Updated for 2018 and beyond.
At long last, Lending Club went public recently with an estimated $5 billion market cap. It’s the first really big new generation fintech IPO, and boy is it going to make a lot of people a lot of money. To give you some perspective, at a $5 billion market cap, Lending Club is ~$1.3 billion larger than Yelp! I’ve been following both Lending Club and Prosper since their inception as their offices were right next to mine in downtown San Francisco.
In 2013, I finally decided to invest some money into P2P lending with Prosper to see what the fuss was all about. I had a friend working at Prosper at the time who helped teach me about the market place and the company over several lunches. I’ve written a post on tips for P2P borrowers from a lender’s perspective, a post highlighting the P2P lending returns by borrower rating and credit score, and how P2P lending can even get a little addictive due to the ability to pick and choose who gets to borrow your money.
I was relatively gung ho about allocating several hundred thousand dollars to P2P lending, but I didn’t because I still wanted to do more research given I expected rates to stay low and the stock market to outperform as a result. I also ended up buying another house, so I only invested several thousand in P2P lending as a result, and basically ignored the account for much of the year until now.
MY EXPERIENCE WITH PROSPER ALMOST TWO YEARS IN
Here’s a snapshot of my current performance:
A 7.43% overall return isn’t too shabby for 2014 given the stock market has returned about ~9% over the same period. I’m a very conservative investor with P2P lending since it’s only been about two years of actual investing. As a result, I pretty much invested in A and AA Prosper Rating borrowers along with several B Ratings to get some juice.
My P2P lending portfolio: Five AA notes up front, two A notes two months later, and then four more (2 AA, 1 A, 1 B) after six months. Most recently, I added an additional four notes (1 AA, 1 A, 2 B). You can see several of the loans have already been paid in full. Prosper and Lending Club recommend investing in more than 100 notes for diversification purposes, but I only have several thousand bucks currently invested in high rating notes. If I had $50,000+ invested, I’d definitely be much more diversified.
There are three guiding principles to my P2P lending philosophy. The first is that I don’t lend to people who have a history of more than two delinquent payments. I understand everybody runs into hardships and needs money sometimes. But if you’ve got three delinquencies, you’re out. There’s clearly something wrong with your financial situation or your ability to honor a contract. The second lending philosophy is to not lend money to people who want to buy stupid stuff they don’t need. You know, like a sail boat or a $50,000 wedding. Finally, I’m primarily only lending money to people who are using P2P to consolidate their loans.
Credit card debt is especially prevalent for P2P borrowers. And we all know credit card interest rates are at a usurious 12%-29% for the most part. If a P2P borrower is taking action to consolidate his or her credit card debt into a loan at under 12%, I’m all for helping this person as much as possible if s/he doesn’t have a long history of delinquencies. I think it is absolutely absurd that credit card companies can get away with charging 10X the risk free rate. It feels good to help borrowers save money. The average credit card debt per household is around $15,000 per the Federal Reserve.
I’ll be depositing more cash into my account in about two weeks, and I will be diversifying into a broader range of notes. Currently I’m highly weighted in AA and A rated notes, so I want to add a few more B rated notes, and maybe a couple C rated notes for the first time. But I know that I’m going to be severely disappointed one day when a borrower decides to no longer pay.
TIPS FOR INVESTING WITH PROSPER
Any type of investing is a learning process, and I’m happy that I have a much better understanding of how P2P lending works now that I’ve actually done it for a couple years. Here are some tips from my experience investing with Prosper.
1) Check if you’re eligible first. Your eligibility to be an investor depends on your state of residence, and sometimes your income too. Not all states are created equal. Further details below.
2) Ease your way into it. If you’re a cautious, low risk investor like me, and aren’t sure if P2P lending is right for you, start off with AA and A rated notes to get comfortable with the process. You’ll still make great returns and can diversify into lower rated notes over time.
3) Don’t overlook your notification settings. I made the mistake of having too many email notification settings turned off, so I didn’t realize when notes I’d invested in expired or were paid off in full. So, I had cash just sitting in my account for months that I should have immediately redeployed.
4) Setup recurring transfers to fund your account. I didn’t realize until recently that Prosper has a feature that lets you automatically deposit funds into your account on a recurring basis. If you have the cash flow, automating is a great way to go.
5) Watch for and utilize monthly payments. Once you invest in notes that become fully funded and active, borrowers will start making scheduled payments every month that will be deposited into your account. You can then use that cash to invest in more notes or withdraw if needed.
ELIGIBILITY REQUIREMENTS TO INVEST WITH PROSPER
There are certain requirements you have to meet in order to be eligible to be a lender with Prosper.
- First, you need to be 18 years or older with a valid social security number. Institutional investors can also open accounts with a valid tax ID.
- Second, you need to have a checking or savings account.
- Third, you have to reside in an eligible state.
- And fourth, you may have to meet certain financial suitability requirements based on your state, indicated by asterisks in the table.
Prosper Borrowers however, are eligible to apply in every state except for Iowa, Maine, and North Dakota.
Financial Suitability Requirements
* Alaska, Idaho, Missouri, Nevada, New Hampshire, Virginia, Washington: Minimum AGI of $70,000 plus a minimum net worth of $70,000, OR minimum net worth of $250,000. Net worth excludes home, home furnishings, and automobiles. Lenders also can’t purchase Notes greater than 10% of their net worth.
** California: If you buy $2500 or less of Notes, your investment can’t exceed 10% of your net worth. If you go over $2500 in Notes, the previous applies plus a minimum gross income of $85,000 on your last tax return and for the current year, OR a minimum net worth of $200,000 and total investments can’t exceed 10%.
*** Maine: The Main Office of Securities recommends total investments do not exceed 10% of your liquid net worth (cash, cash equivalents, readily marketable securities)
Lenders and his/her spouse are considered to be a single person for these rules.
If you’re an individual, the minimum you can invest is $25, and the maximum aggregate investment (after meeting the above requirements) you can have is $5 million. There’s also a 1.0% annual loan servicing fee charged to all investors based on the outstanding principal balance of the borrower loan.
MY GOALS INVESTING IN PEER TO PEER LENDING
I plan on doubling my account size with my next deposit this month and consistently contributing to my account every month for the next year. I also plan to diversify my exposure into more B notes, and a few C notes for the first time in order to increase returns by 1% or 2%. No matter how much financial pundits cackle, I still don’t believe interest rates will be going up any time soon. As a result, the demand for yield will remain and earning 7-8% a year with a practically set it and forget it P2P lending portfolio is a very attractive proposition.
Right now I only have 12 notes that are active (three were already paid off well in advance of the loan maturity date). I plan to increase the number of notes to 20 with my latest tranche of money, and eventually up to the 100+ note recommendation for maximum diversification. I’ve built up a very sizable structured notes portfolio since 2012 by being disciplined in contributing, and I plan to do the same thing with my P2P lending portfolio in 2016-2017. My bogie return is 2-3X the 10-year yield. That means 4.4%-6.5% based on the existing 10-year yield. P2P lending hits the sweet spot.
Update 2H2018: Prosper sent a message to investors saying they overstated returns over the past several quarters. This is unacceptable because now investors can’t fully trust Prosper. I’d invest with LendingClub instead. They’ve had their ups and downs, but at least they are a publicly listed company under immense scrutiny from thousands of investors and the SEC. Trust is everything! I’m decided to wind down my Prosper positions.
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Updated for 2018 and beyond.