Peer-to-peer lending companies like Lending Club, Prosper or OnDeck have grown in popularity in recent years. Through their websites, these companies match individuals or small businesses in need of loans with investors seeking higher yielding investments. However, investors must make decisions on what loans to finance based on the information provided by the companies, making it hard to do thorough due diligence. On May 9th, the CEO of Lending Club resigned and the stock fell 34% after it was discovered that the company falsified data on several loans.
This is a good time to remind oneself of some of the possible advantages of transparent, easily sold, publically traded investments:
1. Publically traded investments like exchange-listed stocks have a global pool of analysts and investors evaluating every nuance. While people may criticize Wall Street salaries, all investors benefit from the due diligence analysts are conducting with company management teams. Active investors hold companies to very high standards and require them to maintain excellent financial procedures or be punished in the marketplace. Often, private investments have few observers questioning their fundamentals.
2. The ability to sell investments can seem unimportant until you need money. Then, the ease of selling becomes crucial. Lending Club and Prosper do allow investors to sell loans on an online trading platform, but only for loans that are current. Loans that have any history of trouble may be completely illiquid. In the U.S., about $800 billion of traditional fixed income is traded every day. That makes for a very robust market that benefits all fixed income investors.
All this being said, investing in these types of online loans may have merit in the future. It is just still very early in their development, as the recent troubles demonstrate. When looking at any investment, but especially with alternative or private investments, investors need to evaluate the investment merits and the oversights in place. A promising investment without the proper controls and protections raises the risk of problems down the line.