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Comment by scottkduncan | Hacker News Reader

I've had pretty good results with peer-to-peer lending. Prosper is the platform I use (Lending Club is the other big player in the U.S. but not available to investors where I live). It can be a bit high maintenance as an investor as you'll need to invest in 100+ loans to be diversified (and you'll have to reinvest proceeds over time), but I find it to be manageable. If you really want to get into it, both platforms allow you to download all past loan data so you can analyze past performance and come up with your own approach.

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I like those platforms in principle, but I don't think investors reallly understand what's in it. The truth is, you're creating your own asset-backed security based on loans originated to refinance credit card loans or finance personal projects for what is (I assume) a pretty narrow slice of the population.

Just like banks and other players (ahem rating agencies) before the financial crisis assumed ABS were safe because they were diversified ("the housing market cannot collapse uniformly accros the country"), they can actually become very correlated in a very short amount of time.

So even though peer-to-peer lending is an interesting proposition, it is important to understand that it can potentially become ugly and sticky...

Yes. After a quick look at this (very interesting) suggestion, my intuitive reaction is that a lot of the borrowers are likely to repay based on their credit histories and the desire to protect them.

My #1 question, however, is what makes people turn to a source like this?

Well, a credit history tells you whether a borrower paid his credit card bill last month, not if he is going to have a job next month. My point is not that people will try to run away with your money, but that holding 100+ notes from Lending Club might not be the diversified investment it appears to be, especially when some macro event happens.

Peer to peer lending being somewhat new, I would say some of the borrowers think it's cool. Some of them might also be making a principled choice ("banks are evil"). But ultimately, if you have a reasonnably good credit profile it should be noticeably cheaper than the average traditional lender with its branch network etc.

Seconded. I've been rocking 10% annual returns since I started with Lending Club almost 20 months ago.

The only bad thing about these sites is that your income counts as normal income and not capital gains.

Well it is income. What would you expect?

http://en.wikipedia.org/wiki/Capital_gains

The second paragraph "Capital gains may refer to "investment income" that arises in relation to real assets, such as property; financial assets, such as shares/stocks or bonds; and intangible assets such as goodwill." is simply wrong, have flagged it. You are earning interest, an age old concept.

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