Big Investors Are Piling Into the ‘Peer-to-Peer’ Lending Market and Morgan Stanley’s ex CEO joins Lending Club’s board

After years of hype and occasional blowups, the “peer-to-peer” lending market, which connects borrowers with mom-and-pop lenders, is starting to attract professional investors.

The allure? Fat returns. At a time when interest rates are near historic lows, peer-to-peer firms such as Prosper Marketplace and LendingClub Corp. say investors can generate annual returns of 10% or higher by making loans, or pieces of loans, to their fellow citizens.

Big Players

Until last year, most peer-to-peer loans came from ordinary—and daring—investors. But big institutions are beginning to dabble in the market as well.

In the past 18 months, Lending Club has gathered 30 institutional investors, including hedge funds and wealth-management firms, and boosted its institutional assets from nothing to about $170 million, which accounts for 40% of its outstanding loans, according to the company.

Lending Club announced Thursday that former Morgan Stanley MS -5.16% chief executive John Mack has joined its board.

 

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What are the Default Rates with Lending Club and Prosper?

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One last point to make about defaults. The longer a loan goes without defaulting the better off you will be. For example, if you have invested $25 in a loan that defaults after 18 months you will not lose your entire $25 investment. You will have received principal and interest payments for 13 or 14 months, so your total loss will only be around $13 – $15 depending on the interest rate. So this will have less of an impact on your net annualized return.

I intend to keep a watch on this portfolio of loans from 2009-10. I will report back on the defaults (both actual and my estimated calculation) on a monthly basis to see how they are going. My goal here is to report the facts as they are. I believe that p2p lending is a great investment, but there is a risk of defaults. It is best if investors come in fully informed as to those risks and not be disappointed a year or two into their investment.

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Why The Rush To Prepaid Debit Cards? Why Not?

In 2009, consumers loaded roughly $29 Billion on pre-paid cards, which are especially popular with young adults and those considered underbanked — meaning they have little access to mainstream financial institutions like banks. But by 2013, that amount is expected to reach over $200 Billion, according to an estimate cited in a report from an arm of the Pew Charitable Trusts.

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Credit card rates four times OCR : RateCity

The average credit card interest rate is four times more than the Reserve Bank cash rate, with providers estimated to be earning $6 billion a year in interest.

According to research conducted by RateCity, the average purchase rate across 200 personal credit cards is 17.16 per cent, while the current RBA official cash rate is 4.25 per cent.

In total, 90 per cent of cards have kept their purchase rates at the same level as October 2011, while nine of the 200 cards dropped their purchase rate since this time. However, only four passed on the 50 basis points resulting from two consecutive rate cuts, while nine increased purchase rates by up to 100 basis points.

Commenting, RateCity’s chief executive officer, Damian Smith, said: “Credit cards will have much higher interest rates than the Reserve Bank’s case rate because they are unsecured loans and therefore have more risk of default.

“But we can’t see any reason why they are charging higher margins above the cash rate compared to the peak of the global financial crisis,” he said.

Newest mutual bank stakes claim for new customers

On its first day as the newly rebadged Teachers Mutual Bank (TMB), the former Teachers Credit Union has claimed that it is already seeing a shift of customers away from the big banks, towards the mutual sector.

The trend has been acknowledged in mutual banking circles since the big four banks broke ranks with the RBA interest rate cycle late last year.

As has been reported widely, refinancing remains the growth area for home loans this year, and James said TMB has been taking refinancing business away from the four majors.

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Depositors forgotten in rate debate

The decision yesterday by the Reserve Bank of Australia to keep interest rates on hold will be welcomed by mortgage holders, but not depositors.

The hammering the banks receive when interest rates rise could understandably lead people to think that the only interest rate that matters is a mortgage rate, and that the majority of Australians are mortgage holders.

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Credit card demand waning – Personal Loans Up: Veda

Applications for credit cards fell 9.9 per cent in the last quarter of 2011, recording the largest Q4 fall since 2009 and the second largest year on year last quarter drop in six years.

Queensland registered the biggest year on year decline, recording a 14.5 per cent fall in demand, followed by New South Wales (11.8 per cent) and Victoria (7.7 per cent), according to the latest Consumer Credit Demand Index from Veda.

The sharp decline in credit card applications across the country late last year bucked the trend from earlier quarters in 2011, pointing to a slowdown in consumer demand for credit during the final three months of the year.

 

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