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China's Peer-To-Peer Lenders Are Falling Like Dominoes as Panic Spreads
- kawfey 8y agoI was literally just looking into the pros and cons of P2P lending because I hadn't heard of it prior to today. I mentioned on another forum how annoying my student loans are being part mine, part my fathers, and all with high interest rates, and someone suggested P2P lending (such as SoFi). Now I am not so sure.
- toomuchtodo 8y agoI invested low five figures with Prosper, a US P2P lending platform, for several years about a decade ago. The returns are abysmal (and when the Global Financial Crisis hit, I had a bunch of notes go bad because of bankruptcies). Why? Because P2P lending is lending of last resort. It's one step above payday lending. I highly recommend not lending on P2P platforms. As a borrower, it might not be a bad deal if you can't get a loan secured by real estate, or a personal loan, to refinance high interest debt. Depending on your circumstances (debt to income ratio, outstanding debt, available credit, income), you might consider using balance transfer offers that get you credit at 3-5% to make headway on high interest debt. For a wealth of anecdotal, self-reported experiences, checkout Reddit: https://www.google.com/search?q=reddit+investing+p2p https://www.google.com/search?q=reddit+investing+p2p
- pishpash 8y agoExactly. Banks have priced risk much better than you and they refuse to lend. What more do you know? There are some cases where the capital needs are too small for large players to look at, but over all it's a fool's errand to invest in unrated junk bonds as an individual.
- sjg007 8y agoBanks want you to finance via credit cards and run a balance. They know switching costs are high. A credit union might get you an unsecured loan but probably not. Banks are extremely risk adverse to loan even to cash flow positive companies/persons except via credit cards.
- packeted 8y agoThese guys are definitely predatory. I'm a bootstrapped startup founder and I think Prosper caught wind that I have some debt, most likely because I use Credit Karma who I'm sure must sell one's credit information. I now get weekly letters from Prosper and other companies offering high interest loans. Not cool.
- toomuchtodo 8y agoCredit Karma’s entire business model revolves around sharing your credit data with their partners.
- secabeen 8y agoP2P lending rates are low because all rates are low right now. Junk Bond rates are at about 6%, which is right about where P2P lending rates are right now (I've gotten a 5.5% rate over the last few years from P2P lending). The question will be, when the market turns, and junk default rates shoot up to 10+%, what will P2P default rates be? Higher? Lower? About the same?
- walshemj 8y agoIn the uk mine is between 4.1 and 6
- ThrustVectoring 8y agoP2P lending has another pretty big issue with how it interacts with tax law. The short story is that the interest you earn is ordinary income, while losses from defaulted notes are capital losses that do not offset (past a maximum of $3000 in capital losses annually, at a lower rate).
- r00fus 8y agoI got bit by this on Prosper. Until the loan taxation can be resolved you're in a bad space when not incorporated as a lender.
- ThrustVectoring 8y agoYou can invest inside a traditional or Roth IRA, which mitigates everything. But your retirement accounts should probably be heavily biased towards stock market index funds anyhow, so that doesn't really help that much.
- ipsin 8y agoUS P2P platforms seem like a great way -- as a borrower -- to convert your non-dischargeable debt (credit cards, student loans) into unsecured debt. So: great for borrowers, terrible for lenders.
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- howard941 8y agoCredit card debt is generally dischargeable if it wasn't incurred in the 60 days before filing, wasn't fraudulent, and doesn't fall under other exceptions (such as charging your tuition on your credit card). Unfortunately the nature of the original debt carries through to the benefit of the new lender and the debtor still has to file a motion to determine dischargability with notice to the P2P lender if she wanted to discharge student loans converted in the manner you suggest.
- pishpash 8y ago"About 118 P2P lenders have failed in July, the most since 2016" -- 200+ funds failed in Aug. 2016. "Shakeout’s impact on the financial system has been limited" -- because bond holders are individual investors; it will depress future demand, but no systemic risk.
- dtien 8y agoPosted this because having heard of P2P lending before, I had no idea that it had grown to such a large ( scale and scope ) industry. The most recent exposure I've had to P2P lending or microloans is probably Kiva's more charitable based business model. But these new companies are certainly not in that space, as some are charging up to 20% on interest!? Who's taking loans at that level, and who's funding it at that level on this type of trust system?? That had me intrigued, so doing more research, this article goes in depth on the various types of lenders, the borrowers as well as their motivations, and the collaterals involved: https://www.accaglobal.com/content/dam/ACCA_Global/Technical/manage/ea-china-p2p-lending.pdf https://www.accaglobal.com/content/dam/ACCA_Global/Technical... And some top US based companies at the moment: https://www.forbes.com/sites/oliviergarret/2017/01/29/the-4-best-p2p-lending-platforms-for-investors-in-2017-detailed-analysis/#7ccacc1252ab https://www.forbes.com/sites/oliviergarret/2017/01/29/the-4-... Still haven't read enough to form a solid opinion, but it is an intriguing space. I definitely see the value in providing capital and easier access to capital to people who probably never had the opportunity, but the space seems ripe for fraud, manipulation, high defaults, etc.
- xjia 8y ago> 20% on interest Based on what I know, a large portion of the loans have very small amount and short duration. For instance, people want to borrow 1000 CNY for a month and pay back 1020 afterwards. That's already 2% per month. EDIT: The reasons they need such loans are more complicated. Some needs money for emergency. Some uses the money to buy stock/cryptocurrencies... EDIT2: P2P platforms typically take money from the deep pockets and subdivide into tiny loans. They earn the interest rate difference (e.g. 20% from users vs 15% to capital providers). > high defaults Empirically the default rate is very low. People pay back on time if you call or just text them. Honestly if they don't pay, it's totally fine, and the P2P platforms just don't care, because they earn so much money...
- geon 8y agoAnd some are just really bad at managing their personal economy. There is a popular edutainment show here in Sweden about people in difficult economic situations, and at least half of them have taken 15-20 % interest loans for luxury consumption, like vacations and hand bags. It's a freak show.
- NedIsakoff 8y agoThere was the peer-to-peer lending in China with porn, how is that going? :)
- frostyj 8y agoDon't make it sounds like they didn't see this coming. They just simply don't care.
- twblalock 8y agoPeer-to-peer lending pretty much involves lending to people who can't get loans from banks, and the banks are actually pretty good at deciding who is too risky to lend money to, so why should this be a surprise? The only way peer-to-peer lending will succeed is if the banks are overlooking or turning away a large group of creditworthy customers, and so far it doesn't seem like that is happening.
- dragontamer 8y ago> and the banks are actually pretty good at deciding who is too risky to lend money to, so why should this be a surprise? Well, what you say is certainly true in America. But is it necessarily true in China? Those are the kinds of assumptions that may not hold as you cross borders.
- mahranch 8y agoWouldn't it be even more true in China, given the big brother system they have in place? The government (and by extension, the banks) knows more about its citizens than say, the U.S government. Hell, they just issued a "social credit score" to every citizen - it's similar to a financial credit score and just goes to show just how many things they're keeping tabs on. Source: https://newyork.cbslocal.com/2018/04/24/china-assigns-every-citizen-a-social-credit-score-to-identify-who-is-and-isnt-trustworthy/ https://newyork.cbslocal.com/2018/04/24/china-assigns-every-...
- echevil 8y agoThings don't work like that at all in China. Even the basic "financial credit score" is in a very immature state at the moment
- sonnyblarney 8y agoNo, banks in China lend in order to achieve strategic targets set by the government, and for reasons of political patronage. Lending is not fully market driven. This is not necessarily personal lending, it's grey market business lending, so it's not about 'credit scores'.
- pjc50 8y agoAh, a shadow banking crisis, right on time!
- rdlecler1 8y agoI’ve been hearing this since 2011. The Chinese government seems to have an amazing ability to get control over the situation as it always seems to be teetering on the brink.
- duxup 8y agoYeah China either has a situation where they're good at managing it / it is manageable.... or as soon as they can't it will be hyper ugly.
- adventured 8y agoThat's pretending nothing has changed since 2011. It's interesting you pick that year, because that's not long after China's former approach collapsed with the global consumer in the great recession, and they had to switch to gorging on debt to continue faking a high rate of growth. It's also fascinating that China would install a dictatorship right as this switch-over - from organic growth to extreme debt - was occurring. I'd wager the Communist Party is terrified of what's coming socially, and given their overwhelming vote in favor of the dictatorship they think that power is going to be necessary to control the people (they very knowingly voted to clamp down on all human rights in the country by handing Xi that position). Since 2011 they've taken on tens of trillions of dollars in new debt. As recently as 2008 China's debt to GDP ratio was reasonable. Their debt to GDP ratio has drastically worsened since and is very realistically the worst among major economies now (when their immense shadow debt is included it's a certainty). Household debt to income ratios have similarly gotten dramatically worse in the last decade. There are in fact limits to how far a nation can push such things. Somewhere between 1/4 and 1/3 of their new GDP every year is going just to new debt interest payments. When you consider what else needs to come out of that new GDP, that's a very stark debt situation. In 2011 they also weren't seeing record bond defaults. The types that cry wolf are often early or very early in their predictions. One has to ask if there is in fact any truth to what they're saying, instead of only focusing on their regularly saying it. In the end, they may be too early in their speculation, rather than entirely wrong. China should have accepted slower organic growth and maintained their financial health. They chose the Japan approach of levering up massively on debt when the growth dropped off. They're so terrified of their own people about what happens if growth is 2% instead of 6% (being terrified of their own people is also why they installed the dictatorship to control them). It tells you all you really need to know about their system, it's fragile and can't survive a recession or stagnation.
- ajross 8y agoI'm confused. Why are these firms "shutting down" if they don't have any exposure to the loans they brokered? I mean, the description of the business model sounds like it's a bunch of transactional companies like ebay or paypal or whatever. Those might be expected to "fail" if the overall market shrinks, if expected growth didn't arrive, or if they get beaten by a competitor. But they don't fail "like dominoes". If anything the exit of one player would be expected to strengthen its competitors. But the headline and analysis is using terminology that make this sound like a credit crisis. Is it?
- TylerE 8y agoAt some point someone who lost money tracks you down via the business information? Ala rubber hose crytography.
- JumpCrisscross 8y ago> the description of the business model sounds like it's a bunch of transactional companies From the “people that are running these P2P companies don’t actually understand what P2P really is,” these sound more like badly-run Prospers than true P2P lenders.
- arbuge 8y ago"Analysts at China International Capital Corp. estimated on July 13 that no more than 200 firms, or about 10 percent of existing platforms, will still be around in three years." Even for a large nation like China, 2,000 P2P platforms sounds like orders of magnitude more than what is actually needed.
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- nsp 8y agoI u
- basementcat 8y agoSounds like this is the perfect time to take out a bunch of loans on a bunch of Chinese P2P lending platforms!
- numbers 8y agoThis is not a surprise, lending on a P2P platform is a "cool" idea but doesn't end up making you much money since you have to keep rates competitive and you always have the risk of someone not paying back. As a lender on Lending Club, I don't recommend it. The returns are worse than a bad year on the stock market holding ETFs. I've stopped lending on there and now I'm just waiting to move my money elsewhere.
- pembrook 8y agoJust because the returns are lower doesn't necessarily mean it's a bad strategy. As MPT states, as long as the returns are un-correlated to the stock market they can improve the risk-adjusted returns to a portfolio. Even if the return is lower (but still positive).
- jnwatson 8y agoThe problem is that it isn’t all that uncorrelated. Prosper tanked hard in the financial collapse.
- ndesaulniers 8y agoI've pulled my investments out of Lending Club and Prosper. Too difficult to track returns (maybe this has since been fixed) and many loans seem to default (even higher rated ones IME).
- jcbrand 8y ago> The returns are worse than a bad year on the stock market holding ETFs. In 2008 the stock market fell 50%. The last 10 years we've not had any bad years in the stock market, largely due to trillions of dollars of money printed by central banks in order to prop up the markets and to create a so-called "wealth effect". Expect a reckoning in the coming years.
- songco 8y agoLots of them provide more than 15% ROR, too high that some normal company also put lots of money to p2p. This is crazy and it is certain most of them(p2p) will go broke.
- madads 8y agoPyramid schemes all eventually fail.
- picsao 8y agoThe banks do loan to the poor (especially if you do some cup-tricks hide the risk ) , there is even the Leeman bro Festival (found in 2008) to celebrate that. Unless there is a stronger filter or behavioral incentive e a repetition during this generation, which should wish for a shrinking economy to save the planet, seems unlikely.
- ilamont 8y agoI know someone who works in this industry in China. He cites illegal activities, negligence of risk management procedures, and the resulting fear of illegal activities and anticipation of a crackdown, as leading to the current situation.
- known 8y agoWithout collateral peer-to-peer lending is nothing but altruism
- pertymcpert 8y agoThis article is 2 weeks old.
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