This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Peer Lending Lures Yield-Hungry Investors

NEW YORK (TheStreet) -- The appeal of yield investments that claim higher returns than traditional fixed income has been heightened by a long horizon of low interest rates and an aging equity bull market.

Peer-to-peer lending -- or lending between individuals -- has seen solid growth since the credit crisis, as tighter regulation of credit causes banks to shun clients who do not fit stricter criteria.

The higher returns on offer have attracted institutions such as BlackRock, while former Treasury Secretary Larry Summers and ex-Morgan Stanley CEO John Mack sit on the board of P2P business Lending Club -- in which Google (GOOG) holds a 7% share. Ex-Citigroup (C) boss Vikram Pandit also invests in Orchard, a vehicle that offers institutional investors access to online direct lending.

Also known as person-to-person lending, the practice cuts out banks by connecting borrowers with lenders through online platforms for small loans, such as debt consolidation. Providers such as Lending Club and Prosper use technology to assess what to charge clients to reflect their credit risk -- Lending Club projects returns of 5.4% to 9.4% while Prosper lists loans on its website for investors to back. Both show information on the performance of different loan pools, with loss rates against credit worthiness and yields.

Must Read: Time Warner Cable Suitor Comcast to Disclose Political Spending

A loan funder can invest as little as $25 with some P2P lenders and may choose to fund part or all of a loan, or a portfolio of loans, in exchange for yield and repayment of capital. The greater risk of a client defaulting vs. defaults on U.S. Treasuries means higher yields against traditional fixed income.

"Our competition is not the banks, but educating the borrower that these choices are available," Prosper president Ron Suber said in a phone interview. He recommends investing no more than 10% of a person's net worth in the asset class and diversifying across loan portfolios.

Niche players are already appearing: SoFi specializes in P2P student loans while OnDeck targets the business loan market. Daric and Peerform are challengers to Lending Club (which has around 70% of the market) and Prosper, which holds most of the remaining share.

Peerform chairman Gregg Schoenberg describes the asset class as a toddler and says a secondary market will mark the next stage in its development. "Baby boomers are looking for cash flow streams that offer a measure of diversity -- it's not a good retirement plan to put all your money into utility stocks," he said in a phone interview.

Peerform targets only institutional investors, claiming this enables it to use more sophisticated risk assessment systems than can be explained to a retail audience. Schoenberg agrees with the recommendation to invest no more than 10% of assets in P2P lending, noting there is little data on how the asset class preforms in a down-cycle. Some suggest P2P lending defaults track the jobless rate, though Schoenberg says this is far from definitive.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.24 0.00%
FB $117.81 0.00%
GOOG $701.43 0.00%
TSLA $211.53 0.00%
YHOO $36.94 0.00%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs