I’ve got a confession to make. When I log into my Prosper account to figure out where to dole out my next $1,000 tranche to borrowers, I feel a little bit like President Obama handing out money to his supporters. The only difference is I’m figuring out how to allocate my own money, not my neighbor’s money to build wealth.
They say money is power, but I never experienced such intoxicating power until I started investing in peer-to-peer lending. P2P lending lets me help decide the fate of someone’s desires or well being. When I invest in the stock market or in private companies, I don’t feel empowered because I’m a minority investor with no say. In fact, I’m losing control over my money as I entrust others to do a better job at making a return on money than I can.
On a personal level, having money is empowering because money buys freedom. Freedom to do whatever was my main motivating factor to save so aggressively during my career. I never thought of making money so I could have power over other people like our great politicians. Now that I’ve tasted what it’s like to be a sugar daddy over peer-to-peer lending, I’m afraid of what I might become!
EMPATHY FOR GREED & CORRUPTION Read more…
Everybody has a different need for borrowing money. Some might want to get a new $5,000 home theatre system (!!!), while some might need a $10,000 loan to prevent their small business from going under. It’s important to understand that if you are a borrower in P2P lending, you must present yourself in the best light possible.
Treat your P2P lending borrower’s profile as if you were about to interview for a job. Your resume needs to exemplify your strengths while deemphasizing your weaknesses. The average employer spends just seven seconds on a resume before making a decision whether to go forward with an interview or boot you to the curb. The same cursory amount of time is spent by a lender, especially one that is investing in over one hundred notes for diversification purposes!
EXAMPLE OF A POORLY RATED P2P BORROWER Read more…
As an investor in P2P lending with Prosper, I’m doing as much due diligence as possible to make sure I have the right portfolio that matches my risk profile. I’m at the lower end of the risk spectrum because I’m using P2P among other investments to replace my CDs which are coming due over the next four years.
One of the important things all investors in any type of asset class should do is analyze historical data. Obviously, historical performance will not guarantee future performance. However, historical data does give us a glimpse of what we might expect if we follow similar investments. A lot has changed in the past three years, most notably a decline in the risk free rate, and a recovering stock market.
With the 10-year yield under 1.7% and the S&P 500 dividend yield under 2%, I now have a minimum bogie to shoot for. My goal is 3X the 10-year yield, hence 5-6%. Now it’s time to figure out how to get there!
As you can see from the detailed chart, investor returns are inversely correlated with the borrower’s rating. Makes sense given the lower the quality borrower you are, the higher the investor demands in return. The chart also calculates the weighted average credit score per borrower rating category. Interestingly, the credit scores are not that bad at all, especially for those in the D, E, and High Risk rating categories.
WHAT WE CAN DEDUCE FROM THESE FINDINGS Read more…
Everybody needs to borrow money some time. Peer-to-peer lending is a good alternative if you don’t want to pay usurious rates from loan sharks, if you’ve been denied a loan by your local bank or credit union, or if you are just too embarrassed to ask someone you know for help. From $1,000 for an emergency medical bill to $15,000 to pay for an engagement ring, some reasons are more legit than others!
As an investor in P2P lending, it’s always a good idea to set parameters on what type of person you plan to lend to. As P2P lending is primarily going to replace my low risk CD income that’s coming due, I intend to focus on low risk borrowers with high ratings between C to AA. They’ll probably pay rates of 6.59% to 15% so I can make a 4-10% return. An important part of understanding a borrower’s risk profile is to therefore understand what they plan to borrow money for!
I highlight all the main reasons why people borrow money through peer-to-peer lending. These are actually selections for borrowers to choose from on Prosper.com. I bucket the reasons into four categories (Great, Good, Borderline, Suspect) and analyze each reason from a borrower’s point of view. As a potential borrower in P2P lending, you can then decide whether you want to go forward with borrowing based on my rationale. The same goes for lenders when selecting loans to fund.
GREAT REASONS TO BORROW VIA PEER-TO-PEER LENDING Read more…
With savings interest rates under 0.3%, the 10-year yield under 2%, and stock market dividend yields under 2.5%, investors are starving for yield. I’m looking for a relatively hands off investment class that can provide superior yields as my long term 4%+ CDs start rolling off in 2014. I think I’ve found it in peer-to-peer lending with Prosper.com. Many of you have asked about P2P lending forever and I’m pleased to embark on this new income stream.
I’ve known about San Francisco based Prosper for years, but I’ve never bothered to invest because the industry was still defining its own rules. P2P lenders sprang up in 2005 to provide needy borrowers with viable alternatives to normal commercial bank loans. The idea was to reduce borrowing costs by removing the bank intermediary, and utilize the internet to connect lenders and borrowers to make more and save more.
The concept is good, but default rates prior to 2008 were commonly as high as 20% vs. 1-5% default rates for traditional commercial bank loans. In response to higher default rates and a determination that P2P investing is a security asset class, The Securities And Exchange Commission (SEC) put stringent regulator oversight on the industry and forced P2P lenders to be more vigilant in screening their borrowers based on their credit histories and submitted information. Also, if a borrower’s loan becomes delinquent, P2P lenders will appoint a collection agency.
PEER-TO-PEER LENDING IS SAFER NOW Read more…