For the past two years I have reviewed the returns of my lending account on the peer-to-peer lending website, Prosper.com. This is year three of those reviews.
First, be aware that I am no longer adding money to my Prosper.com account. As the loans that I have helped to fund are paid off I will withdraw the money. I have chosen to forgo investing in Prosper because of major glitches that I encountered earlier this year that really made me rethink investing specifically through Prosper. I have opened an account with Lending Club and may switch to that company in the future.
Now, I have had this lending account with Prosper for three years. My lending strategy is extremely conservative. Just to recap my strategy is as follows:
- Don’t invest more than $30 in any one loan. Anything more than that and you are asking to be wiped out if someone defaults.
- No one with credit ratings below “A”. I’m a snob and I know it. But again, I put this rule to the side when there are incentives or when I really, really want to help that particular person.
- No loans to people using it for business. Sorry, but these days too many businesses are failing for me to be comfortable investing in one…unless it’s for a small amount (under $2K for short term inventory use).
- No loans to people buying a home. You should have enough money saved for that. Sorry.
- No loans to people wanting to use it for a wedding or engagement. You can have a cheap wedding. I don’t believe in helping you spend money that you don’t have when you can get the same results (being married or getting engaged) within your own budget.
- Don’t believe the hype. Everyone has a story. The more of a sob story the better, but the story angle should not matter. What should matter are the numbers.
- If you have a history of defaults and delinquencies, I can not help you. You have not yet learned how to be responsible.
- Nothing above $10,000. The larger the loan, the higher the payment and the higher the risk of default in my book.
- Avoid 5 year loans if possible. It just gives someone too much time to default. Situations can change rapidly in 5 years.
- Look for repeat borrowers. History is a good indicator of future behavior.
I have broken rule number two and rule number nine. I mistakenly bid on one loan that had a five year loan period without noticing it until it was too late. Whoops! I bid on loans that had ratings lower than “A” class. I did this because the quality and number of the loans that were available declined significantly. This is another reason why I have decided to move on from Prosper.
Going back to my loans, you will notice that most have been paid off. The average age of my loans is well over 800 days. The loans that have not been repaid are quite close to their maturation dates. You will notice one charge off and one loan that is currently in collections. Thankfully, I will lose less than $2.00 on that loan. I did lose $24.24 on the loan that was discharged in bankruptcy. That’s fine. The interest that I have already made will more than cover those losses. Prosper estimates that my rate of return is 7.01%. That’s really good, especially since my total investment was less than $200 since I re-invested the money that I received as the loans were repaid.
This experience and experiment has been great. There is nowhere on this green earth that will pay 7% interest on a tiny $25 investment. I wholeheartedly believe that this is an incredible way to make investment income on a tiny investment. If you walked into your local bank and checked out any saving or investment account I’m 100% certain that any investment vehicle returning 7% interest requires tens of thousands of dollars.
As I mentioned I will most likely continue to invest, but for now, I’m concentrating on my debt and then I’ll go back to peer-to-peer lending with a monthly investment of about $50.
Do you have a peer-to-peer lending account? How is it doing?