else. It’s really become a first choice for people who want that lower interest rate. It’s operated online, so the overhead is relatively low. And like I said, the reverse auction process tends to drive the interest rates down. Any comments on that? Well, it’s just evidence of the free market doing its job. And whether or not you agree with that or not is not important. What’s indicative is that it’s truthful, it’s transparent, it’s out there, and it’s working. So I know we’ve got a couple different websites that provide this. You can do a quick Google search, peer-to-peer lending, P2P lending, it’s called. And you could even easily find some of the things that Todd is talking with us

[09:04] about today. So it is a vetted process, and one company in particular we do like. They’re not available in all states, so we’ve got an affiliate link with them. And that’s a good third win, if you will, a win-win-win for everybody. And if that particular company is not available in your state, you can dig around and find one that is. I know that the companies are working hard to get approved in every state. It always interests me when one particular state will decide that it knows the best for its residents and can say, oh, peer-to-peer lending is okay or life settlements is not okay or there’s another state that says life settlements is not okay and peer-to-peer lending is okay. Really makes you wonder who does some of the thinking for us.

[09:54] But nevertheless, this is an area that we encourage you to check out and take a look at and do so very thoroughly, because as you said, there are professionals that do it and get it wrong. So we as individuals need to look at it and decide if it’s something for us that resonates with us that we want to do. Now from the investment standpoint, the big advantage is to be able to spread whatever amount of money you have over a significant number of loans so that you do get some diversification because there are defaults. And defaults on an unsecured loan generally means that you’re not going to get repaid at the point that they stop paying period. But if you have a thousand dollars spread out in hundred dollar increments, you are

[10:42] far less susceptible to that risk than if you had a thousand dollars in one loan. Absolutely. And that’s something that we recommend absolutely doing is spreading it out not only potentially amongst loans, but also amongst the companies. And I believe in a lot of the websites, you can do it as little as a hundred dollars a loan. Isn’t that right? Correct. And the payments are one of the requirements of most of the websites for the borrowers is they’re automatically debited from a checking account. So it’s not like you’re waiting on somebody to send in a check. And there are professional companies that take care of the collections for you. So at no point are you required to call up Joe and Mary Smith and ask them

[11:28] where their payments are. Again, it’s fully automated. They track your returns for you, provide you your annual statements to file taxes. Generally, there is a fee for that service as well. So a couple of different players in there that make it convenient for you. The big danger, two of them. One, of course, is default by the borrower, which, again, you can look at the credit profiles of the people you are lending to. The riskier the loan, the higher the rate of return. So, you know, I certainly would recommend maybe even mixing up the credit categories that you’re lending to. And then the second thing that isn’t really talked about is if the site that you’re going through or the company that you’re going through, if

[12:16] they go out of business or file for bankruptcy or some type of protection like that, it literally blocks that income stream. And there have been some losses there. And I haven’t known anybody that’s gone through that, but that’s something that you do have to keep in mind. So again, by spreading your money out with different companies is your only way to really get around that. Absolutely. And one of the things that we encourage is get on the websites and just watch them for a while. My son was really interested in this. And when he got home from his first year at college, so you have to be 18, he got onto some of the websites and just pretended that he was going to choose, okay, I have a thousand dollars.

[12:57] I’m going to pick 10 loans. And so he pretended which 10 loans he was going to pick, made a note of them and then circled back about a month later and again, a couple of months later and again, before he headed off to school the next year to revisit those loans and it was late, late in the summer that he finally made his decision and he picked different loans, some the same, but a different batch and it was great experience for him to watch like the percent of funding. One of the things that he chose to do was to put his money on loans that were 90, 95, even 98% funded, meaning that people were almost there and he was just adding a couple, a hundred dollars or a hundred dollars extra to that, to get it closer to that hundred percent funding.

[13:45] So each person can develop their own criteria or as I’ve indicated, some of the websites even have an automated environment where you don’t have to get in there and pick. You just give some certain parameters and you pick, it’s almost like a fund, like a mutual fund where you pick a category like you want all A credit or all B credit or all C credit. Of course, the A credit has the lower interest rates. The C credit has the higher interest rates and I’m not going to pretend to be an expert at this at all. I just think it’s a fascinating environment and a great way for young people to get invested. It’s also a great way for young people to learn. My son was blown away by, oh my gosh, these people are

[14:28] borrowing this for a vacation and that for a car. It really let him see a wide range of society and money and how those people were choosing to spend their money and at each loan person talks a little bit about their situation. So he’s getting to learn about different professional environments and jobs and what particular jobs pay what kind of income. And there was fabulous learning going on there. So it’s a great spot for even a 16 or 17 year old, though they couldn’t be involved until they turned 18, they could sure learn a lot about it and about society and about money. And I think it brings money as a conversation to the forefront of our world and our family, which is not often something that’s done.

[15:15] So many times money is swept under the table and nobody wants to talk about it and that’s not very helpful. One of the questions that we have yet to address is where does this fit into your overall portfolio? As far as, you know, do you want to put your retirement fund in this? What’s the best investor? Certainly when I look at this, I look at this for smaller amounts of money. If you have larger amounts of money, there are probably some investments that would be structured a little better, maybe a little better rate of return, possibly collateralized. What’s your opinion? I agree. I think it is something small. It works great. As I said, for beginning investors, maybe 10, 20% of somebody’s portfolio could go into this if you’re not accredited.

[16:06] So the million dollar net worth mark is a big stopping or starting point for a lot of people. So if you’re not accredited, which means your net worth is under a million and you are looking for cash flow, this can be a good place to provide that. And we do have some other alternatives that you said, well, are collateralized that you could also be looking at in addition, but this can give you some perspective and so I think it’s worth taking a look at and again, possibly putting 10 or 20% in just to experience it, get the cash flow, have some fun with it, maybe it’s something that resonates with you, maybe it doesn’t. We do hope to have on the show either in the future or maybe as some written material, a couple clients have actually turned what they’ve

[16:54] learned from being involved in the peer to peer lending space for quite some time into little e-courses that you could buy. So you can keep your eye open to our email because when we do get those available, we’ll make them available to you. If it’s something that you’re interested in, might shortcut your learning curve a little bit. If that’s something that you want to dig into. Super. Well, I guess what is it they say the best form of flattery is to duplicate or emulate one of the articles that has just come out is that there are a lot of peer to peer appearing sites that are actually the major lenders that are now duplicating the sites using their bank’s money to lend. So as an investor doesn’t help you much as a borrower, when you get on

[17:43] these sites, you’re actually borrowing from one of the major banks. So obviously these numbers are working or you would not see a couple of the big players stepping in and trying to duplicate it. Yep. That’s fun. The middleman returns. Super. Well, any other comments or anything you want to leave our listeners with before we wrap up? Well, we have the audio book available. And so for anybody that’s interested, we’ve got an audio book called Financial Planning Has Failed. It’s at partnersforprosperity.com slash ebook. So don’t get thrown by the website link. There’s an audio book there. Again, that’s partners number four prosperity.com slash ebook. Super. Well, this is No BS Money Guy Todd Strobel for the Prosperity Podcast.

[18:28] Once again, special thanks to Kim Butler and take care of everybody. Thank you for listening to the Prosperity Podcast to take control of your money and have it work for you. Visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.