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Risks

Started by Peter, January 08, 2013, 11:00:00 PM

Previous topic - Next topic

John

Here are some of the major risks I see with P2P loans

Interest rates go up after I have locked into a loan
The borrower does not pay
Borrower pays off early
Lending Club goes under

The last one is the hardest for me to get a handle on.  What is likely to happen if LC were to go under.  I see lots of other institutions go through scandals and it never seems to turn out good for the investor.  Has anyone looked into this?

Also, what ways could LC fail?  Are there any indicators one should watch for?



Lloigor

Interest rates aren't likely to go up fast enough to worry about being locked into a 3 year (or 5 year with a corresponding 3-5% rate increase) term, in my opinion.

The borrower not paying is what we all try to minimize, it is clearly your primary risk factor.  Some hope for remedy, some sell at any sign of trouble.  Devise your own strategy.

Borrower paying off early is a hit, but a small one.  If they pay in full in month one you'll probably lose a few cents to fees.  I had a D4 pay in full in month two, I still made $0.52 after fees, or 2.08% over two (perhaps as much as three including funding, approval, and payment processing) months.  It may not be what you were planning on, but I'll take that happening 10 times over a single missed payment.

According to the documents on their website, there is a successorship arranged that would provide for continued loan servicing and payments to investors.  I do not know if that information can be independently verified, but I have no reason to doubt its validity.  I don't know what would happen to undeployed cash and whether more of the borrowers would default with a different collection team, though.

The risk I take note of that you didn't mention is liquidity.  Notes can be sold, but if you want to keep your shirt you will need a period of time to sell them and get your cash, should you need it.

rawraw


Randawl


DanB

Randawl............Actually, LC does NOT have a Bankruptcy Remote Vehicle in place for retail investors. Prosper just introduced theirs a week ago.


TravelingPennies


Peter

Publisher of the Lend Academy blog

See my returns here: http://www.lendacademy.com/returns

TravelingPennies

After thinking about it some more, I should have added the risk of ignorance (on my part or any new investor).  Fortunately this forum is a great tool for minimizing that. Thanks to all for the great feedback.   

greek

John this was helpful and if anything makes me study the possibilities of the secondary market more.

TravelingPennies


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