The Remarkable Long-Term Performance Of P2P Lending

4thWay has long collated more data on peer-to-peer lending than probably anyone else, stretching back to the very first P2P loan ever made.

And now, we have sufficient data from a large enough number of important P2P lending providers to start accurately tracking performance. So we can begin to make a direct comparison to other asset classes, such as the stock market.

Much more on that is coming in a week's time, with some real eye-opening graphs and statistics, so keep your eyes peeled for that. (Update: it's now a week later, so here it is with the 4thWay P2P And Direct Lending Index: 10-Year Performance.)

But, to whet your appetite, I'm authorised to give you some small parts of the story:

Consistent outperformance of the stock market

4thWay's most precise dataset measures over half of the lending volume of the market.

Over the past ten years – which is how far back this new, core performance dataset extends – P2P lending has outperformed shares by over two percentage points per year after costs.*

Those doing P2P lending have typically more than doubled their money in a decade, half again as much as share investors, whose pots have grown by less than two-thirds in that time.

P2P lending has had no down years and only one year where it lost somewhat to inflation – although lenders still earned twice as much as stock-market investors in that year.

At the same time, the stock-market roller coaster had three individual down years (four after inflation) and it took some share investors more than six years to get back to where they started.

The reasons for this stability

Money lending – of the kinds mostly done in P2P – is intrinsically more stable than owning shares in companies, because, as lenders with property security, investors usually get their money back first, whereas shareholders are usually the last to do so when things go wrong.

Indeed, even without any security, money lenders usually get their money back before owners of assets like shares or property.

Furthermore, assessing a basket of borrowers is much easier than appraising the future profitability of a basket of businesses.

What about the bad eggs that closed?

The vast majority of closed P2P lending providers wound down profitably for lenders and yet there were also some truly bad eggs (FundingSecure, Lendy), as there always are in investing.

While we're not able to get the sort of datasets we needed to properly integrate companies that have closed into our core performance dataset, we have sufficient data to make good estimates.

If we conservatively included their write-offs to date – and even added on to that their probable future losses still to come on outstanding loans – the grand sum of all the losses from all the bad eggs would have a surprisingly small impact on overall lending results.

Indeed, pooling all those losses into just the one year that FundingSecure and Lendy actually shocked many observers by closing down, the interest earned in good P2P lending accounts in that one year alone would cover all those losses with something to spare for lenders.

That would leave all the other years as pure profit.

Looking further back in time, you see why P2P lending is still a “thing”, not a fad

While we can't extend further back than ten years with precision due to the particularly stringent quality standards we impose on our new performance data, we still have sufficient data on almost the entire historical market to see that P2P lending had positive returns every year since it started in 2005!

This compares with six down years for the stock-market (seven after inflation), which includes two completely separate periods of time when some investors will have taken more than six years to recover their losses.

I've just given you a taste of some of the more precise data that will start to become available to you from next week. Do come back to take a look; it's truly astonishing.

Further reading

4thWay P2P And Direct Lending Index: 10-Year Performance.

Why The Best Time To Lend Is Now.

Look Outside P2P Lending: Investing In Shares.

Which P2P Lending Sites Are Profitable?