Comments on: Should I Be The Bank? http://www.moneyandinvesting.net/2007/11/05/should-i-be-the-bank/ Making you richer every day. Mon, 24 May 2010 07:41:03 -0400 http://wordpress.org/?v=2.8.6 hourly 1 By: js http://www.moneyandinvesting.net/2007/11/05/should-i-be-the-bank/comment-page-1/#comment-1310 js Wed, 07 Nov 2007 00:29:52 +0000 http://www.moneyandinvesting.net/?p=93#comment-1310 How do you handle the tax implications of the interest you get off the loan? Does prosper send out a w2 or something? Seems like it might be more of a hobby (that requires alot of work) than a good investment. But if you have the patience and time, it might work out. Problem is the more money you have to "invest" the more time and searching you will have to do...especially when most people are only providing $50-$100 a loan. What if I wanted to put in like 25 or 50 grand? is it even feasible? How do you handle the tax implications of the interest you get off the loan?

Does prosper send out a w2 or something?

Seems like it might be more of a hobby (that requires alot of work) than a good investment. But if you have the patience and time, it might work out.

Problem is the more money you have to “invest” the more time and searching you will have to do…especially when most people are only providing $50-$100 a loan.

What if I wanted to put in like 25 or 50 grand? is it even feasible?

]]> By: CT http://www.moneyandinvesting.net/2007/11/05/should-i-be-the-bank/comment-page-1/#comment-1308 CT Mon, 05 Nov 2007 15:33:12 +0000 http://www.moneyandinvesting.net/?p=93#comment-1308 I tried Prosper with a "test" $500 and I wasn't impressed enough to put in any more money. I did research on it, including reading blogs, lurking in the forums and looking through the stats at the various lending stats sites. The bottom line is that there are much better investment opportunities out there then Prosper. Here are the main problems I saw: 1. Liquidity. Prosper loans are one of the least liquid investments I've ever seen. All loans are for 3 years, and there is no secondary market, so there is no way to get your money out other than waiting for the borrower to pay it back. Even if you sign up for a 10 year CD, there it is still possible to cash out early (usually by giving up a few months of interest). 2. No interest on cash in your account. Most investment accounts have a way for you to put your excess cash into some sort of money market fund, but Prosper doesn't. Any time that your money is not in an active loan (including the time Prosper takes to verify a loan after it has funded), it does not earn any interest. This also means that if you stop lending on Prosper a year from now, you still have to login all the time to transfer your earnings back into your bank account. 3. Too many lenders. Lenders have to login constantly to manage the money that they earn from their loans, and they usually put the earnings back into new loans rather than transfering it out. There are many more lenders on prosper than there are decent loans to fund, which drives the rates on the loans down to unprofitable levels. Also, because there are so many lenders on Prosper, Prosper itself has no reason to try to keep lenders happy. They are much more likely to try to make Prosper more friendly to borrowers, since that will make them more money. 4. Ineffective collections. Prosper handles collections on deliquent loans, and they don't really have much incentive to spend much money on them. Let's say I have a $5000 loan on prosper, and the borrower missed a payment. Prosper itself only stands to make less than $100 on the loan, because they only take a small percentage of each payment. I on the other hand, stand to make more than $5000 on the loan if the borrower pays it. It doesn't make sense for Prosper to spend more than $100 dollars trying to get the loan current, because that's all they can possibly make, whereas I would be willing to spend closer to $1000 if it was up to me. If you look at the collection statistics, Prosper is nowhere near the industry averages because they spend next to nothing on collections. These problems combined are just too much for me to put any more money into. I'm seriously doubtfull that C or lower grade loans will even be profitable over the full 3 years, and it will be difficult to get a true 8%+ return on just AA, A, and B loans. If you adjust for defaults, taxes, and inflation, your real earnings will probably around 1 or 2 percent. Most other options, such as a long-term CD, high yield bonds (including municipal bonds), or stock market investment would probably give better long term returns with more liquidity. I tried Prosper with a “test” $500 and I wasn’t impressed enough to put in any more money. I did research on it, including reading blogs, lurking in the forums and looking through the stats at the various lending stats sites. The bottom line is that there are much better investment opportunities out there then Prosper.

Here are the main problems I saw:

1. Liquidity. Prosper loans are one of the least liquid investments I’ve ever seen. All loans are for 3 years, and there is no secondary market, so there is no way to get your money out other than waiting for the borrower to pay it back. Even if you sign up for a 10 year CD, there it is still possible to cash out early (usually by giving up a few months of interest).

2. No interest on cash in your account. Most investment accounts have a way for you to put your excess cash into some sort of money market fund, but Prosper doesn’t. Any time that your money is not in an active loan (including the time Prosper takes to verify a loan after it has funded), it does not earn any interest. This also means that if you stop lending on Prosper a year from now, you still have to login all the time to transfer your earnings back into your bank account.

3. Too many lenders. Lenders have to login constantly to manage the money that they earn from their loans, and they usually put the earnings back into new loans rather than transfering it out. There are many more lenders on prosper than there are decent loans to fund, which drives the rates on the loans down to unprofitable levels. Also, because there are so many lenders on Prosper, Prosper itself has no reason to try to keep lenders happy. They are much more likely to try to make Prosper more friendly to borrowers, since that will make them more money.

4. Ineffective collections. Prosper handles collections on deliquent loans, and they don’t really have much incentive to spend much money on them. Let’s say I have a $5000 loan on prosper, and the borrower missed a payment. Prosper itself only stands to make less than $100 on the loan, because they only take a small percentage of each payment. I on the other hand, stand to make more than $5000 on the loan if the borrower pays it. It doesn’t make sense for Prosper to spend more than $100 dollars trying to get the loan current, because that’s all they can possibly make, whereas I would be willing to spend closer to $1000 if it was up to me. If you look at the collection statistics, Prosper is nowhere near the industry averages because they spend next to nothing on collections.

These problems combined are just too much for me to put any more money into. I’m seriously doubtfull that C or lower grade loans will even be profitable over the full 3 years, and it will be difficult to get a true 8%+ return on just AA, A, and B loans. If you adjust for defaults, taxes, and inflation, your real earnings will probably around 1 or 2 percent. Most other options, such as a long-term CD, high yield bonds (including municipal bonds), or stock market investment would probably give better long term returns with more liquidity.

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