Background
In 2022 I shared a few posts about peer-to-peer microloans. A microloan is a small loan, typically under $1,000, which often has a short payback time. For example, loaning $100 to someone with the intent they will pay back the loan in a few weeks.
A peer-to-peer loan is a loan which occurs between individuals rather than between a person and an institution, such as a bank. In other words, peer-to-peer loans exchange money between people rather than involving a bank or credit union.
When these two concepts, microloans and peer-to-peer loans, combine we end up with individuals making small, short-term loans between themselves, without the aid of a bank, credit union, or credit card company. These loans are often seen as risky and may have relatively high interest rates. However, the benefit for the borrower is they may be able to acquire small loans quickly, even without a credit score. The benefit to the lender is, assuming the loan is repaid, they earn the interest payment.
In January 2022 I began experimenting with peer-to-peer loans on the open market. In other words, I was visiting Internet forums where anonymous people could ask for loans and get them filled by willing lenders. I referred to this practise as giving money to strangers on the Internet. About halfway through the year I also began using a more formal, organized loan trading platform where a company called goPeer collects loan requests and matches them up with people who wish to invest in a portion of the loan.
My experiments with the open market approach got off to a good start, then I got overeager and made some mistakes, offered some loans to people who were unable to pay them back, and didn’t do enough to protect myself against that possibility. But then I looked at what other successful lenders were doing, educated myself more and started getting better results. In the first six months of my experiment with open market peer-to-peer loans, I went from a few hundred dollars in profits, to being around $800 in the hole, to breaking even around the end of July. It was an interesting experience and one which I felt worth continuing.
With the goPeer platform loans, I started off very conservatively and took some time to get used to the way the goPeer system worked before I dived in. However, after a few months of making small investments in loans offered through the goPeer marketplace, I started using it more than the open market Reddit forum as I found it was a more stable, more automated experience.
From the point I started breaking even with the open market peer-to-peer experience (and the point where I started seriously using goPeer) about six months have past. Given that my total time running this experiment has been a year and the time since I felt I finally had a handle on it all has been half a year, this seemed like a good milestone where I could pause to share my observations and results.
Just the stats, ma’am
Let’s start off talking about some hard numbers. I feel it is important to highlight, before sharing these stats, that loaning money and getting it back (hopefully with some extra interest) is quite different than investing, especially when the loans are super short-term. If I invest in a mutual fund or a stock, I get something in return for my money. I pay money, I get a stock or fund which I can turn around and sell later – hopefully for more money. In other words, I have an item in exchange for my money.
With peer-to-peer loans, you don’t get anything when you give the other person money. You just hope they pay you back. If I buy Amazon stock and it loses 50% of its value, I can still sell the stock and get half my money back. With a loan, if the borrower doesn’t pay back the money, then I lose the whole amount of the loan. Peer-to-peer loans are often an “all or nothing” situation.
Also, unlike investments, it’s more open to interpretation as to how best to describe how much money is loaned out and how much money is made. This is due to the fact loans are often cyclical. In other words, I loan out money, it comes back with interest; I loan out the money again to another person, it comes back with interest. It’s basically the same money being loaned out each time.
If this seems abstract, imagine this example. Let’s say I loan Alice $100 and she pays me back $110. Then I loan Bob $100 and he pays me back $115. Then Calvin borrows $100 and pays me back $125. In the end, I have $150. Now, did I loan out $100 or $300? It’s the same $100 I loan out and keep getting back. Is my rate of return 50% (turning $100 into $150) or is my rate of return about 17% ($50 profit from $300)? The statistics are open to interpretation.
I want to mention this because, if you look at my records one way, I only ever had about $1,100 loaned out, at the most, on the open market during the past year. I was never in risk of financial ruin over this experiment. However, if you look at the total value of the loans when all added up together, it’s over $16,000. It was never possible for me to lose $16,000, it’s just the cumulation of the same few hundred dollars loaned out several times.
With those thoughts in mind, let’s talk statistics!
On the open market provided by Reddit, I gave out 85 loans over the past year. The total amount of these loans cumulated in $16,905. The average value of the loans was $199. Of those 85 loans, 69 (81%) were paid back in full along with some interest. A total of 16 loans (19%) were not paid back. However, of those 16 failed loans, I managed to recoup the original amount through their payment processor 9 times. In other words, I only lost money on 7 out of the 85 loans (8%).
In the end, how much did I make over the past six months (from the point I was breaking even in August through to the end of January 2023)? I gained $983. It works out to about $5/day if you’re just looking at the last six months. Or, since the first six months were a time in which I broke even, you could say I averaged $2.70 over the span of the entire year.
Over on the goPeer marketplace, I started later and so all the stats I have are from the past six or seven months. I provided loans to 143 people, totaling $10,000. It works out to about $70 per loan. Of those 143 loans, 142 have paid back their loans, or are in the process of doing so successfully, giving a 99% success rate.
I feel it worth mentioning that goPeer rates the loans offered on its platform from “A+” meaning it’s likely to be paid back, to “D-” or unlikely to be paid back. At the time of writing there are also higher risk, “HR”, loans. The higher ratings are considered to be safe, but offer low interest rates while the higher risk loans (the Ds and HRs) offer a higher pay back to the lenders. My loans were all in the low-risk/low-reward categories and ranked A or B.
How did I make out with these low-risk, low-reward loans over the past six months? I made $522, for an average of just under $3/day.
In total, from the proceeds of 228 microloans, I made $1,505 in the span of one year. Well, the $1,505 was all earned in the last six months, as the first six months I just broke even as I was learning the ropes.
Big picture
Zooming out for a moment, some people have asked me a few big-picture questions in the past year regarding this experiment. I’d like to address those queries.
One of the more common questions is whether a person can make money engaging in microloans and whether it’s worth it to do so. This question usually compares peer-to-peer loans against investment options such as the stock market. Some people do make money from microloans, if they are careful. Not everyone does. Some people lose their money right away, burn out on the stress, or don’t have enough people pay them back to make up for the losses over time. Peer-to-peer microloans are a relatively high-risk endeavour. People who are careful or lucky can make a little money (as mentioned above, I made a little over $1,000 last year doing it), but it’s not a path to riches. When it goes well, I’d describe it as a profitable hobby.
As to whether peer-to-peer loans are a viable alternative to other investment opportunities, such as the stock market, that will depend on how many loans get paid back and how well the stock market is doing. Last year stocks were down an average of about 8.5%, meaning most index funds and mutual funds were showing a loss. For a while some index funds went down more than 12% during the 2022 year.
While it’s impossible to make a direct apples-to-apples comparison between stock indexes and peer-to-peer loans as they’re quite different in style, I budgeted about $2,000 to engage in microloans through Reddit at the start of 2022. A year later, I’d received all my money back, plus about $983. That’s a 49% return for the year off my original investment. Certainly better than the -8.5% I would be getting from index funds.
While I have had good luck with peer-to-peer lending, I’m not sure if microloans can scale. There are lots of people online looking to borrow money, but a finite number of them able and willing to pay back their loans with interest. In other words, working with $2,000 returned $983 for me, but I don’t think my return would necessarily be a lot better if I’d been loaning from a pool of $10,000. Could I have maintained the same ratio and turned $10,000 into $4,915? My guess is: no. I don’t think I could consistently find borrowers who could pay back their loans at a rate five times more frequently than what I was doing last year.
Speaking of scale, some people wonder how much time I spend on peer-to-peer loans. I didn’t keep strict track of the time I put into this experiment. However, I can say the time investment is low. It’s probably in the range of five to ten minutes per loan, plus I spent some research time at the start of the year. I probably researched, read, and shopped around for good platforms for close to 10 hours. Add that to around 10 minutes per loan, with 85 loans, or about 14 hours working on the loans themselves. Meaning I probably spent about 24 hours total over the span of the year, or about half an hour each week, on this experiment. Less time than I probably spend on other hobbies. My income from peer-to-peer loans is around $40/hour ($983 / 24h = $40/h).
You might have noticed I was only talking about my “open market” loans in the above time analysis, ignoring the 143 loans and about $500 earned on the goPeer platform. The reason I didn’t include the goPeer loans in my calculations is the platform can be set up to be automated. When I created my account I was able to basically “set and forget” the loan parameters and only signed in occasionally to confirm the system was working – automatically loaning money and collecting payments. I didn’t need to monitor or manually do anything for most of those 143 microloans.
Six months ago someone asked me if peer-to-peer loaning was something I viewed as passive income or a side gig. I’d say that the goPeer platform, with its automation options, could qualify as passive income. The platform, with its focus on purchasing pieces of larger loans, feels more like an investment platform where you can deposit money into your account and just leave it alone. The goPeer organization handles verifying information, automates lending, and collects payments, making it a pretty effortless approach. Assuming a person tells the automated system to pick good loan types then it’s likely to slowly, passively make money.
The open market approach on Reddit though is a different beast and all manual effort. The returns are faster, but it does take up around five to ten minutes (minimum) to connect with potential borrowers, verify their information, track the loan information, and collect the money. Sometimes more effort is required if the loan is late. All of this means peer-to-peer lending on the open market, even when it goes well, isn’t passive. It’s more like a gig-style job. I only do it when I want to, and it makes a small amount of money each month. Not a lot, but usually enough to pay my Internet bill.
Lessons learned
In the past I talked about my experiences with open market microloans and lessons learned. The key ones probably being that people with long, complex sob stories are more likely running a scam than looking for help, and that paying a payment processor a $2 fee for the option of disputing/reversing a payment if someone breaks their loan agreement is well worth the cost.
I learned that one of the early warning signs of a person not being able to pay back their loan is requesting more loans from other people. I also was reminded that it’s a bad idea to loan out any money you wouldn’t be willing to set on fire. Microloaning can be interesting and even sometimes profitable, but sometimes the money just doesn’t come back and it’s important to be okay with this possibility.
In the past I mentioned I had trouble pointing to any one characteristic which made people more or less likely to pay back loans. Location, gender, rural or urban, male or female… All seemed to be equally likely to pay back loans or disappear with the loot. In the six months since then I believe I’ve found two trends which indicate a person is more likely to repay their loans. One of these trends is their forum posting history. More specifically, people who regularly display empathy in their posts seem more likely to pay back loans to strangers. In other words, if you are faced with the choice of loaning to a person who goes by the handle ISeeStupidPeople who posts several times a day arguing about movies and video games, and another person called EnvironmentalLearner who mostly responds sympathetically to posts that are seeking advice or comfort, then the latter seems more likely to repay debts. It’s not a guarantee, but a long posting history indicating empathy seems like the best sign I’ve found so far that someone will prioritise repaying me.
Another trend I noticed was women were more likely to repay their loans than men. I went through my records and, based on the names and verification information each person sent to me, I’m fairly certain I loaned to an almost exactly equal number of men and women. I loaned to 22 unique men and 23 unique women, for a total of 45 people. Several of them requested multiple loans, which is how I ended up giving out 86 loans. Of those 86 total loans, 16 defaulted, failing to send back the original funds. Of the 16 who defaulted, 9 were men and 6 were women. This probably isn’t statistically very significant, but a 50% difference in the results down the gender divide did catch my attention. To date these are the only two factors (empathy and gender) which do not seem to be equally divided when comparing repayment rates.
Outside of the peer-to-peer loaning community one of the most common reactions I hear from people when they learn about peer-to-peer loans is: “Why would anyone lend money to strangers? People aren’t going to pay you back.” However, despite this common initial response, it generally hasn’t proven true. Most of the people who have borrowed from me, even in the anonymous wilds of Reddit, have returned their payments with interest. Only 19% of borrowers were unwilling or unable to pay back the money, which means 81% did. These successful borrowers had no real reason to return the money other than feeling it was the right thing to do.
There are some scammers and some people who, perhaps despite their best efforts, never get their finances in order enough to pay back their loans. But those people are in the minority. Despite the cynical, reasonable logic people wouldn’t pay back anonymous lenders, I’ve found most will, even in the unregulated Reddit market. Through goPeer the experience has been even more reliable, with a repayment rate of over 99% to date, and just one person failing to pay me back. This makes the goPeer experience the more reliable option, and less work (on my end) though the returns have been slightly lower up to this point.
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