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You are a conservative investor questioning safety of your principle and reluctant to invest in regulated securities and yet you are interested in lending money to total strangers. I find it rather inconsistent...
Sounds like a micro-lending situation, except these borrowers supposedly have solid credit history, so a bit less risky? I'd REALLY spread out my loans as a lender if I was going to play this game.
A good rule for investing is never to invest in something that you don't understand and I don't think you do.
I don't fully understand it either after looking at their website which is surprisingly sparse on required information. That is a red signal. I suppose you can read it in their filed prospectus. I didn't.
At the minimum, you should understand what you are investing in. You are not lending to anybody. You are buying a note which looks like an uncollaterized version of a collaterized debt obligation (CDO). It is not clear what this note contains. Is it across all of their loans? Is it a particular tranche? If so, how are the tranches created to keep risks same? How do they calculate risks? What happens when they receive more investments than there is demand for loans from qualified borrowers? Do they keep it earning nothing taking fees or drop the standards of lending like mortgage lenders did? What happens when a recession increases the defaults?
To me, it seems like a legal scheme to pass on the cumulative risks of uncollaterized lending to multiple lenders with the middle man getting a fee with no risk. It may, in theory, be a good risk managed instruments. CDOs were in theory. When a situation like this happens, it works until it blows up because the people making the lending decisions are divorced from the risks of the decisions they are making.
Perhaps, there are reasonable answers to all of the above but until you understand them, why would you invest in such a channel?
I have been investing in LC (and other P2P funds) for the past 2 years. IMHO, these vehicles offer the best risk reward opportunities in today's environment.
You are absolutely correct. If one intends to invest in LC make sure to be well diversified. I suggest a minimum of 200 loans and ideally target 500. Minimum investment is $25 per loan.
Reply to @Investor: You took the words right out of my mouth. Just remember, PT Barnum's famous quote. "................................................." Merry Christmas Ted
Reply to @Hrux: As resident of New Jersey, I cannot participate in LC. Could you recommend any other P2P funds for me to look into? I have not invested in this type of vehicle before but I'm happy to explore. Your comment - these vehicles offer the best risk reward opportunities in today's environment - has triggered my interest. Thanks.
Can you tell us more about it? I guess others commented on general grounds, but you have a very positive experience during 2 years, right? What are the other P2P funds? Any recommendations? I am sure that all of us would be happy to get educated.
nath, you are too concervative to invest in bond funds and here you're doing direct lending with unknown credit exposure which is NOT MARKED TO MARKET. i watched prosper.com -- a similar offering --during the crisis. you don't want to be there. stick with the regulated vehicles. good luck.
It's a crowd sourced lending system that you as a investor can decide on your own risk category. You pick the type of person you lend to.
Borrower's are graded A1 through G5 with A1 being the best but lowest APR roughly 7.68% verses G5's at 24.8% you can be as risky as you like A1's are roughly a 720 fico making $70k+ with low debt rates. G5's would be very risky for defaults but have much higher returns (a $100k investment could potentially net you $3k a month without any defaults in a perfect world).
The bank LendingClub uses only backs the grade of borrowers not the money you invest so if there is any defaults it's your direct money. If you go with risky investments then spread the wealth around.
Reply to @Hrux: With all due respect, I am not sure you (or anyone else) understands the risks in LC in particular. Just that you didn't face many defaults in a short period. This looks like the very reason towns in Norway and Italy bought CDOs because it seems to be working for many.
In the Note structure currently being offered by LC as I just read in the prospectus, I wouldn't touch it with a 50 foot pole.
You are buying into unsecured loans to borrowers
a. That are opaque with zero recourse if they were to default and will lose all principal. b. No prepayment penalties, so if the borrowers were to prepay, you would not only NOT receive the interest you took the risk for the but would also land up losing 1% of that amount to LC as fees. c. LC has already taken upfront their origination fee of up to 5% from your money they give the borrower. So they have neither the obligation or the motivation to go after any defaults since the costs of doing so would cost more than the 1% they would collect. And you have to accept the total loss. Even if they were to go after the borrower, the costs would be completely passed on to you while you have no control over those costs. d. If they were to enter bankruptcy, you would have no recourse because you are neither a creditor nor an investor in LC. e. This scheme would not likely pass ANY stress test.
This is going to end very badly at some point. I agree with Ted below on PT Barnum.
If I were to guess, I would say this company was created by some GS or MS interns.
Thank you for the laugh...It's awfully presumptuous of you to assume my comprehension of LC and its associated risks. Over my investment lifetime I have seen many investments promise high returns or yields, only to learn they are highly leveraged, have volatile cash flows, or use creative methodology/definitions when calculating “yield.” If any investment is offering a high return potential, my first question is always, “Why haven’t other investors already jumped in and bid up the price (driven down the yield) to a level where it no longer offers excess return?” Although there are many characteristics that make P2P lending a legitimate asset class, the main factor that sets it apart from other fixed-income asset classes and drives the much higher returns is the fact that P2P originators set the price instead of the market. In most other fixed-income markets, the offering price (yield) is set by the market either directly or indirectly. Typically, if something is underpriced and offering superior risk-adjusted returns, it will be bid up to a price where it no longer offers a superior return.
In my opinion, P2P represents an excellent investment opportunity as long as this pricing structure remains in place. For the time being, returns (prices) are above (below) where market participants would transact, leading to excess returns and more demand than supply of loans. The originators have publicly stated that they are focused on originating quality product to keep investors happy and returning. However, I can envision price/yield changes being made down the road to remedy the supply/demand imbalance or to increase loan volume. However, this does not seem to be a near-term risk. There are a myriad of risks to consider in fixed-income investing, from macro themes like inflation to market concerns like liquidity.
While some commentators may dismiss P2P as an asset class, due to the higher default rates or unsecured nature of the loans, what we do know is that price (or yield) is the arbiter of risk and so we need to examine whether P2P compensates investors for the risk taken. Whether we define risk as an unknown outcome or the probability of loss, one needs to quantify it.
Since all P2P loans are short-term (3 or 5 years), are fully amortizing, and have relatively high coupon rates, duration (a measure of interest rate risk) on any given note is extremely low. Looking around the rest of the fixed-income market, we find 2-year Treasuries yielding .26%, most 2-year investment-grade corporate bonds below 1%, and 2-year high-yield corporates in the 4-5% range. A 36-month P2P note has a similar duration to a 2 year bullet bond, but offers a much higher yield than all of them.
Beyond the risks common to all fixed income, the two P2P-specific risks I see involve the withdrawal of P2P’s competitive advantages: solid underwriting/risk-management and originator-set rates. As we saw with investment bankers during the dotcom bubble and mortgage bankers during the housing boom, it is always dangerous to incentivize the origination of investment products, especially if the originators do not intend to hold product on their books. Although the P2P originators collect a 1% servicing fee, the majority of their revenue comes from loan origination fees. It is important to recognize this fact and monitor any changes to the underwriting standards. Secondly, the fact that the originators are setting the prices/yields and shielding the offering prices from market prices mean that excess returns are available. If this changes in any way, I would be very cautious as this is the crux of the P2P value proposition.
In summary, I do think P2P is a viable fixed-income asset class, with a unique advantage over similar ABS and high-yield debt. Given current dynamics, I think most fixed-income portfolios should include an allocation to P2P loans. Interest rate risk is almost non-existent and there is more than enough yield to cover the credit risk, except under the most dire scenarios. That said, I believe the asset class proved itself through the recent recession, relative to other debt. My personal portfolio holds over 800 loans and are 20 months in season which means they have surpassed their "peak" default window. After accounting for a default rate of 6% my net annualized return is 13.6%.
Again my last bit of advice is for those interested in P2P lending make sure to diversify into many loans (target 500+ loans) and learn what filters to utilize when selecting loans to help minimize default rates. FWIW, I have 10% of my net worth in this asset class and am much more comfortable with it than investing in a stock market at elevated valuations. It always amazes me how much one invests blindly into the stock or bond markets without understanding all the inherent risks but are quick to dismiss a new asset class like P2P.
I don't know how long this thread will continue...but whether it runs longer or not, it already attests to the tremendous usefulness of this forum to investors of all types. Members are never hesitant to be assertive, most point of views and even arguments stick to the issue at hand, a wealth of intelligent insights with meticulous details are freely shared, and as a result, we're all better informed and a touch more refined. I'm grateful to be a part of this wonderful assembly! Thanks, and Merry Christmas !!
While I think there is a certain (perhaps) "doing well while doing good" aspect to investing in these loans, it seems that one must have a separate IRA here to invest. Is there a method to invest from a TDA or similar platform? I couldn't determine the minimum inital allotment required. My current new IRA accounts are for my children, and I couldn't submit them to the risk and active management required for these accounts. How complicated is the tax paperwork for non-
seems like my comment posted mid sentence. (continuing) How complicated is the tax paperwork for non-tax-deferred accounts? I couldn't determine the minimum investment.
The article is correct. LC used to overstate investor returns by not writing down delinquent or past due loans. However this is no longer the case. Before they made this change I used to measure my returns based on a simple XIRR calculation.
On a side note the author of this article did not own enough loans to be fully diversified.
A 10-12% return after defaults is very achievable if you own over 500 loans and stay away from A&B loans.
Personally speaking I cannot wait for this company to go public in 2014.
Here is a link to LC's Board of Directors. Very, very reputable people in the financial industry. This is no scam.
Unlike a Madoff-like Ponzi scheme p2p lending is a simple concept. People borrow money and pay an origination fee to the p2p lender for that service. Investors lend money and pay a service fee to the p2p lender for that service. There are no complex trades going on where money can be hidden. Every loan is registered with the SEC and the details are made available for download from the websites of Lending Club or Prosper.
The other big difference between Ponzi schemes run by the infamous Charles Ponzi, Bernie Madoff or Allen Stanford, is that the financials of Lending Club and Prosper are publicly available. This completes the audit trail. Anyone can search the SEC filings of Lending Club and Prosper and look at the balance sheets and income statements from either company going back several years now.
It is good to have a healthy dose of skepticism with any new investment. But to rush to judgment and assume p2p lending is a Ponzi scheme because the returns are too good to be true just shows ignorance and laziness. When you start digging you can see that the returns are real, the financials all add up and tens of thousands of people are benefitting from this new way of lending.
A very good way to get started with investing in LC is using P2P Picks. This is for those not comfortable with their own filtering analysis. For the record I do not use Bryce's service.
Let me start off by apologizing for not being clear in my statement on understanding risks. I didn't mean to imply that you in particular didn't understand the risks but rather that it was not possible for ANYONE to understand/quantify the risks here to reasonably talk about risk/reward ratio as you did. Did the people writing CDOs understand the risks to price it properly despite their extensive Monte Carlo simulations? The arguments you are making were the same arguments made for CDOs before they blew up.
I believe the current high reward structure is making people ignore/rationalize the risks.
I do not believe this is a Ponzi scheme in the sense of a classical pyramid scheme most often associated with Ponzi schemes but it is quite possible for later investors drawn in by the results of the earlier investors to get burnt because of factors such as business model risks.
What is laughable is that you are comparing this to other fixed income instruments like bonds. Not even close. These are unsecured loans lent out to individuals that are qualified by a single company to fit its business model and subject to its scaling constraints even in such things as income verification. The closest would be retail unsecured bank loans or credit card loans. 3-5 years is a very long time in this space for very illiquid unsecured loans and the risks they imply. What the company is trying to do is to arbitrage the spread between the interest rates of these unsecured loans and the secured loans. It is depending on less greed of the lenders and spreading the risks over a larger pool of lenders with much less capability to evaluate the risks than the lending institutions. The current POTENTIALLY high rewards is not a sustainable model, if it was the company wouldn't require the lenders. The spread between the cost of money and what is being charged is high enough and money is so easily available that it doesn't really need the lenders.
The business model is based on completely transferring the risks to the lenders while taking a cut. Currently, it has skin in the game for up to 40% of the loans but that is only to establish the market. So the risk profile now is very different now than it will be when it phases out its own money, something it will likely have to do before doing an IPO. It is also wrong to believe that the model has been stress tested in the last recession when the company is in formative stages and taking on plenty of risks itself. How do you know if the company itself did not subsidize some of the defaults in the early stages to establish the business? This is not scalable but quite possible in the early stages.
The business model has many structural problems for the participants. Your evaluation of risks from your post seems superficial and incomplete. For example, there is a significant risk because of the no prepayment penalty which will happen in good conditions combined with the defaults in bad conditions. You didn't even touch on it. For example, competition could start a refinancing war where each tries to undercut the other leading to massive refinances. Lenders without sufficient amortization will lose principal in that case.
In fact, nothing prevents LC itself to get its borrowers to refinance at better rates when their credit scores improve. They are incentivized to do so because of the fee structure at the expense of the lenders who get shafted. I will be surprised if they are not doing so already. There is nothing like this out there where the call price is less than the face value of a note! This is great for the company and the borrower but not the lenders. How do you quantify this risk for the next 3-5 years as the company matures and the principals have got their exits? In fact, nothing prevents the company to get a third party to assume the loans and pay off the lenders minus the 1% fee. This is ripe for abuse. How do you quantify this risk and protect yourself? Any new investments run this risk.
Moreover, the returns on these investments aren't really known until the very end of the term of each note because of the possibility of defaults. You are suggesting that diversification will derisk the investments. This is overstated. First of all, you need to do sufficient did on each loan so it is not very scalable. Second, diversifying in the same risk category does not improve the risk profile. If you spread it across multiple categories, the returns become even more difficult to predict. Most retail investors do not have the sophistication or the technology to make these calculations and are likely to assume much more risks than they should. The company's business model depends on this because there is no sustainable free lunch. In fact, I am more bullish on investing in this company than being a lender investor for the risk/rewards because there are enough fools to rush in even if not all lenders are fools.
I do not mean to suggest that every lender will suffer. Some will do well and people may even do well on the average over the entire system but that says nothing about what risks any individual lender is assuming.
I also do not want to suggest that you shouldn't invest in this. That is your personal decision. We all invest partly objectively and partly on faith. But I am objecting to your recommendation to others with what appears to me to be superficial evaluation of the risk/reward structure. I do not think this is a free lunch even at this stage and will be even less so as this industry matures.
It is good for people to understand the whole picture even if we differ in our opinions on the risks.
Comments
Merry Christmas,
Ted
You are a conservative investor questioning safety of your principle and reluctant to invest in regulated securities and yet you are interested in lending money to total strangers. I find it rather inconsistent...
I don't fully understand it either after looking at their website which is surprisingly sparse on required information. That is a red signal. I suppose you can read it in their filed prospectus. I didn't.
At the minimum, you should understand what you are investing in. You are not lending to anybody. You are buying a note which looks like an uncollaterized version of a collaterized debt obligation (CDO). It is not clear what this note contains. Is it across all of their loans? Is it a particular tranche? If so, how are the tranches created to keep risks same? How do they calculate risks? What happens when they receive more investments than there is demand for loans from qualified borrowers? Do they keep it earning nothing taking fees or drop the standards of lending like mortgage lenders did? What happens when a recession increases the defaults?
To me, it seems like a legal scheme to pass on the cumulative risks of uncollaterized lending to multiple lenders with the middle man getting a fee with no risk. It may, in theory, be a good risk managed instruments. CDOs were in theory. When a situation like this happens, it works until it blows up because the people making the lending decisions are divorced from the risks of the decisions they are making.
Perhaps, there are reasonable answers to all of the above but until you understand them, why would you invest in such a channel?
You are absolutely correct. If one intends to invest in LC make sure to be well diversified. I suggest a minimum of 200 loans and ideally target 500. Minimum investment is $25 per loan.
Merry Christmas
Ted
Can you tell us more about it? I guess others commented on general grounds, but you have a very positive experience during 2 years, right? What are the other P2P funds? Any recommendations? I am sure that all of us would be happy to get educated.
nath, you are too concervative to invest in bond funds and here you're doing direct lending with unknown credit exposure which is NOT MARKED TO MARKET. i watched prosper.com -- a similar offering --during the crisis. you don't want to be there. stick with the regulated vehicles.
good luck.
Borrower's are graded A1 through G5 with A1 being the best but lowest APR roughly 7.68% verses G5's at 24.8% you can be as risky as you like A1's are roughly a 720 fico making $70k+ with low debt rates. G5's would be very risky for defaults but have much higher returns (a $100k investment could potentially net you $3k a month without any defaults in a perfect world).
The bank LendingClub uses only backs the grade of borrowers not the money you invest so if there is any defaults it's your direct money. If you go with risky investments then spread the wealth around.
In the Note structure currently being offered by LC as I just read in the prospectus, I wouldn't touch it with a 50 foot pole.
You are buying into unsecured loans to borrowers
a. That are opaque with zero recourse if they were to default and will lose all principal.
b. No prepayment penalties, so if the borrowers were to prepay, you would not only NOT receive the interest you took the risk for the but would also land up losing 1% of that amount to LC as fees.
c. LC has already taken upfront their origination fee of up to 5% from your money they give the borrower. So they have neither the obligation or the motivation to go after any defaults since the costs of doing so would cost more than the 1% they would collect. And you have to accept the total loss. Even if they were to go after the borrower, the costs would be completely passed on to you while you have no control over those costs.
d. If they were to enter bankruptcy, you would have no recourse because you are neither a creditor nor an investor in LC.
e. This scheme would not likely pass ANY stress test.
This is going to end very badly at some point. I agree with Ted below on PT Barnum.
If I were to guess, I would say this company was created by some GS or MS interns.
Thank you for the laugh...It's awfully presumptuous of you to assume my comprehension of LC and its associated risks. Over my investment lifetime I have seen many investments promise high returns or yields, only to learn they are highly leveraged, have volatile cash flows, or use creative methodology/definitions when calculating “yield.” If any investment is offering a high return potential, my first question is always, “Why haven’t other investors already jumped in and bid up the price (driven down the yield) to a level where it no longer offers excess return?” Although there are many characteristics that make P2P lending a legitimate asset class, the main factor that sets it apart from other fixed-income asset classes and drives the much higher returns is the fact that P2P originators set the price instead of the market. In most other fixed-income markets, the offering price (yield) is set by the market either directly or indirectly. Typically, if something is underpriced and offering superior risk-adjusted returns, it will be bid up to a price where it no longer offers a superior return.
In my opinion, P2P represents an excellent investment opportunity as long as this pricing structure remains in place. For the time being, returns (prices) are above (below) where market participants would transact, leading to excess returns and more demand than supply of loans. The originators have publicly stated that they are focused on originating quality product to keep investors happy and returning. However, I can envision price/yield changes being made down the road to remedy the supply/demand imbalance or to increase loan volume. However, this does not seem to be a near-term risk. There are a myriad of risks to consider in fixed-income investing, from macro themes like inflation to market concerns like liquidity.
While some commentators may dismiss P2P as an asset class, due to the higher default rates or unsecured nature of the loans, what we do know is that price (or yield) is the arbiter of risk and so we need to examine whether P2P compensates investors for the risk taken. Whether we define risk as an unknown outcome or the probability of loss, one needs to quantify it.
Since all P2P loans are short-term (3 or 5 years), are fully amortizing, and have relatively high coupon rates, duration (a measure of interest rate risk) on any given note is extremely low. Looking around the rest of the fixed-income market, we find 2-year Treasuries yielding .26%, most 2-year investment-grade corporate bonds below 1%, and 2-year high-yield corporates in the 4-5% range. A 36-month P2P note has a similar duration to a 2 year bullet bond, but offers a much higher yield than all of them.
Beyond the risks common to all fixed income, the two P2P-specific risks I see involve the withdrawal of P2P’s competitive advantages: solid underwriting/risk-management and originator-set rates. As we saw with investment bankers during the dotcom bubble and mortgage bankers during the housing boom, it is always dangerous to incentivize the origination of investment products, especially if the originators do not intend to hold product on their books. Although the P2P originators collect a 1% servicing fee, the majority of their revenue comes from loan origination fees. It is important to recognize this fact and monitor any changes to the underwriting standards. Secondly, the fact that the originators are setting the prices/yields and shielding the offering prices from market prices mean that excess returns are available. If this changes in any way, I would be very cautious as this is the crux of the P2P value proposition.
In summary, I do think P2P is a viable fixed-income asset class, with a unique advantage over similar ABS and high-yield debt. Given current dynamics, I think most fixed-income portfolios should include an allocation to P2P loans. Interest rate risk is almost non-existent and there is more than enough yield to cover the credit risk, except under the most dire scenarios. That said, I believe the asset class proved itself through the recent recession, relative to other debt. My personal portfolio holds over 800 loans and are 20 months in season which means they have surpassed their "peak" default window. After accounting for a default rate of 6% my net annualized return is 13.6%.
Again my last bit of advice is for those interested in P2P lending make sure to diversify into many loans (target 500+ loans) and learn what filters to utilize when selecting loans to help minimize default rates. FWIW, I have 10% of my net worth in this asset class and am much more comfortable with it than investing in a stock market at elevated valuations. It always amazes me how much one invests blindly into the stock or bond markets without understanding all the inherent risks but are quick to dismiss a new asset class like P2P.
Merry Christmas to all!
Ted +1
cman +1
Reminds me of all the "sophisticated" investors seduced by Bernie Madoff. Let's revisit this in a couple years.
Edit If you google "Lending Tree Scam" you come up with information such as the link below and much more
http://www.cbsnews.com/news/the-lending-club-a-critical-review/
How complicated is the tax paperwork for non-
(continuing) How complicated is the tax paperwork for non-tax-deferred accounts? I couldn't determine the minimum investment.
The article is correct. LC used to overstate investor returns by not writing down delinquent or past due loans. However this is no longer the case. Before they made this change I used to measure my returns based on a simple XIRR calculation.
On a side note the author of this article did not own enough loans to be fully diversified.
A 10-12% return after defaults is very achievable if you own over 500 loans and stay away from A&B loans.
Personally speaking I cannot wait for this company to go public in 2014.
Here is a link to LC's Board of Directors. Very, very reputable people in the financial industry. This is no scam.
https://www.lendingclub.com/public/board-of-directors.action
Whatever...This is no Ponzi scheme. Lol
Lending Club reports all the interest you have earned on a 1099-OID.
Unlike a Madoff-like Ponzi scheme p2p lending is a simple concept. People borrow money and pay an origination fee to the p2p lender for that service. Investors lend money and pay a service fee to the p2p lender for that service. There are no complex trades going on where money can be hidden. Every loan is registered with the SEC and the details are made available for download from the websites of Lending Club or Prosper.
The other big difference between Ponzi schemes run by the infamous Charles Ponzi, Bernie Madoff or Allen Stanford, is that the financials of Lending Club and Prosper are publicly available. This completes the audit trail. Anyone can search the SEC filings of Lending Club and Prosper and look at the balance sheets and income statements from either company going back several years now.
It is good to have a healthy dose of skepticism with any new investment. But to rush to judgment and assume p2p lending is a Ponzi scheme because the returns are too good to be true just shows ignorance and laziness. When you start digging you can see that the returns are real, the financials all add up and tens of thousands of people are benefitting from this new way of lending.
A very good way to get started with investing in LC is using P2P Picks. This is for those not comfortable with their own filtering analysis. For the record I do not use Bryce's service.
https://www.p2p-picks.com
Let me start off by apologizing for not being clear in my statement on understanding risks. I didn't mean to imply that you in particular didn't understand the risks but rather that it was not possible for ANYONE to understand/quantify the risks here to reasonably talk about risk/reward ratio as you did. Did the people writing CDOs understand the risks to price it properly despite their extensive Monte Carlo simulations? The arguments you are making were the same arguments made for CDOs before they blew up.
I believe the current high reward structure is making people ignore/rationalize the risks.
I do not believe this is a Ponzi scheme in the sense of a classical pyramid scheme most often associated with Ponzi schemes but it is quite possible for later investors drawn in by the results of the earlier investors to get burnt because of factors such as business model risks.
What is laughable is that you are comparing this to other fixed income instruments like bonds. Not even close. These are unsecured loans lent out to individuals that are qualified by a single company to fit its business model and subject to its scaling constraints even in such things as income verification. The closest would be retail unsecured bank loans or credit card loans. 3-5 years is a very long time in this space for very illiquid unsecured loans and the risks they imply. What the company is trying to do is to arbitrage the spread between the interest rates of these unsecured loans and the secured loans. It is depending on less greed of the lenders and spreading the risks over a larger pool of lenders with much less capability to evaluate the risks than the lending institutions. The current POTENTIALLY high rewards is not a sustainable model, if it was the company wouldn't require the lenders. The spread between the cost of money and what is being charged is high enough and money is so easily available that it doesn't really need the lenders.
The business model is based on completely transferring the risks to the lenders while taking a cut. Currently, it has skin in the game for up to 40% of the loans but that is only to establish the market. So the risk profile now is very different now than it will be when it phases out its own money, something it will likely have to do before doing an IPO. It is also wrong to believe that the model has been stress tested in the last recession when the company is in formative stages and taking on plenty of risks itself. How do you know if the company itself did not subsidize some of the defaults in the early stages to establish the business? This is not scalable but quite possible in the early stages.
The business model has many structural problems for the participants. Your evaluation of risks from your post seems superficial and incomplete. For example, there is a significant risk because of the no prepayment penalty which will happen in good conditions combined with the defaults in bad conditions. You didn't even touch on it. For example, competition could start a refinancing war where each tries to undercut the other leading to massive refinances. Lenders without sufficient amortization will lose principal in that case.
In fact, nothing prevents LC itself to get its borrowers to refinance at better rates when their credit scores improve. They are incentivized to do so because of the fee structure at the expense of the lenders who get shafted. I will be surprised if they are not doing so already. There is nothing like this out there where the call price is less than the face value of a note! This is great for the company and the borrower but not the lenders. How do you quantify this risk for the next 3-5 years as the company matures and the principals have got their exits? In fact, nothing prevents the company to get a third party to assume the loans and pay off the lenders minus the 1% fee. This is ripe for abuse. How do you quantify this risk and protect yourself? Any new investments run this risk.
Moreover, the returns on these investments aren't really known until the very end of the term of each note because of the possibility of defaults. You are suggesting that diversification will derisk the investments. This is overstated. First of all, you need to do sufficient did on each loan so it is not very scalable. Second, diversifying in the same risk category does not improve the risk profile. If you spread it across multiple categories, the returns become even more difficult to predict. Most retail investors do not have the sophistication or the technology to make these calculations and are likely to assume much more risks than they should. The company's business model depends on this because there is no sustainable free lunch. In fact, I am more bullish on investing in this company than being a lender investor for the risk/rewards because there are enough fools to rush in even if not all lenders are fools.
I do not mean to suggest that every lender will suffer. Some will do well and people may even do well on the average over the entire system but that says nothing about what risks any individual lender is assuming.
I also do not want to suggest that you shouldn't invest in this. That is your personal decision. We all invest partly objectively and partly on faith. But I am objecting to your recommendation to others with what appears to me to be superficial evaluation of the risk/reward structure. I do not think this is a free lunch even at this stage and will be even less so as this industry matures.
It is good for people to understand the whole picture even if we differ in our opinions on the risks.