The peer to peer lending industry in the U.S. has grown dramatically since its inception less than fifteen years ago. Total loans issued by Lending Club and Prosper total over $50 billion. In 2018 alone, Lending Club issued over 500,000 loans worth over almost $10 billion. It is clear that, barring some unexpected regulations or legislation from the federal government or many state governments, this industry is firmly established and positioned to grow in the future. In this article, we will look at the outlook for peer to peer lending investing in the U.S. for 2019.
First of all, the state of the consumer lending market in general is probably the most significant indicator of the near term prospects for this investment. According to credit score provider Transunion, the consumer credit market is expected to grow in 2019. This outlook is based on the current low unemployment rate, strong consumer demand and continued low interest rates (by historical standards). This opinion is also shared by The Kenyan Wall Street which sites low unemployment and rising personal income.
Another important factor is the competitiveness of the major peer to peer lending platforms, specifically Lending Club and Prosper. Prosper is a privately held company so there is limited information available about the company’s financial situation. However, Lending Club is publicly traded so there is plenty of information available to the public. While the company has experienced significant revenue growth, it is expected to lose money for 2018. According to CNN Business, analysts expect an increase in the share price of 35% to 175% and their consensus rating is ‘Hold’. This is very encouraging news for the stock and should give comfort to P2P loan investors as well.
The ability of peer lending platforms to compete with traditional lenders like banks is important to the prospects for the industry. As we have seen, the amount of peer to peer lending the U.S. has increased every year. Clearly, these lenders have been able to compete in the past. With no significant changes to the way any of these organizations operate, there is no reason to believe that the relative competiveness of Lending Club and Prosper will change. Therefore, continued growth should be expected.
There are two significant operating expenses to look at when comparing P2P lenders to banks. One is the overhead that banks have in terms of employees, marketing and physical locations. This adds costs to every transaction that the bank undertakes. Peer to peer lending platforms have significantly lower overhead costs which gives them a competitive advantage. On the other hand, banks likely have better techniques for evaluating the creditworthiness of borrowers. This means that they will likely have fewer defaults and therefore, higher profitability. It is hard to say what the net effect of these two factors will be, however, I am included to believe that lower overhead costs outweigh any competitive advantage that banks have with assessing borrowers.
So what is the outlook for prosper and lending club investing in 2019? Based on the factors analyzed here, it is clear that the future looks very promising for this industry as well as individual investors. Of course, every investor has a different strategy and experience so there will be success stories as well as unmet expectations. However, the overall experience should be positive as the industry continues to grow in 2019.