Author Topic: P2P Lending  (Read 5094 times)

kib

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P2P Lending
« on: December 28, 2014, 03:44:14 PM »
I have made personal loans in the past and I was really excited to discover the concept of online P2P lending - Prosper, Lending Club etc. - which would take the personal conflict and legwork out of vetting potential borrowers.  So imagine how Unexcited I was to discover that P2P lending is not available in my state.  The reasons are IMHO a lot of blowhard nonsense to disguise the fact that banks do not want us horning in on the lending market.

So ... I have a naughty question I'm probably not supposed to ask.  What happens if you list your address with, say Prosper, as being in a state that does allow P2P loans?  Do you just wind up having to pay state tax on the investment for the state you claim?  I don't understand how it can be constitutional to say I can't lend my money to someone just because of the state I live in; seems to me the laws governing this ought to be federal.
« Last Edit: December 28, 2014, 03:45:50 PM by frufrau »

rmendpara

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Re: P2P Lending
« Reply #1 on: December 28, 2014, 04:27:02 PM »
I have made personal loans in the past and I was really excited to discover the concept of online P2P lending - Prosper, Lending Club etc. - which would take the personal conflict and legwork out of vetting potential borrowers.  So imagine how Unexcited I was to discover that P2P lending is not available in my state.  The reasons are IMHO a lot of blowhard nonsense to disguise the fact that banks do not want us horning in on the lending market.

So ... I have a naughty question I'm probably not supposed to ask.  What happens if you list your address with, say Prosper, as being in a state that does allow P2P loans?  Do you just wind up having to pay state tax on the investment for the state you claim?  I don't understand how it can be constitutional to say I can't lend my money to someone just because of the state I live in; seems to me the laws governing this ought to be federal.

Unless you have an address in another state (where p2p is allowed) that would show up on your credit report, then they would not accept your application.

If you have parents, siblings, etc and feel comfortable enough to take an "aggressive" position, then it should work. Change a credit card billing address for a few months, put that as your listed address, and make your billing address your current one... or just change it later.

I wouldn't advocate doing this, but I don't see a reason why it would not work.

As far as constitution/legality of the issue, it will become accepted shortly. Even a traditional bank needs a license to operate in each state to do business, so it makes sense that a new lender/investment company would have to do the same.

You can try what I said above if you really want it now, but if it were me I'd just wait. They will likely be in your state within 1-2 years.

solon

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Re: P2P Lending
« Reply #2 on: December 28, 2014, 09:00:51 PM »
Why don't we just cut out the middle man? I'll let you lend money directly to me, without Prosper, LendingClub, etc. I can take your money and run just as well as any other random stranger on the internet.

innerscorecard

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Re: P2P Lending
« Reply #3 on: December 28, 2014, 10:24:25 PM »
It's probably worth noting that Lending Club and Prosper are not sites for lending money to strangers. They are sites for investing in speculative securities. The value of these securities are related to a subsisting loan, but the loan is between Lending Club and the borrower; you are not a party to the loan. (Technically, a bank originates the loan and then Lending Club purchases it. However, you have no dealings with the loan whatsoever.)

One exotic consequence is that if the value of a Lending Club note goes to zero, it's correctly treated for tax purposes as if you sold it for $0 on the last day of the year, which may make it a long-term capital loss. On the other hand, if you were directly a party to the loan (which you are not), then any bad debt would always be deductible as a short-term capital loss, which is slightly more favourable than a long-term one because it can offset income taxed at a higher rate.

This is all explained in the prospectus which every page on lendingclub.com tells you to read. I am guessing most people do not read it.

Well said.

It's funny to me in general how any picking of any individual stocks, no matter how much research is done, is seen by the Bogleheads/Mustachian/reddit investing consensus as speculative and irresponsible (obviously I'm exaggerating a little), but investing in speculative securities tied to basically junk-bond-level (or worse) debt is seen as prudent and something that everyone should do.

Fallenour

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Re: P2P Lending
« Reply #4 on: December 29, 2014, 05:51:00 AM »
I have made personal loans in the past and I was really excited to discover the concept of online P2P lending - Prosper, Lending Club etc. - which would take the personal conflict and legwork out of vetting potential borrowers.  So imagine how Unexcited I was to discover that P2P lending is not available in my state.  The reasons are IMHO a lot of blowhard nonsense to disguise the fact that banks do not want us horning in on the lending market.

So ... I have a naughty question I'm probably not supposed to ask.  What happens if you list your address with, say Prosper, as being in a state that does allow P2P loans?  Do you just wind up having to pay state tax on the investment for the state you claim?  I don't understand how it can be constitutional to say I can't lend my money to someone just because of the state I live in; seems to me the laws governing this ought to be federal.

Rent a room in a state that does allow for P2P, change your license over to that state (I personally prefer delaware), name it as your primary residence, set up an llc in the state you named, set up mail forwarding from there to your current "secondary location" (place you currently reside), profit.

The state you are renting the room in (primary residence), is your primary residence, and thus, the state in which you "reside" for all legal intents and purposes. As such, you qualify to "live" in that state instead of the non participating state, which allows you to borrow and lend via P2P.

Already had to play this game with prosper and lending club. It fixed my proper, should fix yours as well.

kib

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Re: P2P Lending
« Reply #5 on: December 29, 2014, 09:08:01 AM »
From a less sophisticated mind-set, this is how I view Prosper:

1.  It actually helps individual people and very small businesses, without a lot of hoops.  Charity is nice and I would give to Kiva, but at the moment I'm looking for investments, not just a parking space.

2.  I have a real love-hate relationship with investing in large companies, directly or indirectly through mutual funds.  I don't think of money as a game, I think of it as a dangerous weapon when concentrated in the hands of corporate entities and I'd rather not have that particular blood on my hands. YMMV, just my opinion.

3.  I realize that there is a risk of default, but as long as that doesn't happen, I have a fixed rate of return.  I really Hate investing in things that might go up, might go down, who knows.  I want to know how much is going into my account.  I'd rather take a risk of default than the stress of updownupdown.

4. Prosper takes some of the middlemen out of the lending equation.  This is a good thing.  Yes, the contract is with Prosper, and not the individual borrowers, but you do get to pick who's in your portfolio and get at least some idea of their risk, it's not completely blind.

5.  It also mitigates the risk of loaning to one individual - sorry, Solon.

So ... I'm not quite getting the wild hostility toward it. ??


Aside:  what happens if you live in a state Prosper accepts and then you move??

« Last Edit: December 29, 2014, 09:16:02 AM by frufrau »

kib

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Re: P2P Lending
« Reply #6 on: December 29, 2014, 09:15:05 AM »

Rent a room in a state that does allow for P2P, change your license over to that state (I personally prefer delaware), name it as your primary residence, set up an llc in the state you named, set up mail forwarding from there to your current "secondary location" (place you currently reside), profit.

The state you are renting the room in (primary residence), is your primary residence, and thus, the state in which you "reside" for all legal intents and purposes. As such, you qualify to "live" in that state instead of the non participating state, which allows you to borrow and lend via P2P.

Already had to play this game with prosper and lending club. It fixed my proper, should fix yours as well.
  That sounds like an excruciating amount of work and expense, you must really have a lot of money in P2P lending to make this practical!  ??  How do you handle state income taxes, do you just pay tax as a resident of delaware?

rmendpara

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Re: P2P Lending
« Reply #7 on: December 29, 2014, 03:59:31 PM »
From a less sophisticated mind-set, this is how I view Prosper:

1.  It actually helps individual people and very small businesses, without a lot of hoops.  Charity is nice and I would give to Kiva, but at the moment I'm looking for investments, not just a parking space.

2.  I have a real love-hate relationship with investing in large companies, directly or indirectly through mutual funds.  I don't think of money as a game, I think of it as a dangerous weapon when concentrated in the hands of corporate entities and I'd rather not have that particular blood on my hands. YMMV, just my opinion.

3.  I realize that there is a risk of default, but as long as that doesn't happen, I have a fixed rate of return.  I really Hate investing in things that might go up, might go down, who knows.  I want to know how much is going into my account.  I'd rather take a risk of default than the stress of updownupdown.

4. Prosper takes some of the middlemen out of the lending equation.  This is a good thing.  Yes, the contract is with Prosper, and not the individual borrowers, but you do get to pick who's in your portfolio and get at least some idea of their risk, it's not completely blind.

5.  It also mitigates the risk of loaning to one individual - sorry, Solon.

So ... I'm not quite getting the wild hostility toward it. ??


Aside:  what happens if you live in a state Prosper accepts and then you move??

View it however you like, but you are making un-secured loans to prime and sub-prime borrowers.

I encourage you to take the "morality" out of investment decisions. If you want to donate to charity, then donate to charity, but investing is purely about money. I would probably draw the line, for myself, at investing in Taliban bonds, but surely that's much different than buying stock in a tobacco/alcohol/sugar cookies company.

Investing, by it's very nature, is for profit, so good luck in finding ways to promote the social good. Any company which has attractive equity or debt is making a profit off someone.

Regardless, do as you wish. It's your money.

Technically nothing happens if you move. You will still receive a 1099-OID (at Prosper anyway) which you will include in your taxes... similar, but not the same, as what you get for other fixed income investments i believe.

I have not heard of a state forcing a new resident to sell their investments or anything like that...

HipGnosis

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Re: P2P Lending
« Reply #8 on: December 30, 2014, 03:17:01 PM »
I encourage you to take the "morality" out of investment decisions...
I can't fathom why anyone would want anyone else to take morality out of ANY part of their life.
That's an awful slippery slope...

innerscorecard

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Re: P2P Lending
« Reply #9 on: December 30, 2014, 07:12:54 PM »
It's funny to me how every age finds a new way to dress up crappy debt. That's what these P2P loans are. It's a great business for Lending Club the company, but a very bad business for lenders. The returns look good, but are very bad adjusted for the risk taken, which should be the true measure. It is equity-level risk for debt-level returns, a bad combination. This is what happens in every cycle when people "reach for yield."

innerscorecard

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Re: P2P Lending
« Reply #10 on: December 30, 2014, 07:42:33 PM »
Even the non-risk-adjusted returns are grossly overstated because they assume your cash is invested instantly.

I decided to check out Lending Club a few months ago and made an arbitrary small investment of $6,500. I enabled Automated Investing and did not plan to manually pick notes. Months later, only $5,000 of that money has actually made it into notes, and most of those only originated in the last couple weeks. Lending Club reports that my account has an annualised return of 23.91%, but the real return is more like 8% annualised (when you account for the cash sitting idle for months), which is actually really poor considering this is just a few months with no defaults yet. It's obvious that it will go down later in the term of the notes.

On the other hand, I have made some money in the secondary market. My annualised return on note trading is 54.50%. I don't think I can maintain that and I don't plan to contribute any more money to this project. It's slightly entertaining though.

Speculator! :p

Very good point about the misleading annualized return figure.

I never said that all notes on Lending Club are a bad investment. There are surely worthy entrepreneurs that are using Lending Club as a source of funding. But I think it is a very bad investment as a class.

rmendpara

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Re: P2P Lending
« Reply #11 on: December 30, 2014, 10:05:14 PM »
I encourage you to take the "morality" out of investment decisions...
I can't fathom why anyone would want anyone else to take morality out of ANY part of their life.
That's an awful slippery slope...

You can find something "immoral" about every company. It's nearly impossible to find a perfectly moral company. Even a non-profit which supports children's education has an office with air conditioning and commuters who drive themselves and park in a concrete jungle to sit in an office drinking coffee which was grown 3 thousand miles away and shipped over and... do you see my point?

After an IPO, a company barely uses their stock apart from stock-compensation or perhaps M&A in a stock-financed deal. Regardless, people are free to invest as they wish, but I simply don't buy the argument that buying a "good" company's stock actually helps the company. If it makes you (the general "you") feel good, that's fine, but I can't help but roll my eyes when someone tries to tell me about their social investing portfolio and how much good they are doing in the world.

Supporting a cause/group/whatever through purchasing equity is inefficient. The benefits received from a beneficiary if donated to a charitable organization vs invested in a socially responsible company are, in my opinion, not equal. But as I said before, to each his/her own.
« Last Edit: December 30, 2014, 10:08:37 PM by rmendpara »

innerscorecard

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Re: P2P Lending
« Reply #12 on: December 30, 2014, 10:50:53 PM »
Please, let's not even address "arguments" (i.e. uneducated and harmful rants) about how "this evil company makes millions in profits, why can't they just give all that out to their employees making minimum wage!" (Ignoring that many of those employees could have bought discounted stocks through the employee stock purchase program and been entitled to much of that profit themselves through dividend payments, but few actually do that due to a lack of financial education.)

KingCoin

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Re: P2P Lending
« Reply #13 on: December 31, 2014, 11:00:12 AM »
From a less sophisticated mind-set, this is how I view Prosper:

1.  It actually helps individual people and very small businesses, without a lot of hoops.  Charity is nice and I would give to Kiva, but at the moment I'm looking for investments, not just a parking space.

2.  I have a real love-hate relationship with investing in large companies, directly or indirectly through mutual funds.  I don't think of money as a game, I think of it as a dangerous weapon when concentrated in the hands of corporate entities and I'd rather not have that particular blood on my hands. YMMV, just my opinion.

3.  I realize that there is a risk of default, but as long as that doesn't happen, I have a fixed rate of return.  I really Hate investing in things that might go up, might go down, who knows.  I want to know how much is going into my account.  I'd rather take a risk of default than the stress of updownupdown.

4. Prosper takes some of the middlemen out of the lending equation.  This is a good thing.  Yes, the contract is with Prosper, and not the individual borrowers, but you do get to pick who's in your portfolio and get at least some idea of their risk, it's not completely blind.

5.  It also mitigates the risk of loaning to one individual - sorry, Solon.

So ... I'm not quite getting the wild hostility toward it. ??


Aside:  what happens if you live in a state Prosper accepts and then you move??

1-2. Consider that many P2P borrowers have wracked up debt purchasing cigarettes, gas guzzling SUV's, and oversized homes. I think investing "ethically" is a noble goal, but extremely difficult in practice. For that reason, most Mustachians choose to vote with their spending dollars and charitable giving rather than trying to police corporate actions and governance, which is not only time consuming, but also much more tricky than it sounds

3. P2P loans don't appear volatile (up-down-up-down) simply because they're not marked-to-market. Their price would be extremely volatile if risk factors were updated in real time. Don't let this perceived lack of volatility fool you into thinking you're making a safe or predictable investment.

4. I like the removal of middlemen, but middlemen can also be useful and cost efficient. A ETF porfolio of high yield bonds will charge you less than 0.5% and provide services like portfolio re-balancing and income reinvestment.

Why not just buy a high yield bond closed-end fund that yields 8%+? Lever it a bit if you need double digit returns. These also have the benefit of being tradable, which means you can scale up or down at will.

innerscorecard

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Re: P2P Lending
« Reply #14 on: December 31, 2014, 03:37:17 PM »
From a less sophisticated mind-set, this is how I view Prosper:

1.  It actually helps individual people and very small businesses, without a lot of hoops.  Charity is nice and I would give to Kiva, but at the moment I'm looking for investments, not just a parking space.

2.  I have a real love-hate relationship with investing in large companies, directly or indirectly through mutual funds.  I don't think of money as a game, I think of it as a dangerous weapon when concentrated in the hands of corporate entities and I'd rather not have that particular blood on my hands. YMMV, just my opinion.

3.  I realize that there is a risk of default, but as long as that doesn't happen, I have a fixed rate of return.  I really Hate investing in things that might go up, might go down, who knows.  I want to know how much is going into my account.  I'd rather take a risk of default than the stress of updownupdown.

4. Prosper takes some of the middlemen out of the lending equation.  This is a good thing.  Yes, the contract is with Prosper, and not the individual borrowers, but you do get to pick who's in your portfolio and get at least some idea of their risk, it's not completely blind.

5.  It also mitigates the risk of loaning to one individual - sorry, Solon.

So ... I'm not quite getting the wild hostility toward it. ??


Aside:  what happens if you live in a state Prosper accepts and then you move??

1-2. Consider that many P2P borrowers have wracked up debt purchasing cigarettes, gas guzzling SUV's, and oversized homes. I think investing "ethically" is a noble goal, but extremely difficult in practice. For that reason, most Mustachians choose to vote with their spending dollars and charitable giving rather than trying to police corporate actions and governance, which is not only time consuming, but also much more tricky than it sounds

3. P2P loans don't appear volatile (up-down-up-down) simply because they're not marked-to-market. Their price would be extremely volatile if risk factors were updated in real time. Don't let this perceived lack of volatility fool you into thinking you're making a safe or predictable investment.

4. I like the removal of middlemen, but middlemen can also be useful and cost efficient. A ETF porfolio of high yield bonds will charge you less than 0.5% and provide services like portfolio re-balancing and income reinvestment.

Why not just buy a high yield bond closed-end fund that yields 8%+? Lever it a bit if you need double digit returns. These also have the benefit of being tradable, which means you can scale up or down at will.

Because Lending Club has superior marketing. MMM uses it, therefore it must be great!