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♪ Got to sort of tell 'em ♪ Two destinations, one loyalty card. Visit yamava.com/palms to discover more. Have you heard the words peer-to-peer lending? Maybe you've seen some banners for Lending Club or Prosper but wondered what it is and how it works? Today is going to be an introduction from both the borrowing side and the lending side to peer-to-peer lending.

♪ Welcome to the Radical Personal Finance Podcast. Today is Wednesday, October the 15th, 2014. My name is Josh Rascheitz and I'm your host. This is episode 82 of the show. Today I have an interview for you with Simon Cunningham, founder of LendingMemo.com. We're going to talk all things peer-to-peer lending today.

It's going to be a good introduction but we even have a little bit of advanced knowledge for you. ♪ I've been wanting to bring you some information on peer-to-peer lending for a while, but the problem is I'm just not an expert in it. I'm really not. I've never borrowed from a peer-to-peer lender.

I've never lent through a peer-to-peer lender. So that's a pretty bad combination to actually be able to bring you any value. Other than knowing conceptually what it is and reading articles from time to time about it, I'm about the worst person in the world to talk to you about peer-to-peer lending.

So, as with most things that I'm not very good at, I have gone out and found somebody who I think is an expert. And my guest today is a man named Simon Cunningham, and he is the founder of a website called LendingMemo.com. And basically all Simon does is talk and write about and get in--he's involved in, and then he just simply talks and writes constantly about peer-to-peer lending.

So he's very involved in the industry, but he's coming at it from a layperson. He doesn't work for any of the large lending club-- he doesn't work for Lending Club or Prosper, which are the two big peer-to-peer lending companies that are out there. So we're going to talk that through in today's interview.

The beginning of the interview, we talk about lending-- peer-to-peer lending as a solution for borrowers to lower the cost of money. And then we talk about peer-to-peer lending in the second half for investors, about maybe potentially being a decent investment for you. So I hope you'll enjoy this information, and I think Simon did a really great job with bringing it to you in a conversational format that's very accessible.

So that's today's interview. Thank you so much for listening through these interviews. I know we're kind of off of our normal schedule. I'm working on some big projects this week, and I've got plenty of shows that are just me doing, and I've got a few listener questions, but I don't have the time to be able to prepare for those shows really well.

And then if I don't prepare for the show really well, then I wind up with a long, rambly show that gets me lots of comments about having a long, rambly podcast. So I've learned not to just sit down and record a show without having a tight outline, at least, to keep me on track and on focus.

So that's why this week is basically Interview Week Central. So I hope you enjoy that. I may skip a day of playing in interviews simply because some of the interviews that I have released this week have been fairly long, so don't be surprised if I do skip one day and just release four shows this week.

But for now, here's the interview with Simon. Simon, welcome to the Radical Personal Finance Podcast. I appreciate you being here. Yeah, thanks for having me. I am excited to talk to you about peer-to-peer lending. And this is a topic that basically what I'd like to do today is almost have an introduction to peer-to-peer lending.

I know a little bit about it, just paid a little bit of attention, but I'm not an expert by any means, so I'm going to pick your brains, if that's okay, and learn as much as I can in today's show, and then we'll just let the audience listen in, if that's cool with you.

Great. What is peer-to-peer lending? So, peer-to-peer lending is the large-scale lending of money online, particularly using crowdfunding as a way to disintermediate the banking establishment and allow people to borrow and invest money directly to each other. So, yeah, I mean, that's kind of, in a single sentence, that's kind of the definition.

You've practiced that once or twice, huh? Yeah, I mean, a lot of, what's interesting is how this is just such a massive industry. I mean, Lending Club, it took them five years to issue their first billion dollars in loans, and now they're issuing a billion dollars every three months.

So, it's this massive growth thing, and so all these people are suddenly interested in it. So, yeah, I'm very well-practiced in kind of what is peer-to-peer lending. And it's a really fun question to answer. Who is lending and who is borrowing? Are there any trends to it? Is there, I mean, do we know?

Is it everybody, or is it a specific segment of people? Right. It's actually very specific on both sides. Now, there's minority groups on both sides, but there's also majority groups. So, on the borrower side of things, 85% of these people are consolidating credit card debt. So, they have, you know, let's say a 20% credit card APR, and they are reconsolidating that at a debt in a fixed-rate amortizing vehicle through a peer-to-peer loan.

And what's so great about that is that most people are saving 5% over the interest rate that they're paying. And so, especially if these people are having, you know, $20,000, $30,000 in credit card debt, just that simple, you know, four or five clicks for an internet application can mean, like, massive savings for those people.

So, that's probably the main people who are-- 80%, 85% of the borrowers are actually debt consolidators. And then, this final, like, cross-section of 15% are actually a hodgepodge. Most of those people are people doing home improvement. - Okay. - There's also people who are, you know, taking a-- you know, they need a sudden $5,000 loan to pay for a-- they have to attend a wedding, you know, down in Mexico, and they have to pay for whatever, right?

There's a lot of different people-- reasons that people are doing this. Weddings is a big one. So, I mean, you can go-- there's a list of 10 of them online, and you can kind of look at those. The second biggest one is home improvement, and there's also ones like student loan debt, starting a small business, and kind of the new up-and-coming one is actually medical bills.

So, the main group, Lending Club, they actually purchased a medical billing company and so now they're having a larger and larger portion of their borrower side of doing that sort of thing. - Interesting. - On the investor side of things, that has been a very interesting trend to watch.

So when this thing first began, of course, the guinea pigs for this whole investment were actually what we call the hobbyist at-home investor, which you're well aware of who those people are. They're not necessarily chasing yield, although they could be. They're more just interested in ways to make money online or ways to invest their money, and so these are generally people later on in their years, people who have a little more flexible cash, and they're willing to try new things, and that's really how peer-to-peer lending got its start, and so at the very beginning, you had just lots of borrowers connecting directly to these individuals, so individual to individual, peer-to-peer, and that's kind of how peer-to-peer lending's model got straightened out and tested, but the companies actually were not profitable at that point.

They were still burning through investor cash. They couldn't really hit a profitable model, and so they just kept scaling to see if that would help, and really, that's what did the trick, so both these companies are profitable today, and the reason that they're there is because actually large financial institutions realized the incredible investment that this is, and they jumped in the game, and so now you have banks, hedge funds, money managers, large family offices, and it's kind of arguable about what percentage of the total investment dollars are those groups of people, but I would peg it at something like 80%, 90% of the peer-to-peer lending investor cash is coming from large groups like Santander Bank or Union Bank or whatever.

These giant pools of cash are actually funding it because they find this investment so lucrative. - Interesting. So credit card departments of some banks and some financial services companies can be some of the more profitable departments, so it's certainly understandable why the institutions would get in because if this is a competition with a credit card department, and if I were running a bank, I wouldn't let all of my high-interest-rate-paying credit card customers be stolen away by a bunch of individuals.

I'd make sure that I was involved in-- I was still getting the interest I could. Even if I had to knock five points off of their rates, I would make sure that I was investing in what they were going to. - Yep, correct. - Let's start with a-- You just started a little bit of the history, but give me kind of a rough timeline of the history as far as you know of who led the way, who were the original companies, how long has this been around?

- Sure. So in the UK, this was actually the very first-- The first group who started it was Zopa in the UK in 2005, and then the first American company was Prosper in 2006, and then Lending Club followed up in 2007. When Prosper first launched, it launched with a really-- This is kind of a difficult way to describe, but the model it was using was actually a Dutch auction model, and so they had this kind of dream.

It's actually a really beautiful dream that instead of pricing or scoring these borrowers on the platform side of things, they would allow institutions to sort of have an eBay model to choose what interest rate they wanted to offer each borrower. And so basically we call this Prosper 1.0. Prosper's original model was a very beautiful but ultimately failed attempt to have a purely free market where the investors would choose and the borrowers would choose, and it would be this total-- I mean, that's pure disintermediation right there.

I mean, truly nothing in the middle mediating these two people. And it ended up that Prosper lost-- the majority of their investors lost money-- not all of them, but most of them. And so they actually had some rough waters that they had to kind of relaunch under a new model, and that has worked much better for them.

In 2008, I want to say, both these companies shut down and had a quiet period and were relaunched in 2009. I think LendingClub launched in January of 2009, relaunched with approval of the SEC, and Prosper in July of 2009. And with this relaunch, Prosper had this brand-new credit model which was much better.

It's the one that--it's similar to the one they're using today. LendingClub is very similar to the one they're using today, but it's the one that's really got them to be successful. And so now you have--the SEC has classified Peter Perlone's as securities, and so there's lots of regulatory oversight, and as a result we just had a very stable, very consistent investment going forward.

Are there any other competitors, you know, in third and fourth place trying to come up and catch up with them? That's a really interesting question. I mean, on the one hand, yes, and on the other hand, not at all. It depends on what do you define as a peer-to-peer lender.

In my definition, they don't have any competition, but if you would widen the definition of peer-to-peer lending to include any sort of marketplace online lending, which means that you're simply connecting the investors to the borrowers, there's actually, like, lots and lots of companies out there, like Cabbage, Borrowers First-- I'm not going to be able to get all these names--Pave.

There's giant--in the UK, there's all sorts of them as well. And these groups are actually only having accredited investors because the regulatory legal process to launch a platform where your investors are institutional, where they're accredited people who make a large yearly income, the legal framework for those things to launch is actually really much more manageable, and so that's what a lot of companies are starting off today with having a more accredited, high-dollar, high-net-worth investor, and they're able to hit profitability with that model.

And then they've all told me they have a goal to eventually file an S-1 with the SEC and open up their platform for unaccredited, regular people like myself and like most Americans out there. So in that sense, the word peer-to-peer lending are not even close to the only players in the game.

On the other hand, they are the only platforms, the only websites to do online marketplace lending in the entire country for average Americans, unaccredited investors, regular people. And in that sense, they are still a peer-to-peer lender where you have--if you want to, you can be an investor from Arkansas, you've got $12,000, you can go on the platform, and you can lend money to borrowers who are taking loans out for $12,000.

So there's still the peer-to-peer aspect of this investment is still existing in Lending Club and Prosper. Just other companies haven't been able to hit their level yet. And largely that's--I mean, just the regulatory process for allowing unaccredited investors on your platform is incredibly intense. I heard the figure was something around $10 million in legal fees.

Wow. Wow. I want to--I'm trying to decide whether I should start with the borrowing side or the investing side. Let's start with the borrowing side. Sure, it's simpler. Yeah, and that's also probably--I think this is probably a good opportunity. I've recommended--even though I--I don't know if I should have, but I've recommended to people they check out peer-to-peer lending as a source of credit because I think it can save them from some scenarios.

But I've never woken up in the morning and decided that I needed to go and borrow from Prosper or Lending Club. And so for me, if I had credit card debt, I would just surf that debt around on the 0% offers or low offers or things like that. So why--who is the target?

Am I the target if I have credit card debt? Or is it the target with somebody with a lower score, with a more murky payment history? Who is the target--who is the best fit for this on the borrowing side? Best fit are investors who have an average credit score of 700, who have--so you have to realize, all peer-to-peer loans currently, and when I say peer-to-peer for the rest of this talk today, I'm going to particularly focus on Lending Club and Prosper because it's just simpler that way.

Sure, fine. And they are kind of the only peer-to-peer investors that currently exist. The average peer-to-peer borrower is going to have a credit score of 700. They're going to be prime rated. So currently Lending Club and Prosper do not allow less than-- they do not allow subprime borrowers onto their platform.

So that's 95% true. So there are these kind of few exceptions. But so as a result, like, at the beginning, the main people that they were looking for is this giant group of Americans who are trying to consolidate credit card debt. So that number has been pegged something around-- there's $850 billion in unconsolidated credit card debt, something like that.

And they said that something around $250-$300 million of that meets the credit standards for prime rated borrowers. So currently Lending Club has issued something like-- I'm going to get this maybe a little wrong, but something around $5-$6 billion. So you're talking, you know, whatever 5%--5 divided by 300, that fraction is how large the market is for-- that's how many loans have been issued versus how large the rest of the market is.

Not much. So there's a huge--as I've heard Aaron Bermude put great at Prosper-- he's the president of Prosper--the CEO of Prosper-- Aaron would say something like, this is an incredibly large addressable market that we have here. And so trying to focus and really drill down into credit card debt consolidation is actually a really great tactic.

Now, at the same time, you have Prosper-- like, for instance, President Ron Subaru, who's talked about saying, you know, we're not just here to do credit card debt because at the end of the day, you know, the debt gets consolidated and then you're like, okay, now what do we do?

And actually that's what's so beautiful about peer-to-peer lending from a borrower's side. It's actually a really wonderful way to get a quick and easy influx of cash. And so when I was growing up, you know, and you just did not have the ability to go, hey, you know what I could really use right now?

I need about $5,000 because my friend's getting married. I want to fly him down to Mexico, blah, blah, blah, blah, blah. And you know what? I have the cash flow. I'm a responsible person. I have great credit history. But for this current window of my life, I actually do not have $5,000.

So is there a place for me to responsibly borrow $5,000? And for the most part, that option didn't even exist in the whole country until just recently with peer-to-peer lending. So if I could kind of look down the pipe here, debt consolidation is really how peer-to-peer lending is going to become kind of infamous and kind of big and really take its main stage in the United States financial scene.

But what you might see in the future is somebody who literally just opens up an app on their phone, four clicks later and a credit analysis later, they have $3,000, $4,000 in their bank account because they just need that and they're able to borrow that responsibly. The debt instrument is actually really good.

It's fixed rate. It never changes. No prepayment penalty. It's actually a really great way to borrow money. And I know in the financial kind of world that you and I live in, generally we don't want people to take on debt at all. But that's slightly too simple. I would say that I would generally not want anyone to take on debt.

But if they need to take on debt, and there are times in all of our lives where that needs to happen, this is actually a really great way to do that. So you just mentioned a couple of the advantages. Slow down and let's go through that list again. So benefit, and we can kind of loosely compare it to credit cards and then other forms of borrowing as well.

So first benefit is fixed rate. That's one. So are all of the loans that are made through peer-to-peer lending fixed rate, basically at least? Correct. Okay. Number two is fast decision. I've taken that away from what you've said, is that if I'm a borrower and I need some money, and I need five grand, I can get a decision quickly.

So unlike maybe needing to pursue a bunch of different places, going to the local credit union, going to the bank, asking for a personal loan, things like that. So another advantage would be a fast decision. Oh yeah. I sat in my pajamas last November and applied for a Prosper loan, and four days later it was in my checking account here in Seattle.

It was amazing. Okay. What other advantages? The biggest one is lower interest rates. That's the king right there. I mean, that's the main reason this whole thing works, is it's nice to have, for instance, like I said, no prepayment penalty. The late fees are very reasonable. They're usually about $15.

But really the main reason people are doing this is the lower interest rate that it costs. Lower interest rate as compared to credit cards? And compared to any unsecured loan. I mean, the majority of unsecured personal loans in the United States are issued by banks, which have these giant institutions that they have to pay for.

They have vaults. They have cash holding requirements. They're FDIC insured, so they have all this rigmarole involved in that. But with these online companies, because it's such a simple-- I mean, they're literally--Linden Club is a headquarters in San Francisco and a giant server farm in Nevada, and that is all.

So as a result, they have very little overhead, and so their cost structure--so I broke down using SEC forms-- I broke down the cost structure for Wells Fargo's personal loan program and the cost structure for Linden Club's personal loan program, and the operating expenses is one-fifth of Wells Fargo.

And so as a result, you can actually see that in the interest rates that they offer people. Wow. That's interesting. That is actually really exciting because any innovation that comes in the banking industry to kind of bust the cartel up, the five biggest banks in this country, I'm in favor of.

So this is great news to me. But I guess--so I guess--do you have any idea of how it would compare to maybe local credit unions? Because I guess that would be what I would--that would--if peer-to-peer--excuse me. If peer-to-peer lending didn't exist, I think I would encourage someone-- look for and establish a relationship with a local credit union, and many of them still will offer small personal loans, things like that.

Are you aware of the comparison there? I am. So that's a great option. And I'm not one of these people that's just going to say peer-to-peer always, bottom line. Like if you can get a lower interest rate on a credit card--or I'm sorry, at a credit union, then go for it.

That's great. Because a lot of times, because they're going to be--they're going to have less of a profit motive, they're going to have a simpler structure, that a lot of times--and especially if they can-- you know, you've had a relationship with them for a number of years, the lowest interest rate at Lending Club and Prosper is 6.7%.

So if you can get a personal loan at your credit union for 5%, go for it. That's great. But my credit union personally only allows loans, for instance, up to $15,000 here in Seattle. And the interest rate that they offered me was actually slightly above that. So even--I would argue that even with the lack of such a profit incentive at a credit union, they still have to pay for a vault.

They still have to pay for lights. They're FDIC-insured. And that overhead is going to make them slightly competitive with Lending Club and Prosper. Plus, it's just a little bit inconvenient, because usually you can't do it online. I mean, maybe you can. I've never taken a loan out from a credit union.

So this is just me observing industry literature and trying to learn from other people's experiences. But I do have a credit union account at a local credit union here. And I have to go down--I would imagine if I needed a loan from them, I would need to go down in person and kind of the old-fashioned banking process, justify it to some extent, and illustrate why I needed it.

So it's a little bit less convenient than being able to do it online. Sure. So number one, fixed rate. Number two, fast decision. Number three, lower interest rates. What other benefits can you think of? I mean, those are the big ones. The cost of having late fees, no prepayment penalties.

And probably the biggest one that I really encourage people is, "Listen, when you get a peer-to-peer loan, and you get a three-year, 36-month peer-to-peer loan, you can look down your calendar and you can say, 'Okay, on--what's the date today? October 15, 2017, I will no longer have debt in my life.'" Right.

And that is a pretty great thing to say, whereas with the credit card, it's going to be a revolving line in credit. And if you have--it's just a terrible thing to hold on to long-term debt, because you've got to create your own pay structure, you've got to create your own calendar, and you've got to pay it off.

It just requires more discipline on behalf of the user. But with a peer-to-peer loan, because it's this fixed rate, fixed term kind of thing, you can look down and say, "Okay, October 15, 2017, I will no longer have the credit card debt from this period of my life, and I'm looking forward to that day." And that right there is the reason that I'm excited about this.

I don't really care too much about people funding weddings. I don't really care too much about, you know, whatever, somebody who needs $10,000 to do something extraneous. What I'm really interested about is people who are suffering under the oppression of 20% credit card bills, don't know how to get out of it, and all of a sudden they see this thing called peer-to-peer lending.

It takes away 5% of whatever they're paying. So let's say they have a 15% credit card rate, and all of a sudden they're paying 10% on a peer-to-peer loan. Like, that's a 33% reduction in their monthly struggle, right? And that 33% can mean the difference between spiraling further into debt or being able to pay it off.

So it's a tremendous breakthrough. This is not just about getting people more cash. It's really about setting people free. And I love that as well, but I'm not convinced, based upon what you said about the 700 credit score, that that's actually happening. Because if somebody has a 700 credit score, they're pretty aggressively targeted.

It's hard for me to imagine somebody with a 700 credit score paying a 20% credit card. And I could just be ignorant. I don't know a lot of these numbers. The audience can correct me if that's the case. But because of the high credit score and the fact that it has to be prime loans, it's hard for me to believe that that's really what's happening, that people are going from a 20% credit card interest rate to an 8% peer-to-peer.

Am I wrong? In some ways you're correct, in some ways you're not. So, for instance, credit cards do not use the degree of risk-based pricing that peer-to-peer loans do. So if you get a Chase Freedom card or whatever, generally everybody with Chase Freedom cards are going to be paying the same rate.

So I have a Chase Freedom card, and I think it's 14%. Now, I never hold debt on that instrument because who wants to pay 14% on their going out to eat? So I always pay it down every month and just use it for the rewards. But let's say I was holding-- and my credit score is, I don't know, 770 or something.

I'm still paying 14%. And if my credit score dips down, I'm still going to be paying 14% on that thing. And let's say I'm holding $15,000 of debt on my Chase Freedom card. If I would want to reconsolidate it into a peer-to-peer loan, chances are--well, I already know what my rate is because I took out peer-to-peer loans-- but the average person is going to be moving that to a peer-to-peer loan that's at 9%.

So that right there is a pretty good example that just because you have a good credit score does not mean you have low interest rates on your credit cards. Now, you are correct in the sense that those premium, low APR credit cards that are only given to people with excellent credit, those right there aren't available to people with subprime credit scores.

Right. Of course. Yes. So in that sense, is there a huge incentive to reconsolidate a 9% Chase card down to a peer-to-peer loan? I mean, if you're moving from a 9% to a 6.7%, I guess, but that's not going to be as much of an incentive. Right. And you make a good point about the 0% being available only-- I mean, it's really only available to somebody with a prime credit, and it's not available when you're in a distressed situation, even.

So I guess that is true, and this is where my personal experience blinds me a little bit, because usually I've found it generally easy if I needed to take out a 0% credit card with no interest due for 18 months and low fees on a balance transfer or something.

I've always been able to find something like that. But then again, there's only one or two of them offered. I always use these sorting programs. I know--I can't remember--you just search 0%, and a couple of these sites specialize in it. They sort them out, and there are really only a couple of cards offered.

So you make a good point. I have cards that, yes, I use them for the convenience, but I would never carry a balance just because the rate is a high rate. If I needed to carry a balance, if I were anticipating that I needed to finance something and use a credit card to do it, then I would go out and I would get a special card just for that purpose.

Most Americans don't have the foreknowledge to do that. They just say, "Hey, all of a sudden I ran into a medical problem. Let me put this on that Chase Freedom card that I've been putting my bonus points on." Right. And that's one--so you mentioned about medical debt. That kind of scares me a little bit because I would rather-- if I have medical debt, I would rather owe the medical provider directly because I think they're probably more likely to work with me if I have a payment problem than the card company.

But I also know the medical finance business itself is changing, and a lot of the--I've heard and read some reports about how that business is changing, and a lot of the hospitals and doctors are experiencing that. So I guess I would probably rather somebody owe their local hospital a debt than a lending club debt, but I don't know.

Do you have an opinion on that based upon your experience? I mean, it's all about the vehicle for me. So what's the interest that you're paying? What are the payoff terms? How flexible are the people on the other end of the phone? That's the question that I would ask.

Right, right. And I mean, that's a good point. So if somebody's interested in pursuing peer-to-peer lending as far as for their own--they're deep in debt, they're trying to figure out-- because here's one of the things--I don't think financial shows and financial people spend enough time talking about. Getting out of debt can be a good thing.

And is it always a good thing? Well, probably. But getting out of consumer debt is probably always going to be a good thing. If you have debt that was for the purchase of things that go down in value, that's almost universally problematic and you need to get out of that.

Ultimately, interest rates are not usually what makes a difference in that situation. Focus and decision and a plan and intensity is what makes a difference. But there's no reason to pay high interest if you can refinance it. So at every step along the way, you should always be looking at the cost of debt and figuring out if you can refinance it at a lower rate.

So I think anybody who has debt, you should always be looking for more favorable terms and a lower cost to the debt. If I'm interested in seeing if I can refinance my debt at a lower rate, where do I start? Other than obviously through your affiliate link on your site.

The main thing that I'm really interested in is getting people under a lower interest rate with better terms. In my book, there just doesn't exist an unsecured line of credit as great as peer-to-peer loans do today. They're just great. On the other hand, for instance, my brother just recently redid his kitchen.

The easiest vehicle for them to put that debt on was their credit cards. So they all of a sudden had, let's say, $10,000 on their credit cards. And he says to me, "You know, Simon, I'm really interested in getting a peer-to-peer loan. Is that a good idea?" And I said, "Yeah, definitely.

It sounds like a great idea. It sounds like you should not be carrying this debt on your credit card." And home repairs are the largest category in peer-to-peer loans outside of debt consolidation. And then my dad, who just had this--he just said, "No, that's not a good idea." Well, that's not bad, but a better idea is, you know, you have this great house that you have.

Like, have your house have a new--what is it called when they do a reanalysis on the worth of your house? Estimate or whatever? Appraisal. Appraisal. And he was able to actually move that into part of his secured debt with his mortgage. And the interest rate on that is much, much lower, right?

So I was like, yeah, that was--so there you go. That would be a good reason to not take out a peer-to-peer loan. Like, if you have a house that's worth more than its current mortgage and you can move that debt into-- now, this is not financial advice. I just want to put that caveat out there.

I'm saying that there are better instruments out there to carry long-term debt than peer-to-peer loans, but as far as unsecured lines of credit go, it really is hard to beat peer-to-peer loans. It really is. Maybe you could do--and the thing is, you could probably tweak them through and combine them in some way.

So let's say, for example, somebody's doing some renovations on a house, and they're doing that, and the purists are not going to like this conversation when you get into the purists of debt. But just ignore all that and just focus on figuring out a way to kind of hack the system.

Let's say you did something like a Lowe's credit card or a Home Depot credit card where they give you the discount on the purchase, and so you get--let's say they're offering a 10% bonus of 10% reduction, but where you get screwed on that is the high finance charges. So maybe they have a high finance charge of 12%.

Well, you can turn around, and you can refinance that over onto a peer-to-peer loan, and maybe you can drop it to 7%. You do your repairs, and then you build the equity in, and then you can go ahead and get the house to appraise, and you can refinance the house or sell the house if you're doing real estate investment, something like that.

So maybe you could use this as a tool, and you can stack the discounts, get that 10% Lowe's credit card that gives you the 10% off, but then refinance it out using this as a simpler way to do it. Yeah. You know, personally, that's just a little bit too much debt ninjitsu that I'm comfortable with, but I can understand--that sounds like a great thing.

For instance, I've never built a $20,000 house renovation that would increase the value to the degree that I can increase my mortgage and push that debt into a low 2% whatever, a fixed-term mortgage rate. But I think that sounds brilliant, in my opinion. Are there any fees for taking out a peer-to-peer loan?

There's a fee--it's called the origination fee, and it's baked into the APR. So, for instance, the actual interest rate for excellent credit at Lending Club is 6%, 6.03 or something. And then with that origination fee put in, it's around a 6.7%. So there is an origination fee, and the way that that's charged is when you get the loan-- let's say I take out a loan for $10,000, and the lump sum that would be put into my checking account a number of days later would be minus that fee.

So I would get, let's say, $9,600 or $9,500 in my checking account. So the fee is that they'd simply reduce the loan by a certain percentage, and then you pay off the full amount. Okay. So you would have to actually calculate it, but what I was going to compare it to is in the scenario that I just made up.

Take out a Lowe's credit card, 10%, put $30,000 on that. The problem with switching that over to a credit card is unless you could--a lot of times a balance transfer in the credit card world will come with a 3% of the balance fee up front. Even though it's 0% interest, it's 3% of the balance transfer fee.

They're sometimes available, but it's unusual to be able to get a 0% balance transfer fee. So maybe flipping it over to a peer-to-peer loan, if the origination fee is lower--let's say you had $30,000 on the Lowe's credit card. Well, even at a 6% interest rate--so that would be $1,800 a year--divide that by $1,200, that's $150 a month.

So let's just say you flip it over onto that and you carry the debt for six months, and then you're transferring it to another debt instrument of some kind. Then it would be cheaper to do it because of the no prepayment penalties and because of the low origination fee.

Maybe it would be cheaper to do it with peer-to-peer than with the credit card system. Yeah, of course you'd have to run the numbers for your particular situation. But I think what you said sounded really creative and it sounded like it would work to me. Right, then you could maybe hack it with gift cards and get another 10% off if you can find them.

There's some fun things that you can do. What's so challenging--and I constantly feel bad about this, and we're going to move off of the borrowing side and move on to the investing side-- but what's so challenging is that it's so cheap in the U.S. American context. Relatively speaking, our financial system really does work pretty well for the majority of people.

You travel abroad, and it's just astounding how--I have a big interest in micro-lending and micro-finance and the major gains that have been made in that over the last 10 years. And it is stunning when you start to talk to people about how the credit system in the rest of the world works.

It's usurious and it's criminal as far as just how it works. But in the U.S., it really works pretty well, but it really only works pretty well for people who are able to plan ahead. And that's the problem, is that most of us don't really plan ahead, so we're always at the mercy of whatever is going on, and we pay for the convenience.

Yep, correct. Okay, on the investing side, if somebody is interested in--let's phrase the question like this. I've never invested in peer-to-peer loans. Sure. Sell me on why I should consider it. Again, it's all about the interest rate. So that's because the average company--both of these companies have such a thin profile, they have such low operating expenses.

They're able to push--the average rate of a loan at Lending Club and Prosper is something like 10%. So that means they're able to push that interest rate, for the most part, onto the investor. And you or I would love to earn something like 7% on our investment. That would just be amazing.

So that's what I do. Now, I lend to the riskier segments of prime-rated borrowers, so my average credit score is going to be something like 680, 670. So I'm earning something like 10% a year on these things, but the average person is earning between 5% and 10%, and that's just--and it's incredibly consistent.

So in 2008, the S&P 500 lost a third of its value, and peer-to-peer loans still managed to give investors a positive return. And that is because prime-rated borrowers are just an incredible investment who are less correlated with the ups and downs of the stock market. So it's just a wonderful investment.

That's the main reason to do it. Well, basically what you're doing is you're investing in one specific business, for which business--and you're taking the place of the bank, instead of dealing with a larger market where that's subject to many external influences. So I guess where I--I would have to figure out as far as how to account for risk.

So I guess the primary risks at this point is primarily default risk. Are they still doing the thing where you choose the loans and you go through and you choose that somehow? Sure. Let me give you--so here's the official list of risks within this thing, okay? The main thing is exactly what you just talked about, and that is an excess rate of defaulting borrowers.

So the majority of people who become investors in peer-to-peer lending and then go on to have a negative or poor experience are really people who are not diversifying across enough prime-rated borrowers. So if you can, for instance, diversify across 200 prime-rated borrowers or more, like 99.9% of those investors have had positive returns, and 99% of them are having returns between 5% and 10%.

So the main way to kind of not be at risk for borrower defaults is by diversifying your account across enough people, and all of a sudden you start to mirror the asset class as a whole. Rather than trying to beat the market, it's really important to try to diversify.

And we really hammer that over at LendingMemo and throughout the peer-to-peer investing community at large. The main word said over and over and over is "diversify, diversify," because that's the main source of headaches for people who have a negative experience. Now, that said, there's actually a couple scenarios where the market itself could experience just on an aggregate level a large number of defaults, and investors on an aggregate level could start to lose money, similar to what Prosper did when they first came out.

And that's if there's a couple different things that could happen. Probably the one that most people are kind of leery of is the credit models of these companies. So if they're saying that they're issuing to prime-rated borrowers, but actually, you know, they're issuing because they're under pressure to give loans to more and more borrowers and to grow the bottom line of their company, they could start issuing to people who aren't necessarily as prime-rated as their-- they could lower their credit standards, right?

And so us as investors, we would just blindly hand our cash over, and all of a sudden we have all these defaults happening. And it's because the companies, without our knowledge, were lowering the credit standards that people were lending to. Now, thankfully, all the open-- all the data for these companies, all their historical loans, all the loans that they are issuing, all that data is completely open for public scrutiny.

So there's lots and lots of people who are on a-- very statistically proficient people running their own credit models, scoring the loans that Prosper and Lending Club are issuing month by month, and keeping an eye on the credit quality of these companies. And so as a result, if there was ever a beginning of lowering of credit standards, everybody would know about it pretty quickly and could start to draw down their investment.

But both of these companies are really committed to a prime-rated approach to the-- to issuing this debt. So as a result, it's really unlikely that they would start to lower standards. I just don't see that happening. Is there more investor money coming in than desire for loans, or is there more of a desire for loans than money can be found right now?

There's so much investor cash from institutions, from major banks, and they are struggling to find borrowers. So it's-- I mean, hey, when I say struggling to find borrowers, they're still issuing a billion dollars every quarter. So it's not-- you know, but that's kind of where the pressure is felt, is-- and so, for instance, Lending Club purchased Springleaf, this medical billing-- medical loan company.

They largely-- it looks like they purchased them because this is another source for them to be able to find additional people to lend to, because there's just so much investor demand and there's less borrower demand, which is interesting because that is actually opposite from how this thing began. Back in the day, they had all these people who needed loans.

They're just typing the word "loans" into Google, and boom, Lending Club has the very top result for that. And they couldn't get borrowers to fund it because they were pretty unproven as a company back then. But now they're improving, and everyone's jumped in the game, and they can't find enough borrowers.

So it's kind of interesting. So do both of these companies on the investor side, do you still go through-- and I've seen screenshots. I've never had an account with either of them, but I've seen people's screenshots on articles where you kind of go through and read this borrower story and read that borrower story.

Do they still do that as far as go through and look at individual borrowers? That's a really great question. So back in the day, that was the big-- that was kind of the romantic selling point of Peter P. Lending, is you could go in and you could "get to know" the people you're lending money to.

But we actually found out that that was-- again, you have to realize, Peter P. Lending has really romantic beginnings and is actually in a much more mature and realistic place today. So what we thought that would do is connect people to people and kind of create this organic connection and allow-- you know, oh, I don't want to default on my payments because this guy that I know lent me this money over the internet, and I really like him, or something like that.

Now what you have is if you want to see the non-personal information of your borrowers-- so if I want to go into Lending Club right now, I can open up my investment, and I can look at each individual loan that I've issued, and I can look at the people and look at the credit attributes of them, I can look at how their credit scores change, I can look at what city they're from.

I mean, pretty-- everything that's not personally identifiable information is all laid bare for me to look at. But the fact of the matter is, I don't even look at that stuff anymore, because back in the day, the credit models weren't as tight as they are today. So you could kind of game the system by filtering these giant pools of loans and lending to particular people here or there, but by now the credit models are so tight, and in fact, what people have gotten in trouble with is they go, oh, you know what?

I don't usually lend to people who are having an F-graded or a G-graded loan at Lending Club, which is on the riskier side, but you know what? I'm reading this borrower description, and he really seems like a "nice guy." Let me invest in this money, and then surprise, surprise, the guy got-- he defaults three or four months later, and Lending Club is sitting here going, "We rated this G.

You should know that this has a very high chance of defaulting." And the guy who's reading the story is going, "Yeah, but I really liked what he wrote in his description." So back in the day, we really wanted to read these descriptions because it gave us kind of a personal feel to who we were investing to.

But now we've really realized that trusting these credit models, trusting the statistical analyses of these people's creditworthiness is actually the very best way to have a good investment. So, for whatever it's worth. All it sounds like to me, as a layperson, is just simply the development of a more efficient market.

And this is what people who talk about efficient markets don't recognize, that markets are usually inefficient, and then they become efficient over time, and then once they become efficient, then people go to other markets and look for other inefficient markets where they can make more money. And then, that's just what it sounds like to me.

So, if you say diversification, it's surprising to me. Do the companies offer just where you can say, "I want a diversified set of loans of 400 loans with my 20,000 bucks," or whatever, where you can just click it and buy a package of it without going through individual screens?

That's the main thing they want people to do. So, back in the day, it was all about the "get to know your borrowers." And now, if you go to Lending Club and Prosper, they don't really care about that as much. What they want you to do is pick up, amass a large number of loans.

And so, for instance, Lending Club right now, they have two different main investing areas. One is just dump a large amount of money into a diversified portfolio of loans. And on the other hand is this automated investing tool, which you set up the grade. That's the risk that you are choosing.

So, the grades go from A to G. A are the safest. At very small default rates of 1% or less. Then, G-graded loans have a default rate even of something like 13%. So, there are these--you can choose your risk there. But you simply choose your risk and hit a big blue button, and you don't even have to log in.

You just passively earn between 5% and 10%. It's amazing. So, I've been passively earning 10% on my IRA for the last two years or more. And it's a phenomenal investment. I wish more people would be involved in it. Well, the problem is, as more people get involved in it, that's going to drive down the yield on the loans.

So, you can't expect to make the same amount going forward as you have historically. Because the returns that you get, the way I view it--and feel free to disagree. I don't mind it a bit. But, historically, when you make an investment, you are going to price your investment--as a bank, in a situation where you're not making--what analogy to use?

When you make an investment in something, you are going to price your investment based upon the risk that you're taking with your money. So, if I'm going to lend you money, and you're going to start--the example I used to use with clients was, "If I'm going to lend you money, and you're a risky borrower, I'm going to charge you a higher rate of interest." Because the problem is that if you borrow the money and walk away, I'll lose my money.

But if you're an established borrower, then I have a better chance of knowing your character. But as more money comes in, and more money flows to that-- so, Lending Club and Prosper and peer-to-peer lending, if it's this new, since 2000 and about five, this is a very short history.

And now, as the institutional money just flows in, now there's more money than loans. And because there's more money than loans, that's going to drive down the returns. Yes and no. So, there's two things going on here. And this is what I'll say next is probably more my opinion, because some of this is speculation.

The reason that they have kept investor yields as high as they have is to make sure, make sure that they have a consistent investor base upon which they can build borrowers. So, what you've had is you have all this investor demand. And you think, naturally, if this was a pure marketplace, they would simply lower interest rates from 6.7% to, let's say, 5%.

And they would get even more prime-rated borrowers than they ever have. Right. And so, that would be an efficiency that's probably coming in the future, I would say. Now, that said, they still need to maintain a consistent flow of investor capital. They need investor money to be flowing into these platforms.

And the best way to do that is to keep returns, or to keep these interest rates consistent. And so, as a result, what you have is you have all this growth month over month. You know, like, again, I don't know if people realize what that means, where Lending Club is issuing a billion dollars in loans maybe every two or three months now, which is an amazing amount of money.

That is happening even with a slightly inefficient pricing model for their investors. Right. So, yes, they do have an incentive to lower interest rates and get more borrowers at some point. But they have such growth, such phenomenal growth, that they don't have a huge incentive to do that right now.

Now, at some point, I personally believe that this market is going to level out. They're going to have a much more consistent, maybe more normalized baseline of debt consolidators that are happening instead of this crazy wild growth that they have today. And when that happens, a very mature thing for the market to do is readjust and allow interest rates for investors to go down from the 5 to 10 percent that they have today.

That said, let me just emphasize, let's say they go down to 4 and 9 or 3 and 7. Earning a 5, 6 percent interest rate consistently year by year is still a great investment. A great investment. There's incredibly low volatility. There's decent liquidity. I mean, it's just a great way to invest.

And, you know, the uncertainty of investing in the tumultuous stock market compared to the consistency of prime-rated Americans, consumers, is just night and day in my opinion. So, yes, today I'm earning 10 percent, but I would still, if I earned 5 to 6 percent on this investment, I still would do it.

It's a great way to put your money to work. Right. It'll be interesting to watch as the market develops, because to me that's the big takeaway. If I were going to get involved in investing in these types of scenarios, I would just be watching it very carefully and just paying a lot of attention to it as the market develops.

Because it's such a young market. I mean, there are many things that could happen. That's right. Yeah, and if I could just interrupt you. Just to finish off, you know, earlier we were talking about what are the risks involved in this thing. And so I just want to make sure that people know that there's these excess defaults that could happen.

So, like, if you're not diversified, if the credit standards of these companies would die or would be degraded. There's also the case of national unemployment or some sort of macroeconomic factor. So let's say the national unemployment rate balloons up to 20, 25 percent. You know, prime-rated borrowers are going to be struggling to pay off these loans.

Right. So the default rates could go up on that end of things. And investors do need to be aware of the fact that it's possible these companies, Lending Club and Prosper, could go bankrupt. And if they go bankrupt, they have all these backup servicers that would still allow the money to flow from these issued loans back to their investors.

But there's just no precedence for that happening. So in a worst-case scenario, you could have, you know, somebody, you could have them trying to settle their debts. And they decide to, you know, take a whole bunch of investor, these loans, and use it to settle debt with their creditors.

Now, Prosper actually has set up a bankruptcy remote vehicle that, in the case of a bankruptcy, that portion of their company that holds the loans, it actually separates off from the rest of their company and makes that debt harder to use. But, you know, so understanding that these companies could go bankrupt and that could be a scenario that could impact the investor experience, that's another risk that investors need to be aware of.

And also, I personally would be very uncomfortable, although on a macro scale, we compare, we do, we can, we do, and we should compare all of our investment opportunities one with another. But I don't know what asset class peer-to-peer lending would fall into, what it would be most akin to.

In fact, before I make my point, as far as now that the institutions are coming in, the analysts and whatnot, do you see any consensus coming in as far as how, on the institutional side, the portfolio managers are trying to classify this type of investment? I do. So I was just at this big securitization conference down in Miami last month, and then again at the American Banker Conference, had a peer-to-peer lending conference two weeks ago, I want to say, in New York.

And they have the exact same conversation that's going on as, do we classify this as a fixed income investment or as an alternative investment? And as you maybe are well aware, big, huge hedge funds, the portion of their dollars that go towards fixed income versus alternatives is night and day.

And alternatives are usually a very small slice of where they put their cash to work. But actually, peer-to-peer lending is a fixed income investment. You have a very consistent, the money that's coming in doesn't change, it's fixed. It's actually classified as fixed income, but it doesn't have the liquidity of a traditional fixed income.

So this has been a struggle for most of them to go, OK, what do we do here? And the general conclusion is it's just its own category. It's not an alternative because it doesn't have the incredible yields that a lot of these alternatives have. But it's not necessarily fixed income because it doesn't have the same liquidity.

So what bucket do we put in this? And so what we see people doing is we see people going, oh, well, let's invest in a portfolio of peer-to-peer loans, like let's say a big hedge fund in New York. They'll say, let's invest a couple million dollars in a peer-to-peer loan portfolio.

And they'll put it in a bucket, but that percentage will be taken out of their fixed income bucket. So what they'll do is they won't put it in the fixed income bucket, but actually the percentage of their fixed income will be lowered by whatever their investment in peer-to-peer is.

So it's just a really interesting thing. There isn't necessarily a good category for what this is right now. Right. It's interesting. And I don't have, in today's conversation, I don't have a long prepared list of thoughts and specific thoughts about this. So I'm kind of doing this on the fly.

But the interesting thing about it, an investment manager, a portfolio manager is always looking for a non-correlating investment. And so the holy grail is if you can have each investment class has its own risks, and those risks are unique to that investment class. The idea is you don't mind if different investment classes go up and down at different points of time.

Everything goes up and down, but it would be nice if you could predict what goes up when something else goes down, and then you can hedge your portfolio or you can try to move among those. The problem, I think, with peer-to-peer and why I cringe a little bit, not that it's necessarily wrong, but I get a little uncomfortable when you compare it to equities, to the stock market, is that the risk scenario is very different.

And that it sounds just on a gut level that the risks of peer-to-peer lending is much more akin to fixed income investments. And the three things that I can think of as number one, the big glaring risk, is you have a prepayment risk. And so the biggest risk that you face, although we have default risk, which we've covered already, and that's kind of the third thing on my little three-part tree here, but one of the biggest risks that you face is prepayment risk.

And to illustrate this, I would talk about it with the example of mortgage companies. So when you as a borrower have a mortgage, then generally with mortgages, most mortgages nowadays have no prepayment penalty. So at any point in time, you can turn around and you can pay your mortgage off.

And this is what countless people do, is that as rates decrease, they refinance their mortgage and they move that debt to another place. Well, that's a real problem for mortgage investors because when their loan is paid, now they've got this cash and they have to figure out where to invest it.

But now they have to reinvest it at lower rates. And this is a reinvestment risk. And this actually, in my limited understanding, definitely influenced some of the developments over the last couple of decades with some of the derivative instruments, the mortgage-backed securities and some of the derivative instruments to help some of the institutions to be able to better deal with this prepayment risk.

But this is a problem with a peer-to-peer loan from what you've described to me, is that if I've invested in peer-to-peer loans at 7% and interest rates decrease to 4%, well, then my whole portfolio is going to be paid off. Not the whole portfolio because individual borrowers are going to – maybe somebody shot their credit and they can't fix anything.

But I have the risk of those loans being paid down. So that's a big risk that most people are, I would say, not accustomed to thinking about in an investment portfolio. The second aspect to it which makes it unique is that you know what your maximum yield is. If you make an investment at a 7% interest rate, you make a loan at a 7% interest rate, the most you're ever going to get from that is 7%.

That's right. But it could be zero. And so this is very different than a stock investment where you're not generally limited to a certain upside. And although your downside is certainly zero, you're not limited to a certain upside. So you're capped out at whatever you are. But in case of default, the risk could be zero.

So the maximum as far as your risk scenario, if you've made loans at 7%, you shouldn't be planning on anything higher. It's only going to be lower as you get other scenarios involved. So it's kind of a different – I think it's a different animal than most people are accustomed to because most people are not accustomed to investing directly in individual bonds.

And so it's probably a new investing environment. Yep. Go ahead. Well, I just – so those are great points. And I would never – I'm not one of these people that believes peer-to-peer lending is some sort of holy grail that doesn't have its own problems or issues. I will say that on an aggregate level, these things have been accounted for and they have been – we've been watching them and it's not been a huge adjustment.

So, for instance, let's say like borrowers prepaying their loans off. I do lose – like I have – I've loaned to thousands of borrowers – I've loaned to 1,000 borrowers now. I currently right now over 1,000 active borrowers who I've lent money to. And they all the time pay off their loans early.

And I earn a lower return when they do that, right, because the first month of their investment is a giant grace period. So I don't even earn – I don't get any money interest during that first 30 days. And a lot of them pay it off very early and I basically have money tied up for 30 days and I don't earn any interest on it.

So – and then when it gets paid back, it doesn't – there's no penalty or anything like that that I'm earning on that prepayment. So, yeah, there – borrower prepayment is – it does affect the account negatively. It does affect the returns negatively. But on an aggregate level, it's really – it's not a big deal.

Like I – majority – 99 percent of investors who are diversified continue to earn really great returns. And this is with defaults. This is with prepaying borrowers who are dumping the loan earlier than we would wish. And that's totally okay. I feel really comfortable about that. What was the second thing that you mentioned here?

Real quick, the second thing I mentioned was the maximum upside asset. But be careful, though, in what you're saying. And I don't disagree with you. I mean that is your experience and you're making money off of this and I haven't. But notice also the economic environment that we've been in as this growth has happened.

So we're in a time of what most people would say is artificially low rates and rates really haven't adjusted. That's very different than if we were coming – let's say that fast forward, I don't know, five, ten years, and we're in a situation where inflation is trucking away at maybe 5 percent or 8 percent or 4 percent or 6 percent instead of 1 percent.

And you're in a situation also where the average interest rate is much higher. And so now people are going in and they're lending at 14 percent rates on their lending club, feeling good about that. But then the Fed pushes rates down, rates drop across the board, everybody refinances. Well, now your investment portfolio changes.

So part of that, the non-prepayment, might be the fact that your experience over the last four or five years has been in a very low interest rate environment. Yeah, I think that's possible. But I will say that there's a lot of people who have looked at the numbers for how would peer-to-peer lending adjust if we're not anymore in this low interest rate environment that we're in today.

And it still looks to me that this is a great investment, even in that higher scenario. Let's say the interest rates of your bank account would jump up. What are they at now? Like 0.25 or something like that, right? Right, right. If they would go up to... About nothing, point nothing, as I say.

Right, nothing, point nothing, right. I bet Peter Barron's actually of the company, I want to say, Rate Setter, he calls these zombie bank accounts because they actually earn less than inflation. Anyway, clever. But let's say the interest rates would jump up to 5%. I'm not going to be as interested in earning a 5% return in my peer-to-peer lending portfolio when I could earn 5% risk-free in an FDIC savings account.

But on the other side of things, earning a return of 9% or 10% like I am today is still a great option. And yeah, there are investments that return better than that at different times. But what you do have is, what was I saying? Again, in an economic downturn, like the stock market dumping really far as it does, you see something like peer-to-peer loans being much more resilient.

So, personally, earning a 9%, 10% return in an investment that has such resilience in an economic downturn feels to me like a no-brainer. And so, what's interesting when you talk to the management of this company, they talk about how peer-to-peer lending is a good investment today with the market booming, but when it's a really good investment is when the market tanks.

All of a sudden, you get all these people who jump over to peer-to-peer loans going, "Boy, why have I been putting my money in these giant aggregate corporate index funds when I could be putting my money in an aggregate of individual responsible borrowers who are much more steady in these times?" So, I don't know.

We'll see. I would never say you're insane not to do this or whatever, but I just think this is a solid investment. And I think that in the years to come, it'll prove itself trustworthy. Right. And I think that you will, I mean, my bet, just based upon what we've talked about today, is A, you are being compensated for the risk that you, as an early adopter, relatively early adopter at least, I don't know how far back your history goes, but you're being compensated for your risk, for taking a bet, taking a gamble on the initial market, and that's how it should be.

And then number two is that probably things will shake out over time, and if the technology continues, what'll happen is that the market itself, the lending market, will have to adjust. And when the credit card, because I ran the numbers, and if you said that Lending Club issued $5 billion and you said $850 billion is the market pool that at least some of the companies think their target market is, that's just under a 6% of the market.

So relatively speaking, I think that's enough to make people pay attention, but relatively speaking, it's still not a big player. But, you know, fast forward a couple years maybe, and if it's 25% of the market, it'll be awesome to see how everything shakes out, and I think consumers will win.

So it's a really exciting development as far as additional competition in the market. I think you had some comments on my other two points, two and three, of maximum upside is set, but the maximum downside is zero. I mean, the downside could be zero. Did you want to make any more comments on that before I ask you my final two questions?

Yeah, sure. I mean, let me just say this, that a prime-rated A-grade peer-to-peer loan, yes, it does have a maximum, you know, let's say it's 6.7% that you're issuing to borrowers, and 1% of that goes in fees to the platform. So that means on a maximum level, you're going to earn 5.7%, and then there's going to be a small rate of default.

So that's saying, you know, the very, very maximum you would earn on an A-graded loan is going to be something like 4.5%, 5%. So, yes, there is a cap to that that you, you know, don't have in something like an investment in the stock market. But in my opinion, considering most people who are investing in the stock market aren't looking for more than a, you know, I don't know what you are, but like a 5% to 10% return, that feels like what most people are looking for anyways in a normal investment, right?

Well, if that's what they're looking for anyways, why try to shoot the moon, right? Most of the time when we do that, we actually get in trouble. So when the average peer-to-peer lender who's diversified is earning 5% to 10% in an investment that is so resilient in an economic downturn, it just feels to me like that interest rate cap feels like a very tolerable reality.

It feels fine to me, so. All right, all right. Well, it'll be fun to see how it develops. Yeah. I want to ask you two questions. And the, are you familiar with the concept of, I don't, and I don't actually know what to call them. I wanted to do a show on it, but the only one I know of is the Haitian word.

But I know that the Spanish, some Spanish people have and some other ethnicities, some of the Asian ethnicities have a similar scheme. Are you familiar with the idea of some of these like ethnic savings groups? So I know in the Haitians, I think they call it a soul, where basically every month each family, you know, let's say you have 10 families comes together.

And every month each family contributes $100. And then each month one person in the group of 10 families gets the $1,000. And so that they can take it and deploy it. And then it goes around and around and around. Are you familiar with that concept? No, I haven't heard of that.

But I mean, I have. So I lived in Africa for three years and I really came to just appreciate the indigenous approaches that they had to, I mean, nobody had taught them how to do some of these things. And they had incredible ways to save cash. And, you know, so I have a lot of respect for a lot of these different approaches for people.

Yeah, it's a pretty cool, it's a pretty cool model when you actually, I didn't understand it at first. I had a Haitian client and they told me I'm putting, I think it was like $900 a month or $1,000 a month into this plan. And I said, like, what is it?

How does it work? And they explained it to me. And I think the the Creole word for it is soul. But I'm not sure. I know others have had it. But yeah, it basically works like that so that people who are not able to go and borrow money from a bank necessarily still are able to get the influx of a large amount of cash.

So you're the idea is that having $100 a month when you're when you're pretty strapped, it's tough to accumulate enough cash to go out and make some of the big purchases that can make a difference. But by contributing it each month, somebody gets the thousand dollars, then they can go ahead and make their bigger purchase.

And so what I'm hoping is that maybe some of these kinds of that that concept, I was thinking maybe some of these lending club type of things can help take that to a. Frankly, I'm not sure my point with it, but I was thinking, add more technology to what some of the ethnic groups, savings groups actually do themselves, maybe add some technology to help it out a little bit.

Absolutely. I mean, what we're having is, I mean, again, I just want to say Lending Club and Prosper are the only peer to peer lenders that exist today. And I know I have if there's any marketplace lender management who are hearing me say that they're going to be upset at me or whatever.

But, you know, on an on an average American to average American investor borrower relationship, they're the only ones who exist today and they don't necessarily have something creative like that. But what you have is you have lots and lots of companies, dozens of companies who are in the work to launch and become national staples.

And they're trying all sorts of models of borrowing and lending in different terms, in different debt instruments. So they're all they're trying so many different things. And so that's what's so beautiful about innovation and technology is I wouldn't be surprised if, you know, this particular model of Lending Club and Prosper works really well.

But you know what? Give it 20 years and you're going to have some really interesting different ways to invest and borrow money over the Internet, which are going to take advantage of all sorts of different creative models. I'm really interested to see what happens and what changes in the coming years.

It's really exciting. And I'm interested in hoping that maybe some of this can also go international because there are places in the world where lending, I mean, to borrow money, you're paying 50 percent interest. And that's not in any way an exaggeration. So hopefully with the Internet, perhaps some of the companies can figure out and can pioneer a way to price the risk appropriately and figure out how to work in some of the new markets.

And maybe that'll open up new markets where money can flow into places that traditionally have to deal with usurious money and interest rates. And that's what I hope one of the market changes I hope comes out of this. Beautiful. I'm going to put you on the spot with a question because I actually have a concern about this as far as with those of us who are in the finance, talking to people in the public about finance and financial blogging and financial things like that.

And I'm going to ask the question because I want to raise it, but hear me out so I can give a few details to make it fair. You write an excellent site called LendingMemo.com and all you talk about is peer-to-peer lending. And it looks like you have some good articles, you have some video courses, you have a book.

So that's really, really awesome. One of the concerns I have is that in the financial, kind of online financial media space, we have actually gone toward the affiliate commission model as this most straightforward way of making money online, talking about money. So I feel when I wander around the online space, I feel like the standard thing to do is to write some blog articles about financial topics.

And then you need to do a review of personal capital, and then you need to do a review of Betterment, and then you need to do a review of Mint, and then you need to do a review of Lending Club and talk about your new Lending Club investment. And then you need to do a Blue Host review of how to launch a blog, and you need to put your eight affiliate links so everyone can go and get rich doing what you're doing.

And I have no problem with affiliate links. I love affiliate links, and I actually, when people give valuable information, then I go and I actually look for their affiliate link and try to buy stuff through them so that they can get compensated and they can get value for the work they've done.

But I feel like in a sense that it's almost gotten, especially in this peer-to-peer world, it's gotten a little bit out of hand. It's like every financial blog is talking about, "Hey, here's my Lending Club experiment. Who can make more money with Lending Club?" Sure. Explain how the affiliate programs work for Lending Club and Prosper, and just let people know so that they can be aware of that, of how the programs work for the people who have set themselves up with affiliate relationships like you have.

And again, I'm not mad about doing it. I think it's a great thing. But I just want you to explain how they work for people. Affiliate relationships on any sort of level, it's kind of like the new way to create, to drive people to find out what they need.

So, for instance, if you are looking for a credit card, like Credit.com. Credit.com is a great example. They have Hillary Clinton is written for Credit.com. I forget the Republican senator from, I forget, the House guy, he's written for Credit.com. So they have all these authoritative people who write for the site.

And then at the same time, if you need a zero balance transfer or something like that, they have links there and they earn revenue off those links. Right. So just getting it, having to be able to create people, to bring people to these products through your website is just a really great way to say, "Listen, I am Credit.com.

I have an authority on the topic of credit cards. We write about money. And so if you are going to sign up for this, this right here is a good product for you and this is one of the ways that we pay our bottom line or whatever." With peer-to-peer lending, it's exactly the same way with lending memos.

The reason that we are a successful website is not because we simply churn out 10 ways to cut your bills or something like that and some sort of thin content. We strive to produce high quality authoritative content on this topic. And as a result of that, when people say, "Hey, we really want to look up a review of Lending Club and see how this investor experience goes," somebody like Google says, "Well, you know what?

Lending Memo has actually been an authority on all sorts of Lending Club topics. And they're probably going to be an authority on this topic as well." And at the same time, if you go to our site and you look at an article like Lending Club versus Prosper, you'll see that here I compare these platforms head-to-head.

And I actually have some very critical words towards some of these platforms and some of the ways that they do. So one of the things that we really strive to have at Lending Memo is to really not have any sort of bias towards any of these companies. I love peer-to-peer lending.

I don't have as much love for Lending Club and Prosper. I love my commitments. The thing that I am really focused on is the asset class as a whole. And insofar as Lending Club and Prosper support the asset class, I'm on their side. But when they do things like, for instance, right now Prosper is struggling to have more than 200 loans in their platform at a time for normal, unaccredited investors.

There's a ding in my book, and I talk plainly about that in an affiliate article that would link to them. So this is, as you're probably well aware of when you're blogging and writing about these companies online and have an affiliate relationship with them, it's really crucial. And I think Google picks up on that, and people pick up on that as well, is how can you reduce bias while still remaining authoritative on the topics you're writing about?

And I actually feel we're doing a really good job of that at Lending Memo. Yeah, I agree. And the key thing I would say is that affiliates are a great way to compensate people that you want to compensate for doing the legwork of going out and finding products and services that are going to serve the audience.

And it kind of makes me laugh when I – I mean, it's no different than why insurance people sell insurance and make commissions. It's no different why traditionally mutual funds always paid commissions for the sale of them. It often makes me laugh when I see people rail against the fees because I come from formerly the financial advisor world, and I would read people rail against the fees and the commissions that I made as a financial advisor.

And then I read them – I look and I see just the whole link of a set of affiliate commissions, the commission links. And so my point is just simply that people should make sure that on this topic that they are doing their research and that they are fully aware of the risks of being a lender and the risks of being a borrower.

And as long as they've done that, then it's no problem in the world for an affiliate relationship to exist. But just make sure that they do the research. And it looks like you've probably positioned yourself as one of the leaders in this little niche, and that's awesome. And if you have a favorite financial blogger, just recognize that just because your financial blogger wrote one article writing about the returns they've experienced on the $10,000 they invested in their lending club, that's totally cool.

It could just be an interesting experiment. But don't base all of your decisions off of that article. That's right. I mean, at the end of the day, this is an investment, and it involves risk. And so if you're going to get into it, just like any investment, you need to be aware of those risks.

And, you know, again, I would trust less the person who you're hearing this from and look very closely at the actual data and know that you feel comfortable with what's happening. Right. But personally, on my, you know, I didn't start this or do this for any sort of profit incentive.

I do this because I love peer to peer lending. I think this is an incredible investment. It's a beautiful connection organically of people to people, capital flowing between people from people who need it to people who want it or who have it to lend. It's, as Scott Sanborn of Lending Club has said, it's just lubricating the average monetary relationship between people who are just walking around our country today.

So it's an incredible thing that's happening. It's awesome. It's awesome. It really is. It's another aspect to the same awesomeness as what is happening with Kickstarter and Fund Me and some of these other Indiegogo, because it's allowing people to have access. It's breaking down the barriers. In the past, if you needed money, you had to go into your banker on your knees, hat in hand, and grovel on the floor for money.

Or you had to go ask your dad or your mom or your rich Uncle Joe or rich Aunt May. And so the cool thing is that it's just destroying the barriers between people. And I think it's going to be an amazing -- I mean, it's awesome. I love it.

I'm so excited about what the markets that are opening up with all of these things. It's exciting. Well, what I want you to do is to go and put the minimum investments, probably about five grand. I would love for you to put five grand into Lending Club or Prosper and come talk to me in ten months or whatever and tell me, "Simon, I can't believe I was having this gut uneasiness about this thing." And I'm just going to tell lots of people to start investing.

I understand. Especially if you've never done this, it's going to feel a little awkward at first because you're just like, "What am I doing? I'm just lending to strangers of the Internet?" But I'm telling you, ten months later, you're going to sit there going, "Why in the world haven't I been doing this for years?

This is just a no-brainer." You're partly right and you're partly wrong because the problem is that I'm so skeptical that ten months from now I'd be still saying, "Hmm, I think this market could fall apart." "Well, it's okay so good. Is this going to fall apart, this market?" So it would be about 35 years by the time you would get that out of me.

I'm just kidding with you, but in my mind, a year is not going to-- It's certainly not a scam, but it's certainly not without risk, is what I was saying. It's a new market and anytime a new market is developed, there will be hiccups and there will be problems.

And everyone who's involved in that market now should be aware of that and then it'll get shaken out. So whether that's with additional regulation, whether that's with just-- The market will develop, just prosper 1.0, prosper 2.0. You can expect to prosper 9.0 over the coming years as things get worked out, as new competitors come in.

But it is exciting to be on the ground floor of a new market and that's awesome. I'm going to be keeping a close eye on your content and on your site. Anything I missed that you want to mention? No, I just think this is an exciting thing and I would love for people to get involved and start talking about this.

And start talking about this on a more large-scale level. I think this is the future of one of the ways that our country is going to interact with its finances and I'm just eager for that to happen. Plug your books and your courses and your site real quick and let us know what people can find when they go there.

So, basically, LendingMemo is here to help you get started and get educated. So I don't touch anyone's money. I'm not an RIA. But what I do very well and what we do very well at LendingMemo is we just help people understand what is this thing and what are the details involved in this.

So, come on the site, open up a free account, watch the videos, download some e-books, feel comfortable with this thing and try it out. And if you don't like it, no big deal. But I'm thinking that you're going to love peer-to-peer lending and it's a great thing to do.

Awesome. Simon, thanks for coming on today. My pleasure. For me, I feel like I have a little bit of a better understanding of the market. Frankly, I really, like I said in the beginning, have not been involved much in peer-to-peer lending. So, it's a good overview and I'm going to keep watching it.

I'm excited about some of the changes that are coming and I'm going to keep a close eye on the market as it develops. And now that the institutions are getting involved, though, it's kind of the wild west. It's not quite the wild, wild west. That's not an accurate analogy.

But things will be shaking out. So I will be watching it with interest as time goes on. I'll be watching Simon's site, LendingMemo. Go over there, check out some of the resources and information that he has. I think you'll enjoy that. Real quick as we're closing out, though, just one encouragement for you.

If you are a borrower, if you have any kind of debt, consider and keep a close eye on some of your debt. And keep a close eye on how it's structured and consider if lending through a peer-to-peer loan, borrowing money through a peer-to-peer loan, might improve your situation. I can think of a number of scenarios where it really could if you could get a lower interest rate.

Even if it were something like, I don't know, everything like the example that I said about Lowe's credit card, refinancing credit card debt, business debt to start a business, if you need to do that. I could even imagine, I don't know how much of a loan you can take out over there, but I could imagine if you owe $40,000 on your house, but you want to drop your homeowner's insurance because you have enough other assets that it wouldn't be catastrophic if you dropped your homeowner's insurance, something like that.

Maybe then you could switch out and refinance a mortgage away from a mortgage so that you could, and then into a lending, I don't know, a peer-to-peer loan, something like that. Probably usually not a good idea for most people to drop their homeowner's insurance, really isn't, but there are certainly times and places where it does work.

So consider, always look for a way to get lower cost debt with better terms, and you're going to be in good shape. So check out Lending Club, check out Prosper, check out Lending Memo, Simon's site, and hopefully that could be a good resource for you. Have a great Wednesday, everybody.

Thank you for listening to today's show. This show is intended to provide entertainment, education, and financial enlightenment. Your situation is unique, and I cannot deliver any actionable advice without knowing anything about you. This show is not, and is not intended to be any form of financial advice. Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy, and consult them because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions.

Hold them accountable for your results. I've done my absolute best to be clear and accurate in today's show, but I'm one person, and I make mistakes. If you spot a mistake in something I've said, please come by the show page and comment so we can all learn together. Until tomorrow, thanks for being here.

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