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
I just spent the past couple hours going through Prosper.com’s investment system to deploy $1,000 in new loans. What stood out was how little some borrowers spend filling out their profile. Let’s use the below D rated borrower as an example.
The borrower’s credit profile is what it is. If you’ve got 23 delinquencies in the last 7 years, Prosper’s system will pick this fact up. There is no escaping or massaging your profile except for when it comes to your employment info such as “Stated Income” and “Occupation.” Stated income is hard to verify, while this borrower doesn’t even bother to highlight their occupation. Parking ticket officer perhaps? Just like when you don’t put down your GPA, an investor thinks the worst!
As I wrote in a previous article entitled, “P2P Investor Returns By Borrower Rating And Credit Score,” my plan is to disperse funds between AA (top rating) and D, E, and HR (lowest ratings) for a dumbbell approach to achieving 6-9% net returns. This borrower’s profile looks alarming, however that’s what the estimated 22% expected interest return is for. The borrower’s debt to income ratio is low, while the revolving credit balance of $2,168 is not high at all. Alrighty, let’s take a chance!
Not so fast. With a D Prosper rating, a 640-659 credit score and 23 delinquencies in 7 years, I want to know more about this borrower’s past. The solution for a borrower is to simply describe the purpose of the loan and why they are a good candidate in the “Description” section below. This is where one can really sell themselves to create a connection with the lender. Again, if you write nothing, investors will think you’ve got something to hide, like being a bank robber.
Imagine reading a description such as, “The purpose of this loan will be used to help rebuild my house of 28 years after burglars set fire to my kitchen and stole my wedding ring that was given to me by my deceased husband. I’m an excellent candidate for this loan because although I’ve gone through much hardship in life, I plan on making amends by consolidating my loans and paying off all my debts.”
Instead, the borrower writes NOTHING. As a result, I’m not even going to bother because there are plenty of D rated borrowers in the system. If you are a low rated borrower, it’s more important than ever to share your story!
EXAMPLE OF AN “AA” RATED P2P BORROWER
Now let’s take a look at an AA rated borrower’s profile on Prosper.com. This borrower plans to pay an interest of 6.7% on her loan, more than 3X the current risk-free 10-year Treasury yield of 1.9%.
It’s obvious from the borrower’s credit profile that she is an excellent candidate. She has a Prosper Score of 9, a 800-819 credit score, no delinquencies, and a moderate debt/income ratio of 25%. The only red flag is that she doesn’t highlight her occupation. Be proud of your occupation, no matter what it is folks!
What sold me on this loan was her simple financial situation description. “My payments are always full payments made on time. I was in banking for 20 years so I have always been good with money.” Her Prosper Activity information of 17 on-time payments backs up her description nicely. Although my plan was to make 20, $50 loans this round. I decided to invest more heavily in such borrower’s whose profiles I really like.
TIPS FOR BORROWERS OF P2P LENDING TO GET THAT MONEY
- Think Like A Lender: The number one thing a lender wants is knowing he can trust you to pay the agreed upon interest rate in the time stated in the contract. The more you can convince a lender you are credible borrower, the higher the chance you will be able to get money.
- Tell The Truth: Remember that social capital carries a lot of weight in the internet world now. As soon as you start to lie or mislead investors, you will be shutout forever. Everybody makes mistakes with their money. Just come clean and get people on your side! As soon as an investor sniffs something fishy, you will be blackballed.
- Describe As Much As Possible: Be as clear and explicit as possible why you need the money. If you need the money to pay this year’s college tuition, say so! Saying you need money to achieve “a brighter future” is not good enough. You don’t want to leave any doubt in the lender’s mind where your money is going. Fill out your application as completely as possible and leave no question unanswered!
- Check Grammar And Punctuation: Nothing turns off a reader or lender than poor grammar and punctuation. You wouldn’t send a poorly written application to a college of your choice, nor would you forget to spell check your resume before sending it to your dream employer. The same rules apply for borrowing someone else’s hard earned money. The default assumption for applications with poor grammar is low quality, high risk, scammers.
- Expectations: If you’re banging a 580 credit score while making $35,000 a year, don’t expect to miraculously have people banging down your internet door to fund a $25,000 loan. Prosper will calculate your Debt to Income ratio which limits you to what you can reasonably borrow. Prosper’s goal is to keep the marketplace running and to minimize defaults for everyone’s good!
- Don’t Come Across As Desperate: The more desperate in your application you sound, the less likely an investor will lend you money. You’ve got to have a confident, matter-of-fact tone in your writing. Have your parents or loved one review your application. Do not whine about why life is unfair. Be as confident as possible that you will utilize the money for a necessity and pay them back.
RESPECT THE CONTRACT
Understand that someone will be lending their hard-earned money to help make your financial situation better. They believe in your story and are therefore taking a leap of faith to help you. The lender is also trying to improve their financial situation. By defaulting on your loan, you are directly hurting someone else as a result.
The P2P lending marketplace is often times a second chance for those who’ve gone through financial difficulty. Please always honor your borrowing contract on Prosper. If you fail to repay your debt, your credit score will get smashed, and your social capital will be ruined to a point where you will run out of places to ever borrow money again.
If you are interested in investing from Lending Club click here. They’ll ask you for the purpose of the loan, loan size, estimated credit score and basic information to see if you qualify. I encourage you to leverage P2P mainly for consolidating your higher interest loans. Borrowing to go to Hawaii on vacation is not a wise choice, nor is borrowing to buy a new 2013 Mercedes SL550 in the picture above.
If you are interested in being a lender just be warned, investing in P2P lending can get addicting because it is a lot of fun analyzing profiles to make a greater return on your money.
Wealth Building Recommendation
Manage Your Finances In One Place: One of the best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances on an Excel spreadsheet. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.
A great feature is their Portfolio Fee Analyzer, which runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was hemorrhaging! There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.
Finally, they recently launched their amazing Retirement Planning Calculator that pulls in your real data and runs a Monte Carlo simulation to give you deep insights into your financial future. Personal Capital is free, and less than one minute to sign up. It’s one of the most valuable tools I’ve found to help achieve financial freedom.
About the Author: Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college on Wall Street. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 35 largely due to his investments that now generate over six figures a year in passive income. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom.
Updated for 2018 and beyond.