Why You Should Not Invest in Peer to Peer Lending | BeatTheBush

With Peer to Peer lending, there are some risks they are not telling you. First, there is the liquidity issue where your money is essentially trapped in a loan for 3-5 years. The current aggregated default rate is variable and is dependent on the well being of the economy which could fluctuate. The returns are not guaranteed and the default rate could spike resulting in a loss rather than the paltry 6-9 percent of advertised gains. Second, the borrower is not ultimately responsible to pay you back but rather pay the intermediate company. This create some pretty peculiar situations if the company becomes insolvent. .

How’s it going everybody this has beat the bush today i’m going to talk about why i don’t invest in peer to peer lending and why you shouldn’t either peter peer lending started cropping up sometime in 2006 from companies like lending club or prosper there’s various other ones that does the same thing the claim to fame with these companies is that it promises that

You are peer to peer lending where you have a whole bunch of investors not banks or anything just regular people that has some money that you want to invest and then you’re funding a particular person that needs to borrow money so these peer to peer companies can say oh we don’t have a bank involved so we can charge the borrower a little bit less interest and we

Also can give the investor a little bit more so this is kind of like undercutting the bank cutting out the middleman so then they can charge everyone less it’s de strange thing about these companies is that they’re owned more and more by big banks because they have a larger and larger investment in these actual companies so you can kind of say the big banks aren’t

Involved or any more but they are they are financially invested in these peer-to-peer lending platforms now what they tell you to do in these lending clubs is that you’ve got a bunch of money in there and they want you to disperse it a little bit little between a lot of different loans that in effect says okay it’s kind of reducing your liability for each particular

Loan so it’s kind of like diversification kind of so i pulled up some statistics just general knowledge 2015 they have a default rate of about 3.3 percent your returns can vary anywhere from six to nine percent and it varies because you can actually go in there and choose which loan you want to fund in increments of twenty five dollars or something like that so

You can put very little in each one and then you can just kind of like blanket everything and hope that you pick the good ones or just from the description from the credit score that the borrower is gonna make good on repaying you the borrowers have something like three to five year term in which they have a solid payment they have to make every single month their

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Interest rate varies depending on their credit score you can kind of think of this as $10,000 to someone it’s not one single person but let’s just think of it as one person for now there’s a certain interest rate they’re gonna pay you and they’re gonna pay you back within three to five years okay so they’re gonna make monthly payments to you once your $10,000

Is invested you cannot access that you can’t just one day say hey give me all my money back i really need it no youyou can’t do that if your money is locked in until they slowly pay it all back to you as a person with limited capital that’s really restraining because what if three to five years later you need someone need to do whatever you need to buy a car or

Something some emergency happens but you can’t really withdraw that so liquidity is a huge issue here let’s say you are investing $10,000 in lending club and once you go into their platform you can invest in many different borrowers you can split them up however you want you can choose whichever you want so what happens is let’s just say we aggregate all these

Borrowers into one just to make it simple so the borrower here applies for a loan and they get a certain interest rate depending on their credit score but once it gets funded lending club actually takes a percentage of that for anywhere from one point one 1% to 5% away before they get the rest of the money so if they apply for $10,000 you’re not gonna get the full

$10,000 you’re gonna get a fee removed from it and lending club gets to pocket that wow this is great i really would like to be lending club myself because you just sit here on the sidelines you don’t have any of the risk because you got the investor here that gives money to the borrower to borrow you’re just here collecting fees and you don’t have any risk on top

Of that when the borrower is paying you back okay we estimate maybe let’s say it’s a three year loan 10% and then every single month is about $320 when the payment comes in they also take a little cut right here in terms of a fee so three dollars every single month ii they get recurring revenue and then the rest goes to you historically after you take into account

The default rate okay you’re going to make somewhere between six to nine percent but this is dependent on the current default rate we know that this is a variable okay let’s say that economy tanks people lose their jobs unemployment goes up you know it happens once in a while and this can happen anywhere between three to five years the timeframe of this loan here

Because you have to wait that long okay if if something bad happens within this time frame the default rate goes up it can completely wipe out your gains of six to nine percent on average so there’s a very very inherent risk in lending money yourself to a person even if you disperse the risk across many borrowers when i first looked at the website i was about to


Invest in there i even gotten an account and i was about to fund it but i stopped short of that because i didn’t like borrowing money to separate borrowers myself that’s just the level of risk i like to take i don’t like to take that much risk and have my capital being illiquid like this because it’s a it’s a long outlay three to five years it’s kind of longer than

Like a one-year cd except see these are quite different because you don’t get payments you just get something right at the end there’s another layer of risk here that is completely transparent and you cannot really see this when you sign up as a user of this that is because whenever you fund something okay you’re actually buying securities in lending club okay not

Their stock really but securities in it that varies depending on what you invest in okay so every single person that does this is gonna get a different form of the security based on the balloons that you’re funding and so this security is a lending club security okay they are obligated to pay you okay if anything goes wrong and so these securities are repackaged so

It kind of sounds like those subprime mortgage crisis things you know whenever you repackage securities and they get so complex this is hard for me to understand it’s like they juggle around and so the next layer of risk here – i’m sure men investors are not taking into account is if lending club ever goes bankrupt okay the borrower is still required to pay lending

Club okay they’re not required to pay you so let’s say lending club goes bankrupt and they cannot pay anybody back you are immediately out of all your principal $10,000 all gone okay but the borrower here it could be across many borrowers they still have to pay lending club so you essentially become a you know like a second-class citizen here you get paid the last

If anything goes wrong with lending club so that kind of sucks because you’re already taking the risk of them defaulting okay if they default these days without pulling lending club under okay you get less of a return already but on top of that if lending club ever becomes insolvent they are a company okay and they can go bankrupt if they ever go bankrupt all this

Money outlay that you did is all gone you cannot get paid back for that so you put $10,000 in and you’re just looking at the watch three to five years okay you’re just waiting three to five years and you’re counting on lending club being in business okay if at any time between those three to five years they become insolvent you are out of your initial principle

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Which is a huge loss compared to six to nine percent you get per year and this in itself makes the risk even higher than buying multiple pieces of stock in actual companies because you can at least diversify between you know 10 20 companies put a lot of money in this you’re actually investing in one single company on top of this there’s other crazy things happening

Like the ceo owns a bunch of investment that the company actually bought so that the investment would go up right you’re normally you’re supposed to disclose this and so there’s a conflict of interest and so i think you got fired or something and the stock price kept on going down down down now it’s not doing so well including the people are not investing as much

In the platform which is kind of like the beginning of the end here you know like it’s like falling down and if they don’t get people to invest it means they’re gonna lose they’re not gonna make as much money not lose money but they’re gonna make less and less and it’s gonna get closer and closer to being insolvent i’m not saying they’re gonna go down right away

But you know it could be viable it could just coast for a really long time and stay solvent but every single time you invest okay you have to wait for the next three to five years and you hope that they’re gonna stay in business for desk duration if money comes in like this as payment you’re gonna have more money to invest in okay so they have these options where

You can either go in there manually to invest in notes okay or you can do it automatically so if you do it automatically it means you’re just kind of resetting your clock every time it does the reinvestment you’re gonna extend the time at which you can completely pull all your capital out where the new money that you invest in it’s going to have a three to five

Year period before you can completely get all your principal back so i’m quite disturbed by the fact that you can actually lose all the capital i’m actually emotionally disturbed here i feel kind of flustered knowing that there’s such a product out there that all these people can fall trap into i hope you watch this video and kind of understand where the risks

Are especially for people that are actually invested in it don’t forget to give me a like over here and comment down below let me know if this change your mind about peer-to-peer lending and don’t forget to subscribe over here thanks for watching

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Why You Should Not Invest in Peer to Peer Lending | BeatTheBush By BeatTheBush

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