Sep
5
Prosper … Will I Prosper?
September 5, 2007 |
Life is not all about stocks. It is about loaning money as well, about helping other people achieve their dreams, grow the economy, and fill your pocket. For a long time I have toyed with the idea of starting either a bond portfolio, or a Prosper loan portfolio. For those not familiar with Prosper, it is a Peer to Peer lending program where borrowers try to get better rates than they would otherwise get from banks and lenders diversify their loaning money among multiple borrowers to reduce default risk.
Certainly Prosper could be a risky business. Prosper argues that less than 3% of the loans default. Some people say that only about 82% of the loans produced in Prosper are ever paid in full, without defaulting. Yet, people still make money, and some lenders keep lending. My tricky situation is finding the top 82% of the borrowers, and avoiding falling prey of such 18% defaulters (poor credit, history of delinquencies, etc.)
Rationale
It is difficult to get investment grade bonds. For starters there aren’t too many available. The flight to safety approach of investors in the current credit market has left me without too many options. Secondly, individual investors have to cough up a lot of money to start into the bond market. It is common to need $5,000 to $10,000 to buy bonds, and then it is from a single issuer. I certainly do not want to do bond funds – which are affected by bond price fluctuations more than individual bonds would affect me.
Investment
My initial investment into the bank-wanna-be market is $1000. I have decided to fund 10 loans at $100 each.
Selection Criteria
My initial strategy is to find AA, A, or B rated borrowers with no delinquencies reported on their credit reports, and no public record entries (potential bankruptcies) within the last 10 years. It is not as easy as it sounds (or reads). However, I am trying to stick as much as I can to this rule. During my landlord experience I have found out that people who pay their loans on time are more likely to pay my rent on time. And I have found a huge difference between people who have spotless credit and those who haven’t. So far I want to stick with people who have demonstrated to be responsible: at least to the banking industry. Hopefully I will get few defaults here.
My Goal
I want to receive a total rate of return of 8%. Since prosper charges around 0.50% in fees for the service, and around 0.50% to 2% may default (depending on whether the borrower is rated AA, A, or B), I have to bid for interests of 9.5% to 15%.
To be continued…
This is just the start. I have bid for 10 loans, and during the next 24 hours or so I will find out if my bids where successful. It would not be until months later that I will find out if this is a good strategy. Hopefully I will be able to benefit from the credit crunch that borrowers are suffering while alleviating their pain with the extra money I am making on day-trading.
Comments
6 Comments so far
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If I can make a couple of recommendations…
- 10 loans isn’t very diversified. If one goes bad, you are almost guaranteed a loss. I would suggest going with 20 $50 loans, but it sounds a little late on this.
- Think about setting up a standing order for autofunding loans for your parameters. I’ve been finding one or two a day reach my criteria (AA-B, less than 25% DTI, 0 delinquencies, offering a rate over 14%). I don’t use public records, but I probably should and will soon. The standing order is great because you don’t have to do any work. The auto-funding is great because it can’t get bid down to nothing.
- I’ve been lending for around 18 months now, and it’s still difficult to determine how things are playing out, so it may take more months than you think. Since I switched to the above mentioned strategy, I’ve been doing quite a bit better.
I’d like to echo Lazies input, 10 loans are not particularly diversified. I did sixteen $50 loans for my initial foray into Prosper. So far two of them are already kicking up and playing dead for me.
I was silly and decided to have some fun and bid on a HR for the hell of it. That one died quite quickly. Unfortunately even the B’s are not completely safe. The B had a completely clean credit report according to prosper, I almost feel sorry for that that now it will be ruined for several years.
Just try to make it fun so that the loses, if you are unlucky, are not to mentally damaging. With only a few months under my belt, I’ve almost made back a full loans worth of net income to make up for one of the defaults. Thats a nice feeling.
[...] And Investing started a Prosper portfolio and wonders whether Prosper can make him prosper. It’s an option, but I doubt any serious money can be made without a sizable [...]
FWIW, I have three $50 loans out there and it’s on B,C and E grade loans. So far so good. I think you are right to go with higher grade borrowers. Somehow I ended up with the E grade by mistake. I was only seeking listings that were C or better, with a homeowner and verified bank account. I think that the latter two criteria are very important, more than the credit rating itself. A serious listing will have done the verification/vetting first and a homeowner will have a better idea of their budget, usually, than a renter. I don’t factor in age, but I noticed that my loan holders are mostly over 30.
I would love to hear your results! For me, it’s still just mad money, but I could see it being a great investment vehicle if done right.
[...] I have been lending money at Prosper. (P2P lending where lenders spread their risk among many borrowers, and borrowers get a chance for better interest rates than they get charged at banks). I increased my loan portfolio to $3,000 and may increase it a bit more early next year. I still have the goal of earning an effective rate of 8% (after fees and defaults). That should be a bit better than depositing at the bank and than corporate bonds (without going into junk bonds). My strategy keeps being the same: $100 loans to B, A, or AA grade individuals with no reported delinquencies or public records. By the time I reach $10,000 invested in prosper I should have at least 100 loans so that no single loan default will wipe out more than 1% of my invested loan portfolio. [...]
[...] Ironically, Prosper.com is the only one of my portfolios showing all nice and green. Better than I expected, it shows all loans either current or paid (1 paid). So far, I have issued 31 small/shared loans, one of them has been paid off. The initial principal was $3,000 (small amount, but significant enough to try). I am increasing the principal amount $2,000 more. Short term goal is to have around 50 loans or around $100 each. I started my Prosper Adventure on September 2007. [...]