May 17, 2015:  When we have the next economic contraction or recession, those who make loans via peer-to-peer lending could see a nasty surprise.  Top  peer-to-peer lending sites include the Lending Club, Prosper, Funding Circle, Upstart, Kiva & Zopa.

During the past few months I have seen interest by people not known for having the best investment timing ask about peer-to-peer lending sites as a way to get better returns for their fixed income. My stock reply is I want my fixed income investments guaranteed by the government.  These investments could be more risky than owning dividend paying stocks, my preferred investment for "risk assets."  Spreading risk between 100 risky borrowers could mean you lose money when the economy turns down.  The sites who want your money for a fee to broker these deals will keep your fees and you will be stuck with zero collateral if the borrowers default.

When interviewed for the article "How the 'sharing economy' helped me claw out of massive credit card debt," Ron Davis, the face on the Prime Meridian web site said something to Ken Sweet that reminded me of what the regional banks were doing just before the financial collapse that scared me enough to sell my very profitable position in Fidelity Select Regional Banks mutual fund BEFORE the financial collapse.  Excerpts from the Ken Sweet AP article that should leave you scared:

• When I realized I was paying off six different credit cards and not getting anywhere, I decided to consolidate my debt, like millions of other Americans. I visited my local bank, asked for a $15,000 loan but was offered an interest rate higher than my cards were charging.
• So I looked into online lenders and discovered a growing part of the sharing economy known as peer-to-peer lending, a system in which a group of investors pool money to loan to people like me.
• The first company I went to, Upstart, was willing to lend me money but again, the interest rate was too high.
•  Then I went to Prosper, the second-largest lender in the industry. Prosper found investors in my loan in two days and I had my money in five.
• I never visited a branch or met a loan officer. And the interest rate of less than 9 percent beat the 13 percent offered by my brick-and-mortar bank.
• After borrowing the money, I wanted to know more. Who were these "peers" and why did they think I was such a good credit risk?
• The lending peer I tracked down is Don Davis. I owe him $1,500. Davis' company, Prime Meridian Capital Management, owns 10 percent of my loan.
• "I take you at your word you'll pay us back," Davis joked in an interview.
• Davis got into peer-to-peer lending in 2012 and owns more than 14,000 loans, in whole or in pieces. His $60 million-plus Prime Meridian Income Fund had a return of 8.5 percent in 2014.
• Like many investors, Davis was attracted to peer-to-peer lending because other types of debt, such as bonds, had become unattractive. With interest rates and yields stubbornly low, it's difficult to make much money in that market.
  

Getting my money back from "fixed income" investments is no joking matter to me. I currently have most of my "fixed income" in SAFE INVESTMENTS such as cash, CDs, savings accounts, individual TIPS, I-Bonds... They all investments that have US Government guarantees to give me my money back if the institutions holding the funds fail.   Subscribe to my newsletter to get the specifics.

Funds like Prime Meridian Capital Management Income Fund attempt to improve the odds, but of course, for a fee.

Prime Meridian Income Fund provides investors low cost access to short-duration high yield consumer loan portfolios from creditworthy borrowers that produce consistent returns. This fund lets investors participate in the enormous and profitable consumer credit market that has previously been the exclusive territory of a few big banks. The objective of the fund is to outperform peer-to-peer lending platforms and other fixed income portfolios by using a dedicated API with proprietary credit algorithms to overweight the best risk/reward loans in a broadly diversified portfolio.

Pay Attention: The Prime Meridian Income Fund is available to "Accredited Investors" only. That means you have to be large enough to buy something stupid and take responsibility for this.  You are not granny looking to invest her life savings of $10,000 in a CD... sort of like you need to be a pension fund or rich person who can sign a sheet saying you know this is a risky investment... with more risk than banks are willing to take....

The big banks sold the risky loans to "accredited investors" before the financial collapse.  It was the big pension funds and large institutions who suffered along with rich, "accredited Investors" whom the law assumes are smart enough to know what risk they can safely take.  Obviously, I believe many of them are fools, including large pension funds.

My Advice remains the same.  Take risk with individual stocks and index mutual funds via the "Core and Explore" approach detailed in my newsletter [Subscribe ] and keep your fixed income as safe as possible.  I prefer to take risk with high risk stocks (currently two biotech stocks and a gas drilling stock) where the upside is unlimited rather than make loans to folks wishing to pay off credit card debt at a lower rate.
.

Gold -

TOP OF PAGE