The Problem With Peer To Peer Lending

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There’s only the one major problem with peer to peer lending. It doesn’t work.

The peer-to-peer industry has been dealt another blow after lending firm MoneyThing announced it was closing down with immediate effect.

Moneything will no longer accept any new investments or customers and will wind down its outstanding loans by the end of next year.

Almost half of the company’s loan book was in default at the time of closure, meaning borrowers were struggling to pay their debt back.

The firms are falling over one by one – actually, in waves of more than just the one at a time.

The underlying idea is entirely reasonable in one sense. Sure, the internet allows disintermediation, why should we be paying for the middlemen to take a slice? Bankers aren’t notably underpaid in any society after all. So, do it ourselves. As long as we’ve a diverse portfolio of loans out there we should be as with junk bonds. Higher risk, certainly, but higher interest more than compensating for it. That better deal for both sides, borrower and lender, coming out of the hides of the no longer extant bankers.

Great.

But we then run into the Adam Smith point. Those who are willing to pay high interest rates are the promoters we’d not want to be lending to. Meaning that the default rates are going to be higher than are compensated for by the higher interest rates.

Think on it. Any reasonable business plan will, in this era of low interest rates, gain funding from the usual sources somewhere along the line. Meaning that the peer to peer platforms are left with what can’t pass the tests of the normie banking system.

The other way of making the same point is that there’s not and never has been a shortage of money to lend out. There’s a shortage, as there always has been, of people worth lending money too. This isn’t a problem that a change in the method of lending solves. What is needed is a change in the method of selecting who to lend to, the thing that this new system doesn’t actually do. Or, at least, doesn’t do successfully.

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Bloke in North Dorsetjgh Recent comment authors
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jgh

Hmmm. I’ve got a PtP loan, one monthly payment left to pay it off. It got me out of a hole where timing of paydays and bank holidays conspired against me. 4.8% interest, arranged online in 20 minutes, cheaper than a credit card, and was able to get it when the banks were closed and I couldn’t get to arrange a top-up on my overdraft.

Bloke in North Dorset
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Bloke in North Dorset

The other way of making the same point is that there’s not and never has been a shortage of money to lend out. There’s a shortage, as there always has been, of people worth lending money too.

I read an interesting article recently that claimed that one of the reasons that the industrial revolution took off was that there were capitalists available to fund it. They also made the point there’s always been capitalists, they just never had great ideas to fund until the IR.