Every day I receive emails from readers with questions. Having authored this blog now for two years I see many questions coming up again and again. So, I thought it would be useful to put some of the most frequently asked questions together in one post.
1. Should I invest in Lending Club or Prosper?
This is the most common question I receive and my answer is: Yes. You should invest in Lending Club or Prosper. Both platforms offer advantages and disadvantages. Lending Club is the clear market leader and they are close to profitability but they do not allow any kind of hands-off automated investing and their filtering capabilities are somewhat clumsy. Prosper has a flexible user interface for filtering loans as well as automated investing but is the clear number two and their financial situation is not as solid as Lending Club. Both offer the opportunity for great investor returns and a wide selection of loans. If I had to choose one to start off with I would pick Lending Club right now given their market leadership position but as I have said many times serious p2p investors should have accounts at both companies.
2. What would happen if Lending Club or Prosper were to go bankrupt?
If you read through the Lending Club or Prosper prospectus you will find many pages devoted to what would happen in the event of a bankruptcy. In fact the word bankruptcy appears 83 times in Lending Club’s prospectus and 80 times in Prosper’s – the topic is covered in great detail. The short answer is that backup loan servicing plans are in place at both companies where, in the event of a bankruptcy, a third party would take over servicing of loans for investors. Prosper is working on a bankruptcy remote vehicle that will provide protection for investors. Regardless of all this, there is no precedent in this country for the bankruptcy of a p2p lender so no one knows exactly what would happen. Here is my take: Lending Club has all but proven that p2p lending can be profitable and has huge potential. So, in the unlikely event one of these companies were to file for bankruptcy I expect another company would buy their assets. This should mean little disruption for investors.
3. How do taxes work? Will I be getting a 1099 from Lending Club/Prosper?
Now, I am not an accountant and I am certainly not qualified to give tax advice but I am happy to provide an opinion. Around tax time every year I write a post explaining how I am preparing my p2p lending taxes. That post goes into detail about the taxes questions and there is some interesting commentary from both qualified accountants and others with an opinion. Suffice it to say there is no agreement on exactly how we should report our income. But if you have money in a taxable account you should report all your income to the IRS regardless of what the 1099 says from Lending Club or Prosper.
4. How do you decide how much to invest in each note?
There are different schools of thought on this but I maintain that investors should always keep to the $25 minimum unless their account is at least $5,000 (preferably $10,000). After that I think it is up to the individual. I have spoken to investors with $1 million invested in $25 and $50 notes. If I had that much invested I would probably do $1,000 per loan. In the initial investment stage, I don’t think there is any need to have more than 1,000 notes. So, if you are investing $50,000 then $50 to $100 per loan would be a good investment amount. I think the advantages of diversification fades after you have 1,000 notes. Here is a post from last year that discusses diversification.
5. How do you find repeat borrowers at Lending Club?
At Prosper you are able to filter available loans for repeat borrowers, a strategy I have used successfully for a long time. But at Lending Club there is no such option. There are no plans to include this option either. Sometimes you will see a borrower state in their loan description that this is their second loan – that is pretty much the only way you can find out.
Let me take this opportunity to wish everyone a Happy Thanksgiving. As someone who was not born in this country but lives here by choice I am very aware of how much we have to be thankful for. The Thanksgiving holiday is a wonderful tradition and my favorite holiday of the year. I hope you enjoy it, too.
Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.