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Thursday
Jan212010

Continued criticisms of p2p lending

A slew of articles criticizing the emerging p2p lending industry appeared this week, beginning with Mark Gimein's post at Slate's the Big Money, "You are Unlikely to Prosper". Felix Salmon soon after wrote "The Problem With Peer to Peer Lending" and then Techdirt followed with "Person to Person Lending Not Saving the Economy...Actually Looking Really, Really Bad".

The message of all of this coverage? That p2p lending is riskier than advertised, most lenders have lost money, adverse selection abounds, and really the whole venture is a failed innovation in finance. As usual in articles about p2p lending, the comments are full of testimonials from lenders about their terrible losses on Prosper.com and how p2p borrowers tend to be deadbeats.

If we were back in 2008, these criticisms would all be noteworthy. Prosper undeniably made terrible, risky gambles, produced misleading advertising, and failed to adequately screen borrowers in the early years. Investors are still reeling from those mistakes (see Fred93 who dropped $800K into the site), but why are we still focusing on earliest years and the losses incurred during the height of the credit crunch? This seemed like old news back in April.

By contrast, Lending Club (scarcely mentioned in these articles) launched with SEC approval, institutes stringent borrower requirements, and has a happy lender community (no hate blogs that I've found yet). Gartner predicts that p2p lending will increase by 66% over the next three years. It's 2010. Let's look forward and let the new crop of p2p lending companies learn from Prosper's early mistakes and do better.

Note: The best discussion forum to get a sense of p2p lender frustration is prospers.org.

Flickr credit: amalthy

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Reader Comments (2)

Um, did you notice that by checking ericscc.com you can see that Fred93 is actually in the black, with a return of 3+%?? Also, I just checked out the community you referenced. From what I can tell they consist of lenders who haven't bid on loans since 2007. Is it relevant to have 2007 customers providing reviews for a product today? I also noticed that these are the customers that are quoted in the big money story. I read Prosper's rebuttal on their blog and agree that it's quite odd that these are the only customers quoted and they're quoted anonymously. A bit too convenient for the writer trying to make his case. Also, I respect that your a Lending Club fan - I am too as well as one of Prosper's - but I didn't digest the big money story to mean stay away from just Prosper, it shouted stay away from peer-to-peer lending all together. In other words, I don't think any of the companies went unscathed, which is too bad.

January 22, 2010 | Unregistered CommenterJackson T.

@Jackson T: Fred93 still poured $800k into the site and often chronicles his extreme frustration with defaults. That is why I mentioned the prospers.org site as well because it gives a "sense of p2p lender frustration" as I wrote, not because it is the best source for current news on p2p lending. I agree that the anonymous customer model as testimonial is not fair or effective. I also agree with your final sentiment, that the implication of the Big Money article and others is that p2p lending is to be avoided altogether, which is unfair. That's why I wrote that this criticism was all a bit outdated and we should be embracing the newer and better incarnations, such as LC.

January 22, 2010 | Registered CommenterMelody
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