Peer-to-peer lending pretty much involves lending to people who can't get loans from banks, and the banks are actually pretty good at deciding who is too risky to lend money to, so why should this be a surprise?
The only way peer-to-peer lending will succeed is if the banks are overlooking or turning away a large group of creditworthy customers, and so far it doesn't seem like that is happening.
"banks are overlooking or turning away a large group of creditworthy customers, and so far it doesn't seem like that is happening."
Bank do refuse to lend to large segments of the population which can be lent to profitably.
In China, part of the reason is caps on loan interest rates.
But banks in developed countries, like the US and the UK, also fail to serve a large segment of the population. Those underserved by banks have limited options to get loans for emergencies etc., and difficulty building their credit history to gain access to cheaper credit in future.
If you're based in London and are a software engineer or data scientist interested in solving this problem, please email me (personal address in profile) and I can tell you about what we've built so far and what's ahead.
In my opinion, if it only possible to lend to someone at usurious interest rates, we're trying to paper over more serious problems with lending (e.g., the person may need the money for some necessity of life but cannot really afford whatever it is)
I imagine that most (but not all) people reading this comment have savings that could cover either (i) an unexpected expense of $500, e.g. to repair the car they use to drive to work, or (ii) an unexpected one-off $500 drop in income, e.g. due to a gap between casual jobs.
But many people, even in rich countries like the US, don't have a buffer to deal with situations like these. To many of them, paying $100 interest so that they can get their car fixed today, and continue to go to work and earn a living, is a rational and reasonable decision when compared with the alternative (can't drive to work -> no income -> can't pay bills -> ...).
Right, so there is an example of a serious problem which I don't think is best addressed by predatory lending. Sending your child to work in a coal mine or selling them off to someone into slavery were also rational economic decisions but there is a reason that, as a society, we no longer tolerate these things.
I wish we, as a society (being the US) could agree on what is intolerable. It feels like a near majority is cynical that actually helping anyone will improve their lot, and that the only thing that works is a stick.
> It feels like a near majority is cynical that actually helping anyone will improve their lot, and that the only thing that works is a stick.
I think it feels that way to those who think they know what helps and what doesn't. To me, it feels like a vast majority agree helping is good, but are cynical about the method and helpers. I think we can all agree that repeated failures and not learning from them is intolerable.
I'd agree with that - I appreciate the added granularity. I wonder sometimes, what if the problem is because we so disagree on the methods we can't get anything done, when either full bore one way or full bore the other would be a better outcome?
I'd be interested to learn more about what you're proposing (if this is possible).
I've thought for some time that this is one area where (as you say) there's a clear social need, and that the solution is for a non-profit lending organisation to offer the loans. As in, the lending company would, overall, aim to break even once the cost of operation, loan defaults, and profit from loans are taken into account.
It probably goes without saying that the loans would have a higher interest rate than those seen with longer-term standard loans, but I'd imagine they'd be orders of magnitude lower than some of the awful, predatory rates --many over 1000% APR-- that we typically see with UK 'payday' loans.
"and that the solution is for a non-profit lending organisation to offer the loans"
As I said above, the major issues are (i) effective underwriting, and (ii) efficient operations.
The better you can distinguish good customers from bad (better data and better models), the less money you lose to people that don't pay back. The better your tools to serve customers, the more customers you can serve without needing to increase the size of your team.
By reducing costs, you can charge less, get more customers etc.
A non-profit would face exactly those same two challenges, just to break even. Not needing to make a profit would have a much much smaller impact on its ability to reduce prices, than the two factors I mention.
This exists. It's called a credit union. They're successful and widely used globally, and have 101 million members in the US alone. Source - https://en.wikipedia.org/wiki/Credit_union
> It probably goes without saying that the loans would have a higher interest rate
I remember in the '90s all the fuss about "microcredit" in developing countries. Maybe it's time to have something like that in "developed" countries too?
I hate to go true scotsman, but I think the term microcredit in many of those scenarios has been diluted beyond recognition. The guy who dropped dead in your second source, had borrowed a fifth of the cost of building a house - that's not really microcredit by any real standard: it's not small and it's not really a productive investment. The rates and methods mentioned (weekly 10% repayments!) are usurious, and usury can be micro or macro but it's still usury, not credit.
The original microcredit vision was low rates, in strong collective settings, as an investment to support productive endeavours: giving people enough money to start a business, or supporting them in emergencies so that their situation wouldn't dramatically change (fix a broken car so you can keep working etc etc). It shouldn't be a way to support consumption. It's hard not to inject moralism in the process, but there must be criteria.
Anyway, even if we're specifically talking about micro-enterprise, there is a high rate of failure and then people having the loan as millstones around their necks, and there's questions about how good it really is to have a bunch of businesses of the sort that are financed by microcredit: https://governancexborders.com/2013/05/29/the-art-of-pointle...
> I imagine that most (but not all) people reading this comment have savings that could cover either (i) an unexpected expense of $500, e.g. to repair the car they use to drive to work, or (ii) an unexpected one-off $500 drop in income, e.g. due to a gap between casual jobs.
And, even if they were short cash for some reason,they have both access to zero-cost (or negative cost, given rewards) short-term loans [0] and sufficient income after essential expenses to pay it off without resorting to loans with interest.
[0] e.g., currently zero-balance credit cards as long as paid off within the next billing cycle.
> > Bank do refuse to lend to large segments of the population which can be lent to profitably.
> Why do they refuse to lend if it is profitable?
Good question.
Note I didn't say it is profitable for the banks to lend to those segments. I said those segments can be lent to profitably.
In order to profitably lend to customers who banks turn away (mostly those with a 'bad' credit history based on credit bureau data, or those with little/no data at the credit bureau), you need:
1) Effective credit underwriting (i.e. accurate models/processes to decide whether to accept a particular application, and how much to lend to that applicant at this time), and
2) Efficient processes of acquiring, onboarding and servicing customers.
When a bank lends 10k at 8% for 3 years to a low risk customer, they'll make over 1k in interest over the life of the loan. So they can afford to have inefficient operations/systems.
When you lend 500 to a customer who is likely to pay back, e.g. 600 over the next 6 months, there's only 100 in risk-adjusted margin there, to cover all your costs of underwriting the loan, following up on missed payments etc.
I feel like the Market Segment is so small, and your costs will be so high, and it requires so much expertise and oversight/monitoring that it won't be worth it.
"Worth it" is subjective; it doesn't necessarily have to be about turning a big profit. In fact if it's a nonprofit, then the goal could be to just help under-served communities, and it seems like it could have a positive enough impact to attract some angel investors
For the same reason Google shutters profitable projects, or why oil drilling companies often pack up but sell the rights to someone else to pull out the dregs, or why Annhauser doesn't make high quality craft brews.
They aren't profitable enough for an organization of that size.
Markets get segmented into tiers. With banks that might create a situation where the easiest lending targets get processed by the highest volume, lowest cost institutions, and the small valuable cases become boutique.
The problem with that is, unlike other boutique areas, the wealthier person can spend a little more for a limited run high quality good. But here the boutique has to sell to the poorest groups, so it's hard to compensate the provider through pricing for the lower efficiencies of being smaller. It might shut down services that the industry would provide if less consolidated.
I'm not defending this, just presenting one possible way this could be playing out even with everyone acting more or less rationally.
In the US, a major portion of it is that banks are limited in the data they use. For example, certain lenders highly restricted in how they can use zip code in any automatic algorithm. So they stick to manual processes (which are only profitable on large loan sizes) or very simple automated algorithms.
Non-bank smaller lenders often have many fewer regulations, allowing them to make more targeted automated algorithms, which means they can serve people banks can't.
Because of risk. Just because there's 10k people out there that can afford to borrow and repay, doesn't mean you set 100k loans hoping you got some of them.
That's the point the parent is making. If the risk profile is as you say, that isn't a profitable segment for the banks. The question being asked is: why would the risk profile be any different for peer to peer lenders than it is for the banks? If it isn't profitable for the banks, and the risk profile isn't different for the peer to peer lenders, then it won't be profitable for them either.
The profit made by the bank needs to also cover the cost of employees, bureaucracy, huge buildings, etc. For a peer-to-peer lender, even tiny profit is enough.
As an example, imagine that you lend someone $100, and there is a 50% chance they will pay you back, and in that case they will pay you $210. And all this costs you is a mouse click. Some individual would click "yes". In their free time.
Now in the bank, there is an employee doing this as a part of their paid job. They have a manager, that manager also has a manager, plus you need to pay the janitor, etc. You also need to pay diversity training for all of them. And all financial transactions they do must follow all kinds of regulations, which regularly change. Simply, the overhead is not worth it.
See points above. Banks, being an integral part of the financial system, are only allowed to take on so much risk.
Third party companies have no such restrictions. But they can’t issue loans because they are not a bank.
So what happens is a bank issues a loan according to criteria the bank and the third party agree to. Then the bank sells it the next day to the third party. That way the bank is more insulated from risk because they aren’t holding the loan.
Also, they need to "predict" whether the loan would be profitable as they have not loaned the money yet. The decision largely depends on the precision of their prediction
I tried Affirm (https://www.affirm.com/) -- I missed one payment because of a bad check from my employer and I was barred from the service permanently. Even though only a week went by between payments, and I payed off all of my loans as soon as I got paid.
Seems like it's clearly spelled out in their FAQs:
Q: Do I have a credit limit with Affirm?
A: Unlike a credit card, Affirm is not a revolving line of credit. While customers can take out multiple Affirm loans at once, each Affirm loan application is evaluated separately as a closed-end transaction. An application from a returning customer may be denied, however, if that customer has failed to repay other Affirm loans on time or if the customer shows excessive borrowing behavior.
Non-bank lenders have plenty of other motivations besides usury.
- Many immigrant populations thrive because more established members of the community invest in and loan to their peers (especially family members). They may not have twenty years of credit history and market research, but they have close-knit ties that go back generations and a person's reputation as leverage.
- A Planet Money episode after Hurricane Sandy mentioned studies that proved a small business was more likely to survive a natural disaster if it worked closely with other businesses. The conclusion was that businesses would provide informal loans to one another to keep everyone afloat until the insurance claims could be processed (which could take months)
One problem is that the populations that are underserved by banks are over-exploited by those options made available to them;
"Cant get a loan due to less-than-perfect credit? Then pay 4,000% interest!"
---
The finance charge ranges from $15 to $30 to borrow $100. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter term loans have even higher APRs. Rates are higher in states that do not cap the maximum cost.
"The finance charge ranges from $15 to $30 to borrow $100."
For context, US banks typically charge this $15 to $30 in overdraft fees, for payments of less than $50. For example, see the table and note immediately below it here:
>Bank do refuse to lend to large segments of the population which can be lent to profitably.
>In China, part of the reason is caps on loan interest rates.
How exactly is that the reason? I thought about it, and guessed that you may mean that it is because lenders cannot charge high interest rates to those segments, but if they are a risk anyway (guessing because poor or have unpredictable income), why would banks want to lend to them? I mean, even if banks were allowed to charge higher interest, the borrowers could default on the principal or the interest, right? [Not a financial expert here.]
Because the risk of default is not binary, it's on a sliding scale. If the banks are not allowed to charge enough interest to cover the risk of default, the loan will not be made.
"and the banks are actually pretty good at deciding who is too risky to lend money to"
Uh, no.
Chinese banks are politicized, they lend for the strategic impetus of the government, which in itself is often really just the result of patronage (read: soft corruption) anyhow. And even without that you have crazy targets which distorts not only lending, but entire sectors of the economy.
Chinese lending is la-la land and not really based on credit worthiness.
Also - lending is all intertwined, public or not. Credit doesn't care where credit comes from, so if this lending bubble is big enough it could cause a recession. And now that China is #1 or #2 sized economy, it would possibly hit everyone.
It seems to me like, if you took a credit union, and then stripped out all the junk that isn't actually savings or loan - so free checking accounts, debit cards, ATM networks, branch locations & most the services offered therein, FDIC insurance, etc etc - how would that compare to Lending Club?
The biggest remaining difference would be the "peer to peer" bit itself. Which feels like a good thing to drop to me. From a purely financial perspective, the "you choose who to loan to" just feels like a way to introduce economic inefficiencies: The loan facilitator doesn't have a whole lot on the line, so they're poorly incentivized to do their due diligence on each loan. And the lender doesn't have direct access to the borrower, so they aren't able to do so in the first place. Nor, being non-bankers, are they likely to have the expertise to do a great job of it even if they could.
The more I think about it, the more peer-to-peer lending, at least as I understand it, sounds like CDOs in tie-dyed T-shirts.
I remember reading a couple of introductory posts by financial bloggers that started giving out some loans on Prosper and the like. They promised to post updates about the returns, but those updates have been absent. I imagine the returns are not good.
Here's my experience. I don't recommend doing any p2p stuff like this. not really worth it
For fun, I tossed $1,000 into prosper in 4/2015.
I set it to auto invest each time I hit $50 in available funds from someone paying their loan back. I also only set it to auto invest at the B (estimated return of 6.8%) and C (est return of 7.8%) levels. The levels change a bit, but it factors in the estimated loss for each level too.
Currently, my portfolio is about $1,300 with a little bit extra in available funds.
Ive only logged in to get some tax documents after the initial $1k investment and setting up auto invest.
> the banks are actually pretty good at deciding who is too risky to lend money to
This seems like a pretty shitty premise given the US mortgage meltdown of 2007.
In any case, peer-to-peer lending also has viability in microloans. The traditional alternatives for that have been credit cards (specifically the cash withdrawal), payday loans, and pawn shops, all of which have distinct downsides.
> This seems like a pretty shitty premise given the US mortgage meltdown of 2007.
Not exactly. The US mortgage meltdown of 2007 happened because, in effect, banks realized that the aftermarket for debt had grown so unskeptical that they could basically resell any loan immediately after they made it.
So, from their narrow perspective, virtually no loan was too risky.
How'd that work out for them? If you act rationally at all times and then loose your shirt in the end, are you "pretty good" at judging risk? I believe banks failed miserably at the the one thing they were supposed to be good at and it cost us a trillion dollars.
So you've got to draw a distinction there, though the distinction was blurred significantly by the repeal of the Glass-Steagall act.
Particularly before it was repealed, you had two different kinds of banks: Savings and Loans, and investment banks. S&Ls were the ones actually making the loans, and would have been prohibited from getting involved with CDOs. Investment banks would have been allowed to get involved with the derivatives market, but could not have operated as a S&L.
The banks who were just operating as S&Ls made out like bandits - they made bad loans, immediately found a rube to sell them to, and whistled Dixie as they walked away.
Banks that bought a lot of these CDOs ended up being the rubes, and that activity was the major source of the "too big to fail"-type bank closures and near-closures.
Where it gets muddy is that it used to be illegal for those two kinds of banks to be the same entity. But still, I think you can draw a logical, if not physical, line down the middle in order to say, "the people actually making the bad loans weren't really the victims here."
Banks did what they were supposed to do. In that sector, in those circumstances, if you don't ride the wave with the others, you get left behind.
Banks did have "counterparty risk insurance" on their assets - those CDS (credit default swap) things. (Like the other banks. And thus the CDS provier AIG "failed", because - of course - all their insurance contracts were correlated / not independent enough.)
I think the important distinction between all the banks are stupid and a stupid systemic failure of banks is important. After all, a lot of banks were not stupid, and stayed afloat well, without any sort of bailout.
>This seems like a pretty shitty premise given the US mortgage meltdown of 2007.
Only if you have a very superficial understanding of the mortgage meltdown. The underwriters of many of the bad mortgages were able to quickly sell the mortgages off to other banks. So there was almost no incentive to actually restrict who they were lending to.
Also, you imply a contrapositive that isn't the case. Just because there were banks that were excessively lending in the early 2000s doesn't mean that there are banks that are being excessively conservative and leaving behind good returns.
I feel like you just reinforced the parent's point? In a distorted macroeconomic environment (as has been the case for a decade plus in the US), banks are generally loathe to have false negatives, which makes a loan denial a fairly strong indicator of untrustworthiness.
First of all banks in China works very differently from those in US. It's very hard for individuals and small companies to get loans from banks.
Secondly, there are tons of companies working on peer-to-peer lending in US as well. Lending Club and Prosper has been around for a while. Newer ones like Upstart and Lendup are also in the same category. Their claims essentially that they have more data and better models to make better decisions than what traditional banks can do
I worked at one such lender. Here’s how they actually work with banks.
Banks, being an integral part of the financial system, are only allowed to take on so much risk. Third party companies have no such restrictions. But they can’t issue loans because they are not a bank. So what happens is a bank issues a loan according to criteria the bank and the third party agree to. Then the bank sells it the next day to the third party. That way the bank is more insulated from risk because they aren’t holding the loan.
Some p2p companies such as lending club actually do the same thing. The bank sells the loan to lending club, and then lending club essentially “sells” to all the individual investors: lending club doesn’t take the hit when people default.
The downside of such a model, besides missing out on upside, is requiring volume. You need lots of it to keep the lights on. So if investors get spooked you are in a world of hurt, which is probably what is happening here.
In developed countries with effective credit scoring methods, this is true. In developing countries, the banks don't have good methods of effectively scoring vast chunks of the population, plus the amounts poorer people would want as loans is smaller, so it's easier to just ignore them in favour of bigger clients. Tech companies are now trying to step in with innovative ways of credit scoring through phone data analysis(e.g reading through SMS for mobile money transactions, gambling transactions etc)
Wouldn't it be even more true in China, given the big brother system they have in place? The government (and by extension, the banks) knows more about its citizens than say, the U.S government. Hell, they just issued a "social credit score" to every citizen - it's similar to a financial credit score and just goes to show just how many things they're keeping tabs on.
Given what I have heard about social credit I wouldn't be surprised one bit of one sector of shadow banking is perfectly creditworthy people whose only additional risk as a lender is lack of being repaid due to being disappeared or arrested on 'it means what we want it to mean' charges.
The whole concept of social credit is what I refer to as stupid-evil. For one its whole concept is obviously exploitable as a 'recruit the low credit and purge the high credit' list if anyone ever want to form an insurrection powered by their newly minted low caste. And that is without the obvious side effects of people reacting accordingly to the actual information like not trusting anyone with top-tier social credit as likely too powerful to be held accountable and will thus screw you over at the drop of a hat.
Unfortunately even the US has had a similar issue to a thankfully far lesser degree with the idiotic "Operation Choke Point" abuse of power. Such abuses should always be reigned in.
Of all your points, the protectionist approach is the only credible threat to China's economy. Protectionism has always doomed countries. Much of China's growth over the last twenty years is directly attributable to opening the markets to foreign investment.
Less developed economies that tried to be protectionist obviously were hurt by it (many examples: India, China etc.)
But large swaths oft the economies of most, even developed nations are protected. Banking, telecoms, agriculture, military and in many cases broadcast entertainment and energy - are still protected to this day.
And then of course de-facto protectionism of state-backed or related entities.
Large open economies usually have more to gain relatively speaking than do smaller open economies, which risk being gobbled up.
Should rephrase my original comment to blanket protectionism. What works well is a "soft touch" where a local sector is supported just enough to remain competitive with foreign entities. That approach could equally be labeled "increasing competition", and is proven to work well.
Honestly, on paper I see US collapse coming closer then China, or May be EU first. The Chinese population still has bank savings that is double their GDP. DOUBLE!.
Which is something no western media want to cover, for one reason or another.
I see lot of medium to small problem in China, largely fixable and are being fixed right now. For US I see lots of large problems, ticking bombs and it seems no one want to touch it.
...is there something I'm missing? While I'm not sure I agree with parent's conclusion, they bring up valid topics for discussion and seem to be contributing value to the conversation. Is parent poster known for creating new accounts, and how can you tell? Why do you believe that they did not simply decide to create an account to comment here because they had something to contribute?
Also, there's a certain irony to this being your second ever comment.
Also it's not hard to imagine the sort of situation what would make one hesitate to speak frankly on the record about economic prospects for China: living there or doing business with people who live there.
Like you said, I normally don't post comments, so I agree there's irony here. However, recently I found some newly created accounts posting comments like the one above. Some of them are getting warnings from admins. Granted my comments aren't contributing either. So, sorry about that.
"Throwaway accounts are ok for sensitive information, but please don't create them routinely. On HN, users should have an identity that others can relate to."
There's room for interpretation here, but I think it's fair to say that the preferred default is the consistent use of a single permanent identifier. Do you prefer a different approach?
Banks are messed up in China and won’t officially lend to companies that aren’t really safe bets or politically connected (SOEs). As a result, a lot of shadow and underground banking was needed to fill in the gaps, the P2P lending being basically an extension of that.
For consumers, it’s a bit different, but again the kind of official loans available are much more restricted than the developed world, with lots of unofficial lending again filling in the gaps.
So far, 130 million euro's have been lend through the largest peer-to-peer lending platform in the Netherlands, www.geldvoorelkaar.nl. This was spread over 1300 projects. Over all the projects, the average interest rate (after incorporation of defaults) was 4-5%. This is not good enough for a bank, especially considering they would have to check each individual project, whereas that is now done by 'the crowd'. Still, it is a lot better than you can get through a savings account as a consumer, and a lot more fun than investing in big companies.
The theory is that fixed costs for banks are so high they cant profitably source and score these loans. However Fintech p2p firms can using "technology".
Note in my experience most p2p financing companies aren't actually peer to peer. They have a bunch of cash from investors, banks or other p2p loans companies which they then loan out.
If you calculate risk and charge a high enough interest rate you can make a profit. That's how a lot of the predatory load practices work. They charge an extremely high rate to people who normally can't get credit.
Posted this because having heard of P2P lending before, I had no idea that it had grown to such a large ( scale and scope ) industry. The most recent exposure I've had to P2P lending or microloans is probably Kiva's more charitable based business model.
But these new companies are certainly not in that space, as some are charging up to 20% on interest!? Who's taking loans at that level, and who's funding it at that level on this type of trust system??
Still haven't read enough to form a solid opinion, but it is an intriguing space. I definitely see the value in providing capital and easier access to capital to people who probably never had the opportunity, but the space seems ripe for fraud, manipulation, high defaults, etc.
>But these new companies are certainly not in that space, as some are charging up to 20% on interest!? Who's taking loans at that level, and who's funding it at that level on this type of trust system??
That's cute. LendUp is charging upwards of 900% APR on short term loans [0]. Usury is nothing new, but until the "disruptive" tech economy picked it up, it had been mostly regulated and outlawed.
Turns out fleecing poor people for everything they have is profitable enough for people to not care.
If you Google around you will see that the interests rates charged by Kiva (or rather Kiva local partners, the ones actually handling the loans) can be pretty high [1].
But keep in mind that interest rates should always be compared to inflation. Lots of developing countries have inflation >10%.
You also need to compare their rates to what else is available in those markets. The loan terms might be bad but they're better than the other bad options, so at least it's pushing things in the right direction.
Based on what I know, a large portion of the loans have very small amount and short duration. For instance, people want to borrow 1000 CNY for a month and pay back 1020 afterwards. That's already 2% per month.
EDIT: The reasons they need such loans are more complicated. Some needs money for emergency. Some uses the money to buy stock/cryptocurrencies...
EDIT2: P2P platforms typically take money from the deep pockets and subdivide into tiny loans. They earn the interest rate difference (e.g. 20% from users vs 15% to capital providers).
> high defaults
Empirically the default rate is very low. People pay back on time if you call or just text them. Honestly if they don't pay, it's totally fine, and the P2P platforms just don't care, because they earn so much money...
And some are just really bad at managing their personal economy.
There is a popular edutainment show here in Sweden about people in difficult economic situations, and at least half of them have taken 15-20 % interest loans for luxury consumption, like vacations and hand bags.
So according to that accaglobal.com article that I linked ( focused on Chinese P2P industry ):
Why are they borrowing:
51%: to accumulate credit worthiness
20%: meet basic needs
9%: fund major purchases of consumer durables
So seems to cover some of your anecdotal experience of the space. I understand the P2P business spreading out the risk by subdividing large investments from lenders into these various risk pools, but from a lender's perspective I can't imagine the return is worth it on one of these platforms.
I'd imagine the P2P platform itself would take a large cut probably with initial borrowing costs, plus a percentage of any interest rate payback.
Just seems like there'd be much better ROI in other investments than this type of lending ( as a lender ). Though, I'm sure the P2P businesses are making a nice profit by fleecing these types of borrowers at every step.
This is not a surprise, lending on a P2P platform is a "cool" idea but doesn't end up making you much money since you have to keep rates competitive and you always have the risk of someone not paying back.
As a lender on Lending Club, I don't recommend it. The returns are worse than a bad year on the stock market holding ETFs.
I've stopped lending on there and now I'm just waiting to move my money elsewhere.
I've pulled my investments out of Lending Club and Prosper. Too difficult to track returns (maybe this has since been fixed) and many loans seem to default (even higher rated ones IME).
> The returns are worse than a bad year on the stock market holding ETFs.
In 2008 the stock market fell 50%.
The last 10 years we've not had any bad years in the stock market, largely due to trillions of dollars of money printed by central banks in order to prop up the markets and to create a so-called "wealth effect". Expect a reckoning in the coming years.
Just because the returns are lower doesn't necessarily mean it's a bad strategy.
As MPT states, as long as the returns are un-correlated to the stock market they can improve the risk-adjusted returns to a portfolio. Even if the return is lower (but still positive).
I'm confused. Why are these firms "shutting down" if they don't have any exposure to the loans they brokered?
I mean, the description of the business model sounds like it's a bunch of transactional companies like ebay or paypal or whatever. Those might be expected to "fail" if the overall market shrinks, if expected growth didn't arrive, or if they get beaten by a competitor. But they don't fail "like dominoes". If anything the exit of one player would be expected to strengthen its competitors.
But the headline and analysis is using terminology that make this sound like a credit crisis. Is it?
> the description of the business model sounds like it's a bunch of transactional companies
From the “people that are running these P2P companies don’t actually understand what P2P really is,” these sound more like badly-run Prospers than true P2P lenders.
"About 118 P2P lenders have failed in July, the most since 2016" -- 200+ funds failed in Aug. 2016.
"Shakeout’s impact on the financial system has been limited" -- because bond holders are individual investors; it will depress future demand, but no systemic risk.
I’ve been hearing this since 2011. The Chinese government seems to have an amazing ability to get control over the situation as it always seems to be teetering on the brink.
That's pretending nothing has changed since 2011. It's interesting you pick that year, because that's not long after China's former approach collapsed with the global consumer in the great recession, and they had to switch to gorging on debt to continue faking a high rate of growth.
It's also fascinating that China would install a dictatorship right as this switch-over - from organic growth to extreme debt - was occurring. I'd wager the Communist Party is terrified of what's coming socially, and given their overwhelming vote in favor of the dictatorship they think that power is going to be necessary to control the people (they very knowingly voted to clamp down on all human rights in the country by handing Xi that position).
Since 2011 they've taken on tens of trillions of dollars in new debt. As recently as 2008 China's debt to GDP ratio was reasonable. Their debt to GDP ratio has drastically worsened since and is very realistically the worst among major economies now (when their immense shadow debt is included it's a certainty). Household debt to income ratios have similarly gotten dramatically worse in the last decade. There are in fact limits to how far a nation can push such things.
Somewhere between 1/4 and 1/3 of their new GDP every year is going just to new debt interest payments. When you consider what else needs to come out of that new GDP, that's a very stark debt situation. In 2011 they also weren't seeing record bond defaults.
The types that cry wolf are often early or very early in their predictions. One has to ask if there is in fact any truth to what they're saying, instead of only focusing on their regularly saying it. In the end, they may be too early in their speculation, rather than entirely wrong.
China should have accepted slower organic growth and maintained their financial health. They chose the Japan approach of levering up massively on debt when the growth dropped off. They're so terrified of their own people about what happens if growth is 2% instead of 6% (being terrified of their own people is also why they installed the dictatorship to control them). It tells you all you really need to know about their system, it's fragile and can't survive a recession or stagnation.
China has been predicted to collapse any day now since 2001 when I started paying attention in highschool.
It hasn't but people always have an explanation on why this time it's different.
Dictatorships have a remarkable ability to completely ignore the market and coerce it to do their bidding. You only need so many public executions before people stop doing things you don't like at scale.
What they don't have is the ability to indefinitely force hungry soldiers to shoot hungry peasants. China is no where near that level.
Agree—things tend to only get really bad when people can eat. In fact I can’t believe that Venezuela is as stable as it is—I would have expected full civil war by now.
Turkey seems like they're on the edge of the cliff right now. The lira was already having serious issues due to massive spending before sanctions were announced.
You first have to ask the question, can the Chinese government ignore the market longer than the market can ignore the Chinese government.
The answer so far is no and not only in China.
Once the global market is reconfigured in such a way that it funnels benefits back to China they no longer ignore it. Much the same way the Portuguese reconfigured the Asian spice market in the 16th century to their benefit for the next two centuries.
"Analysts at China International Capital Corp. estimated on July 13 that no more than 200 firms, or about 10 percent of existing platforms, will still be around in three years."
Even for a large nation like China, 2,000 P2P platforms sounds like orders of magnitude more than what is actually needed.
I was literally just looking into the pros and cons of P2P lending because I hadn't heard of it prior to today. I mentioned on another forum how annoying my student loans are being part mine, part my fathers, and all with high interest rates, and someone suggested P2P lending (such as SoFi).
I invested low five figures with Prosper, a US P2P lending platform, for several years about a decade ago. The returns are abysmal (and when the Global Financial Crisis hit, I had a bunch of notes go bad because of bankruptcies). Why? Because P2P lending is lending of last resort. It's one step above payday lending. I highly recommend not lending on P2P platforms.
As a borrower, it might not be a bad deal if you can't get a loan secured by real estate, or a personal loan, to refinance high interest debt. Depending on your circumstances (debt to income ratio, outstanding debt, available credit, income), you might consider using balance transfer offers that get you credit at 3-5% to make headway on high interest debt.
P2P lending has another pretty big issue with how it interacts with tax law. The short story is that the interest you earn is ordinary income, while losses from defaulted notes are capital losses that do not offset (past a maximum of $3000 in capital losses annually, at a lower rate).
You can invest inside a traditional or Roth IRA, which mitigates everything. But your retirement accounts should probably be heavily biased towards stock market index funds anyhow, so that doesn't really help that much.
P2P lending rates are low because all rates are low right now. Junk Bond rates are at about 6%, which is right about where P2P lending rates are right now (I've gotten a 5.5% rate over the last few years from P2P lending). The question will be, when the market turns, and junk default rates shoot up to 10+%, what will P2P default rates be? Higher? Lower? About the same?
Exactly. Banks have priced risk much better than you and they refuse to lend. What more do you know?
There are some cases where the capital needs are too small for large players to look at, but over all it's a fool's errand to invest in unrated junk bonds as an individual.
Banks want you to finance via credit cards and run a balance. They know switching costs are high. A credit union might get you an unsecured loan but probably not. Banks are extremely risk adverse to loan even to cash flow positive companies/persons except via credit cards.
Credit card debt is generally dischargeable if it wasn't incurred in the 60 days before filing, wasn't fraudulent, and doesn't fall under other exceptions (such as charging your tuition on your credit card). Unfortunately the nature of the original debt carries through to the benefit of the new lender and the debtor still has to file a motion to determine dischargability with notice to the P2P lender if she wanted to discharge student loans converted in the manner you suggest.
These guys are definitely predatory. I'm a bootstrapped startup founder and I think Prosper caught wind that I have some debt, most likely because I use Credit Karma who I'm sure must sell one's credit information. I now get weekly letters from Prosper and other companies offering high interest loans. Not cool.
I know someone who works in this industry in China. He cites illegal activities, negligence of risk management procedures, and the resulting fear of illegal activities and anticipation of a crackdown, as leading to the current situation.
Lots of them provide more than 15% ROR, too high that some normal company also put lots of money to p2p. This is crazy and it is certain most of them(p2p) will go broke.
The only way peer-to-peer lending will succeed is if the banks are overlooking or turning away a large group of creditworthy customers, and so far it doesn't seem like that is happening.