The complicated ethics of peer-to-peer lending


“If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest.”
Exodus 22:25

“Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.”
– Polonius, Hamlet (Shakespeare)

“Will I make it from the student loans to a Benz-o?”
– Kanye West

With your market investments not guaranteed to make 12%, some are looking to alternate streams of investment income. This is a good thing, as even if you invest in tons of different market products, it’s still the same type of investing. You can never diversify enough.

But what about investing in other people? Instead of dealing with investment “products”, why not invest in real people who are trying to accomplish real problems?

What if you could make a really high rate of return, almost guaranteed? What if, at the same time, you enabled people to go into debt?

Welcome to the ethical quandary of peer-to-peer lending.

Welcome to the club

I’ve been reading about Lending Club and Prosper recently. These services are peer-to-peer marketplaces for lending and investing. If you need a loan, you can apply for one, with rates depending of the risk. If you want to invest, you buy these loans (or pieces of them). The more risky the investment, the higher the return.

Join the club, except if you're in a state we don't operate in (ahem, like Oregon).
Join the club, except if you’re in a state we don’t operate in (like Oregon, ahem).

The theory is that if you spread your money around in a wide range of risks, from stable (and low return) to all-but-crazy (and high return), you’ll make a healthy return. With a certain amount of default built in to the averages, Lending Club still all but promises returns of 8% even in their intro video. Other people have reported much higher returns.

Okay, those numbers have my interest (so to speak).
Okay, those numbers have my interest (so to speak).

How cool! People can get loans without having to beg their bank, and those with extra money to invest can get a sweet return. Great!

Except, maybe not.

People, not profits

In general, I don’t like lending money and I really really dislike taking loans. It’s not just me being a miser, or a desire to remain self-sufficient (which is a myth anyway) but because I feel it can strain relations, possibly irreparably. When I’ve been loaned money, I feel this incredible weight on my shoulders. I hate it, and I want it off. And what if someone I lend money to is unable to pay it back? I wouldn’t want it to come between us, but it’s not always up to me.

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Rather, if I can, I’d prefer to just give people money when they need it. No strings. No long-term anything. And, yes, it goes without saying, no interest.

So the question becomes: does this equation change when I don’t know the people? Because that is effectively what Lending Club is offering, a chance to lend money to a whole bunch of people that I don’t know, in the pursuit of high returns and a different stream of income.

I see two sides here:

  • If the primary objection to lending money is to avoid strained relationships, then Lending Club eliminates this. I don’t know any of these people, and if they default, our relationship remains essentially unchanged. Plus, with risk management, I won’t have put a lot of money into any one person, so a single default wouldn’t really affect me all that much.
  • If the primary objection to lending money is philosophical, then Lending Club is right out. Because in this case, no loan is a good loan.

Damn the banks, full lending ahead

Or maybe a third side here. Part of Lending Club’s appeal is that it allows people to get and service loans without having to go through banks. Perhaps by enabling this, you are helping your fellow community members (and not helping to funnel more profits into banks). It’s certainly in the proper spirit of the “sharing economy” and other services like AirBnb (rent out your place) and RelayRides (rent out your car).

But perhaps the potential to make more than 12% returns on my investments is clouding my vision. It certainly is pushing up against my “too good to be true” filter. I can remember another scheme that promised huge guaranteed returns. And who knows, maybe the whole thing will go belly-up when the next downturn in the economy hits. Or maybe there won’t be enough borrowers for the lenders and the deals will dry up. There are so many ways this could go.

So I’m not yet ready to do any peer-to-peer lending, but I’m keeping my eye on it. It’s either a positive revolution in lending and investing, or a dangerous idea that will end poorly for many involved.

But enough about me. Have you done any peer-to-peer lending or investing?


  1. saulofhearts

    I took out a loan via Lending Club a while back to consolidate credit card debt. I agree that I would rather see people lend among themselves without bringing in the big banks … but, I found Lending Club’s tactics to be pretty much as manipulative as the big banks. Lots of bait-and-switch messages promising one rate and then offering another.

    I’m more curious about Upstart, which bases your rates on your GPA and expected earning potential, rather than your credit score:

    • Mike @ Unlikely Radical

      Wow! That’s terrible. I wonder if the way they treat lenders is different from how they treat investors.

      I’ve never heard of Upstart, but it looks interesting. They do definitely tend to play up their Google connection!

      We’re clearly in the early days of things here. I know I’m overly cautious, but I’d expect to see some consolidation (and many people losing their shirts) before we can really see if this is a sustainable marketplace (for lenders or investors).

  2. Qweetix

    Hi Mike
    Very interesting to read your thoughts about P2P lending. Personally I feel very divided about the concept. I’ve investing a small amound on the Mintos platform, but for my own ethical/moral reasons I’ve chosen not to invest in short-term loans, since I believe it’s a greedy and unfair way to make money. Time will tell how the crowdlending market will evolve…

    • Mike Pumphrey

      Hi there. Thanks for writing in. I wasn’t familiar with Mintos, so I looked it up. It looks interesting, though I admit I remain skeptical of any investment platform that outperforms the broader stock market. Can it continue indefinitely, or is it a bubble? Is a platform like this sustainable, or does it only work as long as it doesn’t get too well known? And yes, there is the question of who are the ones taking out these loans, and so what are we contributing to?

      I’d much prefer a P2P investment platform that didn’t trade in loans. Is it possible to make those outsized returns without trading in debt? I wonder.

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