What makes you think that ~5-6% return is the bottom for P2P loans?
Some of the best performance (low default or loss rate) of P2P loans was encountered during recovering economy from loans issued during and just after recession. This is typical for all type of debt. During recession, credit criteria tend to be strict so debt gets issued to fewer and best quality borrowers. As borrower's financial situation improves with rising economy, fewer debt to borrowers go bad resulting in best performance for lenders.
Some of the worst performance (high default or loss rate) of P2P loans will be encountered as we slide into recession from the loans just before recession. This is typical for all type of debt. During good economic times, credit criteria tend to be loose so debt gets issued to large number of and marginal borrowers. As borrower's financial situation deteriorates with declining economy, more debt to borrowers go bad resulting in worst performance for lenders.
As we haven't gone through a downturn with Lending Club loans yet, we don't have handle on how bad things can go. A good way to visualize the worst case performance is to use 20+% default/loss rates of Prosper loans issued between 2005 and 2008 and apply to your loans.
Great article Anil (and great foresight by you as well in your predictions!).
The issue that I have is that we have hit the bottom of the forecasts (~5-6% returns) while conditions are still very strong (strong economy, strong consumer credit performance, etc...). I'm not convinced that the 5-6%(or whatever your diminished returns look like now) we're seeing as the long term average; I'm seeing it as the average during the optimal conditions, which we wont be in forever.
Am I foolish to believe 5-6% is not the long term average, but in fact, the new 'tops'? What are you expecting to returns to look like during a recession? Do you ever see returns rising beyond what we're seeing today?
