When the Money’s Gone in Peer-to-Peer, It’s Gone

If you held on to stock index funds throughout the financial crisis, you eventually made all your money back and then some. A beautiful characteristic of the stock market is that being down doesn’t erase the money lost permanently. The value can always go right back up.

With peer-to-peer member payment dependent notes, like the kind Lending Club and Prosper sell to investors, there is no comparable way to recover losses. Once a loan defaults, that money is gone. Optimism, a market rally, and good consumer news won’t bring it back.

Anil Gupta, the co-founder of PeerCube summed this up well in the Lend Academy forum:

With losses in P2P lending, the challenge is you never recover “double digit percentage” losses incurred. There is finite life for a loan and once it is charged off, you not only have lost your principal but also any possibility of future returns from the sunk money in the loan. With stock, at least you don’t realize losses until you are ready to realize them or company goes bankrupt or you can wait out for stock to recover or double-down. Troubled P2P notes are like stock options that expire worthless.

The potential to lose money permanently with no chance to recover simply by waiting it out should weigh heavily on your decision to invest in P2P notes.

Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.