This is the 4th post in a series of articles about Prosper.com. Prosper is a person to person lending site with an auction format similar to EBay. I’ve been lending money on Prosper for awhile. In this article I’ll write about my results.
In my previous articles, I’ve discussed how Prosper.com works and the risks of lending money on Prosper. Refer to those articles if you have questions about the details of Prosper or the risks.
I Wanted Higher Returns
When I first discovered prosper, I was looking around for higher returns on my investments. I had a lot of money sitting in savings accounts at the time. I wasn’t happy with the rate these savings accounts were paying. I even had high rate online saving accounts with ING and HSBC but the higher rates on these accounts didn’t last very long.
I Wanted to Diversify
I felt at the time that I had enough in cash, real estate and the stock market. I wanted to diversify my assets. Personal loans seemed like a good way to do that.
Getting Started
I started with Prosper back in January of 2007. I placed bids on 2 loans. The first loan had a A credit grade and the second had a AA credit rating. I funded the minimum of $50 on each loan. As you can see I was very conservative at first.
Everything went fine, the borrowers got their money and they started making their payments. I waited until May to bid on more loans.
I made two more loans in May, another A and AA. I made another loan in June. The loan in June was unique. It was and still is my only B loan.
In October I made 3 more loans, all A grade. In December and January I made one A grade loan each month. I now have a grand total of 10 loans.
I Wanted to Make More Loans
Right now I have cash sitting in my Prosper account. I wanted to make more loans but I soon discovered two things. First, it’s very hard to find AA and A grade loans which offer a decent return. Secondly, I’m very risk adverse.
I have a saved search that I use to find loans. I only want AA, A or B credit grades that pay 10%, 11% and 12% respectively. I want a debt to income ratio less than 35% (that’s what most lenders typically use). I wanted 0 delinquent accounts. First credit line had to be 5 to 10 years ago to try to eliminate bankruptcies that had just fallen off the credit bureau. People with bankruptcies have very short credit for their age. For instance, a 50 year old man with 5 years of credit is very suspicious. I wanted only full time or retired, no self employed or students.
You can see that my criteria would give me only the best borrowers at a rate that would still allow me to make a profit. The problem is these borrowers were very hard to find.
Most of the loans that matched these criteria were fully funded, so you ended up bidding down the rate and getting less of a return. The others had some bad situations like medicals bills.
Don’t ever get involved in a situation with medical bills! I can’t emphasize that strongly enough. You don’t have enough information as a lender to asses the situation. Is it from a child birth or is it terminal cancer? You just can’t know, so stay out.
Too Much Work
After awhile I felt searching for loans became too much work. I wanted to select the loans as I don’t trust the automatic options. I want to analyze each borrower's situation. My experience in the credit department came in handy as I knew what warning signs to look for, things like medical bills, too short credit for age, self employed, etc.
I found myself having to constantly log in and run a search to find maybe one or two worth bidding on. If I did get lucky and find a good borrower, many times I would be out bid.
Beating the Stock Market
My goal when I started with Prosper was to get a rate of return that matched the stock market. If you figure 10% (which is a little aggressive in my opinion) as the average market return then my loans had to beat that.
I was not going to accept low rate loans, so my search for a good loan was long and arduous. Something happened in the meantime that made me realize I was underestimating my risk.
Losing All Your Money
I realized you could lose all your money. At the end of last year one of my borrowers just stopped paying. This guy had a AA grade rating. Right now he’s 4+ months late. There are only 25 AA’s out of 15,429 loans that are 4+months.
I had been reading Grahams’ Intelligent Investor at about that time and his advice really hit home. Graham emphasizes protecting your capital (money) above all else. I had known that someone could default but by looking at the loan performance page, it seemed very unlikely, especially considering this was a AA grade borrower.
I invest in mutual funds. If the market is down, I end up with more shares. If the market is up I end up with fewer more expensive shares. But there’s very little chance my shares would ever be worth nothing.
That’s not the case with loans. Banks budget a certain bad debt expense. Banks realize that a certain percentage of borrowers are not going to repay their loans for one reason or another. That’s part of the cost of doing business.
If you’re a small lender on Prosper, bad debt can eat up your profits and then some. Right now I’m looking at a $42.95 loss. In the big picture, it’s not very much money. However, if 10% of my portfolio is going bad, that’s not a good thing. I knew that I could lose money, but until it happened, it hadn't registered in my mind.
I’ve made $29.91 as of today. With a $42.95 loss, I’m now down $13.04 and I don’t own any assets. At least with a house or a mutual fund, I can wait out a down market. Banks can sell their loans to other banks. With a bad Prosper loan, the only thing I have is a tax write off. I didn't have a tax write off in mind when I started lending.
My Opinion
Right now, I’m not that excited about Prosper. I did a lot of work to end up with a loss. There is no way to sell your loans, you have to wait 3 years (or until the borrower pays of the loan) to get your money back.
I think Prosper is great for speculators. If you love taking risks, I think you can do alright with Prosper. At this point in time, I’m spending more time than its worth.
I’m going to transfer my excess cash from Prosper into my checking account each month. I’m going to let my current loans pay off (hopefully). I will revisit Prosper again in 6 months and see if anything has changed.
If you have experience with Prosper, I’d love to hear from you. Are you doing well? Do you have a winning strategy? Leave a comment below and let me know what you think.
Tags Investing Loans p2p Person to Person Loans Prosper Risk SavingsRelated Posts
- Moving My Money Away From Prosper
- Prosper Increases Maximum Interest Rates
- SEC Shuts Down Prosper
- What Prosper.com Taught Me About Risk
- Lending Money on Prosper: What Are the Risks?
Comments
4 Comments so far
[...] Lending Money on Prosper: My Results [...]
I quite like Prosper! I have to admit, there is at least as much behind the idea itself that draws me to Prosper as the potential of making a return – perhaps not the best driver of investment choice!
But for me it's turned out well; I leveraged my good credit to get a loan under 6% and then lent it back out at much higher rates. Six months into the experiment, I've not had any defaults (though I have my first person in 'late' status now), I have 26 loans ranging from AA to D and I have made $129.42.
Right now, I won't be investing any more capital, but I am enjoying watching my mini-hedge strategy in action. I'll see how I feel when/if my first 'late' becomes my first 'default'.
I am not a prosper member so I am not speaking from a position of knowledge or strength, but to me it seemed your strategy was flawed. You stated you had stocks, mutual funds, etc and wanted to diversify. But your big push was protection of capital. With the money you were lending and the people you were lending to, you were not taking advantage of the set up. People with AA or A credit, no bankruptcies, low debt ratio, etc… can go anywhere and get a loan at well below the 10% return you wanted. This idea seemed more logical for people with B or C credit willing to pay higher interest rates for an approval of loan. Inherently risky, but necessary for the return. With most of your money in less than risky investments, this seems like a vehicle for you to allocate some funds for a risky venture. Obviously you would not commit anything you were afraid of losing, but the return could be quite nice. Personally it seems like the Zopo style, where your money is spread over a whole class of loans, is safer. Have you done any research with them? I would love an answer on that.
I don't know if anybody is still reading this thread, as it is old, but I'll say whatever anyway. The prosper vehicle is simply a way for people to get credit. Unfortunately, we, the lenders, don't have access to all the information that a bank would have regarding proof of income, full credit history, and other valuable knowledge of who we are lending to. Simply a picture, credit grade, and whatever they tell us. The money you place in Prosper should be money you have already forgotten. If you lose it all, it should have ZERO impact on your financial situation… in other words you aren't banking on the returns to work for you. My personal experience has been very good with this attitude… minimal strategy, fine tune the automatic bidding portfolio, and sit back. You are correct with minimal money makes a huge percent loss… but thats not the idea behind lending. Takes money to make money. In March, I put 2250 in, divided evenly of $50, and today I have 52 loans. I get one new loan a month from the payments I recieve, sometimes 2… automatically bidding again. The strategy is many loans, over the spectrum of credit grades, with a slightly higher bias to the AA-B. Yes, you will incurr a default here and there, but the rates of return are in your favor comparing to the statistics of how long into the loan the defaults start occurring by credit grade. You can find this information at http://www.ericscc.com. The strategy of picking and choosing is limited by emotion, but allowing a computer to compare a slew of statistical data to any given lender and have it spit out a default rate works more in your favor simply by shear numbers. As with any statistic, the more numbers, the better chance of hitting ideal… like flipping a coin. You can flip a coin 2 times, and have 100% heads. Flip a coin 500 times, and you can bring that down to 50%. Just my thoughts. Hope you try it again!