How Might Peer-to-Peer Investing Do in a Recession?

Daniel Penzing
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The Effects of Recessions on Lending in General

One of the worst things about the continued recession (or fear of one) is the effects it has on lending. As predicted by many economists, banks are tightening credit and making it difficult to obtain loans. For this reason, many people are turning to P2P lenders as they saw just how much the recession damaged their borrowing power. A credit check is much less intrusive when it’s taken out for a P2P lender, and they will often "show flexibility" when it comes to issues like employment. The checks will still be as rigorous as with bank loans, but in a P2P lending atmosphere, they are more likely to be accepted.

P2P Performance During the Last Recession

Peer-to-peer investing has been a growing phenomenon for several years. Lending Club, Prosper, and Funding Circle are all examples of P2P lending platforms. Before we dive into peer-to-peer performance during the last recession, let’s briefly review peer-to-peer lending.

This is a relatively new trend. The oldest, Lending Club, only started in 2006. So far, there have been no major recessions during these companies’ short history.

In order to through economic downturns, you want to look at how peer-to-peer investing did during the last recession. It’s hard to find out exactly how peer-to-peer investing did, but we can get a general sense from Lending Club’s numbers. According to the (pre-IPO) PR Newswire, Lending Club’s loan volume increased 211.5% in 2008.

The industry as a whole may not have performed as well as Lending Club, but the company saw a huge surge. That’s a sign that investors weren’t spooked by the recession and were willing to keep investing in P2P.

Most Peer-to-Peer Loans Are Unsecured

Unlike a conventional loan from a bank … where the lender can repossess your house if you’re late in making your payments … most peer-to-peer loans are unsecured.

To make matters worse, peer-to-peer platforms aren’t subject to the same scrutiny as banks. Therefore, peer-to-peer loans can be risky and should be evaluated with this in mind. If you’re considering a peer-to-peer loan, it’s important to conduct your own research.

Where Should You Be Looking for a Peer-to-Peer Loan?

There are several peer-to-peer lending organizations but Four Bond is one of the best choices.

Four Bond offers peer-to-peer loans as well as investments to its customers.

Four Bond believes in personal service and special interest and you can tell because they are a bit more expensive than some of their competitors. You can find out a little more about Four Bond and its professional service elsewhere on this site.

The Debt Consolidation Dilemma

Peer-to-peer investing is what you will likely need to do, unless you want to accumulate debt and spend the next few years paying that debt off. If that’s your only option, then by all means, use whatever method helps you reduce and eliminate debt.

An alternative debt consolidation method is to use a credit card. This is a risky approach though and can lead to spending again.

Another option is to transfer your balances. If you have any cash left in your emergency account, you could transfer one credit card balance to another card, paying yourself back with interest. Most credit card companies offer 0% offers on purchases, so that you can transfer the balance to one of those.

Credit card cash advance is also a form of debt consolidation. It involves taking out money via your credit card. Like transferring, this option is risky and can be disheartening. As you might expect, this option is pretty effective at reducing debt.

Limited Liquidity

It is probably safe to say that some companies that invest other people’s money are going to go under once the recession hits. Some investors will not be able to get the money that they need to pay off their debts and some lenders will not be able to help them. That is not the case with all peer-to-peer lending sites. Many of the lenders are small businesses that are owed money by larger businesses that have yet to pay. They will be desperate for cash no matter what the economy is doing.

Are Troubles Already Brewing?

Firms that host online lending communities promise fast money for people who can’t get loans from traditional sources, like banks and credit unions.

But these peer-to-peer firms are cutting off lending in many places and leaving a lot of people hanging, said Rob Fairchild, a credit union official in Salt Lake City who is following the industry.

The calls used to be nonstop, Fairchild said.

But these days, calls usually come from people facing foreclosure or overdue loans, he said.

Rather than putting money into peer-to-peer loans, Fairchild and other credit union officials are considering other options.

That’s why one of the biggest peer-to-peer companies, Prosper, announced this year that it was changing the very nature of its business.

Prosper spokesperson Alison Davis says the company has pared down its number of loans to about 600, from more than 5,000. And it has made big changes to its website in response to all the problems.

There are signs of trouble with peer-to-peer lending in other places, too, including the loan rates people have to pay.

Stay With Higher Credit Grades

When times get tough, people tend to look for lower credit grades. While this may give you a little more interest, you will take on a lot more risk. You need to stay with higher credit grades. They are safer and they are more likely to provide you with interest gains.

Another reason to stay with higher credit grades is due to how they do in a recession. When people start to cut back and look for other places they can trim expenses, they’re going to home in on small luxuries like dining out and going to bars and clubs. That is naturally going to slow down growth in spending in those areas.

You need to stay with higher credit grades because you will be less dependent on discretionary spending. This gives you the chance to really be able to grow your wealth. Why put all your eggs in one basket and depend on larger areas when you have other opportunities?

Why Peer-to-Peer Lending Is Not a High-Yield Substitute for Safe Investments

As anyone with an investment portfolio knows, there is no such thing as a safe investment. Even the safest investment imaginable loses some value over time. However, both stocks and bonds are risky investments that can help increase your return. While there are some risks associated with both of these types of investment, bonds have a higher potential than stocks and yields are higher.

What Is Peer-to-Peer Lending

Peer-to-peer lending gives the average person an opportunity to earn interest off of loans that they take out. The term peer-to-peer means that you are lending directly to individual borrowers. In the past, it was much more difficult for people to get financing for just about anything, such as a personal loan or even a business loan. Now, there are many companies that will grant funding to people that others would turn down. Instead of going through a trusted bank or other financial source, you make a loan directly to investors.

The loans are unsecured which means that the financial institution offers you an interest rate with a better rate of return than you can find in most other places. You can then take your earnings and put the money into a well-established portfolio that is going to yield a better return than you got from the loans.