Peer-to-Peer Lending with a Twist

by Kevin on May 18, 2009

I’ve written about my experiences with social lending through Lending Club in the past. I’ve got two loans with Lending Club that are earning me 9.76%.

When peer-to-peer lending first started to become mainstream there was one site: Prosper. Then Lending Club came on the scene. Both websites allow you to directly lend money to borrowers. You can lend as little as $25 or $50, but your money is being risked in full — until the loan is paid back.

Now that doesn’t have to exactly be the case.

Pertuity Direct Lets You Invest

Pertuity Direct Redefines P2P

The newest player in town is Pertutity Direct.

In essence this is the same social lending idea: you put money into your account and the money is lent to qualified borrowers (credit scores greater than 660, things like that).

However, unlike Lending Club and Prosper where your money is tied to a specific borrower, Pertuity is like investing in a mutual fund.

That sounds weird, so let me explain.

With Pertuity Direct your money is pooled together with money from all other investors involved with the lending program — just like investing in a regular mutual fund.

This pooled money is then lent to qualified borrowers at a fixed rate ranging from 7.9% to 17.9%. You earn a return based on the returns of the mutual fund.

The National Retail Fund

This curious mutual fund is called the National Retail Fund. Pertuity Direct takes the loans and sells them to the NRF. You then invest in the NRF and earn a return based on what it returns.

The National Retail Fund is mentioned several times on the Pertuity site, but I couldn’t find a direct link — I had to search for it. I would imagine they are run by the same company, but I don’t know that for sure.

The NRF Has Investing Expenses, Just like a Regular Mutual Fund

Here’s something I found to be curious: where a regular mutual fund carries an expense ratio in the 0.2% to 1.7% range, the National Retail Fund has one as well. The “expense ratio” is 1.63% of your invested money. If you invested $1,000 in the fund your expenses would be $16.30 before you earned any money.

This doesn’t make me terribly uncomfortable because they are upfront about what’s going on. And 1.63% is a small price to pay if you are earning 10% overall on money you’ve put in with the company.

You Enjoy Greater Liquidity… Eventually

Unlike other P2P lending sites where you have to wait until the loan is paid (or try to sell it off at a discount), Pertuity let’s you withdraw your investment on a quarterly basis. Not as fluid as stocks or other mutual funds, but better than having to wait the three years it might take to pay off the loan!

However — let me note that deep down in the notes of the prospectus is the catch that if you withdraw funds before one year (so 365 days or less) you will get dinged with a 2% early withdrawal fee. That’s fine if you know that going in — but it doesn’t clearly spell that out in plain English on the “learn about lending” page.

An Example of Investing with Pertuity Direct

So let’s say you’re interested and want to try out this new way of social lending. Here’s how the whole process would work:

  1. open an account with Pertuity
  2. fund your account (there is a $250 minimum, so let’s go with that for the example)
  3. your investment earns a return, let’s say 10% for the entire year
  4. $250 plus a 10% return leaves you with $275
  5. The mutual fund expenses of 1.63% are applied — costing you $4.48. Your account value is now $270.52.
  6. Your net return is 8.2% — still not too shabby

If you were to withdraw your funds on the 364th day you would get hit with that 2% early withdrawal fee and end up with $265.11. Again a positive return of 6%, but the fees can really add up (just like any other investment) if you aren’t careful.

It’s definitely a different way of doing things and I like the liquidity aspect. Liquidity is one reason I’ve stayed away from most social lending (although, again, I am trying it out with Lending Club). Unfortunately for Pertuity your liquidity doesn’t really kick in until a year has gone by.

I’m curious: is anyone else out there using Pertutity Direct? What has your experience been?

{ 4 comments… read them below or add one }

Shawn Ward May 18, 2009 at 2:51 pm

I read about Pertutity Direct last week and signed up at their website. Unfortunately the service is not available in Florida. You can remain on their mailing list and if the state is added they will notify you.

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LoomisK May 20, 2009 at 6:11 am

I read about it and it sounded very interesting, however the 2 reasons I was drawn to P2P lending were 1) being able to pick who to lend to and 2) Potential for high returns. Perpetuity does not allow me to pick the loans, investing in a “pool” of loans. In terms of returns, My Lending Club account it giving me a nice 9.34% after fees and defaults, which beats the crap out of any other investments out there. I do like the mutual fund feel of it though.

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Roger May 21, 2009 at 6:41 pm

Interesting idea; I suppose the mutual fund-like organization of Pertuity does have the benefit of allowing instant diversification, which I like. Although, given that Lending Club (and presumably Prosper, although I’m not familiar with them) allows you to make loans with as little as $25, it’s not that hard to create a diverse portfolio with even a little bit of money, plus you have more control over your investment choices. Still, it’s an interesting alternative.

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Theresa July 11, 2011 at 1:10 pm

I found just what I was needed, and it was enetritainng!

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