David Fleer
Bristlecone Value Partners, LLC
12301 Wilshire Blvd., Suite 320
Los Angeles, CA 90025 USA
Work 1-877-806-4141

Is Peer-to-Peer Lending a Magic Bullet?

November 21st, 2014

While the Federal Reserve’s recently-concluded “quantitative easing” program has been a boon to several asset classes (including domestic equities, which are once again broaching record highs), the policy of deliberately low interest rates has been a burden to investors with large allocations to fixed income.  With 10 year U.S. Treasury notes yielding less than 2.4%, and even riskier “junk” bonds barely yielding 6%, the risk-averse retiree is hard-pressed to generate steady income from his portfolio. At the same time, large banks have become more circumspect in their lending, as they work to rebuild their balance sheets in the wake of loan losses, billions of dollars in civil settlements and fines, and more stringent regulatory requirements.  The end result is an environment where credit is ostensibly “cheap,” yet many individuals find it more difficult than ever to borrow.

Stepping into this void is a new class of middlemen aiming to disrupt consumer lending by disintermediating the established class of middlemen (ie bankers). So-called “peer-to-peer” (P2P) lenders such as Prosper (founded: 2005) and Lending Club (founded: 2006) play matchmaker between investors with excess capital, and borrowers seeking credit on better terms than are offered by traditional banks.  On paper this is a win-win; investors earn higher returns, and borrowers have better access to credit.  But how do P2P loans stack up as investments?

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