Investing Intelligently recently posted [Update: Investoid broke the news a while back] that Canadians could soon be getting our own social lending service, which would allow you to lend money to (or borrow money from) other people eliminating the middleman (read bank) from either side of the transaction. The lending service called CommunityLend will be modelled on already successful websites such as Prosper in the US and Zopa in the UK. While I understand the advantages such services provide to borrowers who are unable to get an unsecured loan for a reasonable interest rate elsewhere, I do not see the attraction of lending money to total strangers:
- You need to lend a lot of money to make a significant difference to your bottom line. If the interest rate spread between a savings account and a P2P loan is 3%, lending $10,000 will net you $300 per year. The extra spread you earn may not be worth the time spent in managing your loan portfolio.
- A P2P loan is not a savings account. By making a loan, you are agreeing to lend your money for a period of three years. Unlike a savings account, a P2P loan is not liquid and does not offer 100% principal protection.
- The biggest risk you face with P2P loans (which are unsecured) is default: the possibility that your loan will not be paid back either in full or in part.
- A P2P loan is similar to investing in mortgages because every loan payment is a mixture of principal and interest. Unlike Government of Canada bonds, you face the risk that your loans will be repaid early, either due to decreasing interest rates or improving credit history of the borrower.
- Since bonds are best held in a tax-deferred account such as RRSP, the location of a P2P loan in a taxable account is not ideal. You have to pay tax at your marginal rate on your interest earnings.
Prosper has been online for a while and US bloggers have been posting their experiences with the service. You might be interested in My Money Blog’s review (Part 1, Part 2, follow-up) and Tired but happy’s experience as a lender.
