Peer 2 Peer Lending? (1 Viewer)

[theSpaniard]

Does anyone here have any experience with Peer to Peer lending? It seems to be an up and coming investment trend, and more and more people are giving it a try due to the terrible yields on bonds, CDs, MMAs, etc.

I decided to give it a try on Prosper.com, just with a small investment until I see how it goes. I would really appreciate some advice investment strategy, how to choose loans, etc. if anybody here has tried this out.


Edit: There is not much out there online as far as lending strategy, tips and the like, so I decided to create one myself. Maybe someday in the future this will help out someone else.

http://www.squidoo.com/prosper-com-lending-guide

 

[parlorcitysaint]

My one rule regarding loaning money is to never loan more than I'm prepared to lose.

Somehow, though, I don't think that that's the kind of advice you're looking for.

 

[theSpaniard]

Agreed, that is why I am starting small

 

[wizard1183]

I looked into it once and thought it was a great way to "make" money. MUCH better ways out there trust me. For one, the firms you're using are not backed up by major banks or FDIC (may be mistaken) and the insurance that backs them up, something fishy with it. You will be the last person on the list to get paid IF you get paid at all! You have to stay on top your game and you are taking a risk every day you lend out money because these are mostly starter loans they give out or to ppl who screwed up their credit. Now you get to choose who you lend to y accepting or denying the loan but if you're too choosy you won't lend out much and if you loan out too much which is the intent, the risk is greater. They claim you want 50-60 loans in diff categories of say 8-22% interest rates to help in case they don't pay. Well to me it's too great a risk especially when it seems like the majority of ppl who are taking out small loans could careless about whether they pay them or not. Invest into something else. The stock market is much better than this.

 

[Zack Lee]

has not been the same since the big napster lawsuit.

 

[whodat2626]

I've been loaning money on Prosper for about a year and haven't had a default yet. I only loan to A rated borrowers and I been averaging about 8% return.

 

[VVextreme]

I've been loaning money on Prosper for about a year and haven't had a default yet. I only loan to A rated borrowers and I been averaging about 8% return.

Ok, debt is super cheap right now. If these people really are such great credit risks, why are they paying 8% plus whatever % that Prosper skims off of you to borrow money?

You may not have had any defaults yet, but all it takes is one default to wipe out all of your gains. When that happens, you're no longer getting the returns you need.

 

[theSpaniard]

On the Prosper site, they talk about how they build the default risk into the interest rates.

For example:

Say the highest rated borrowers (rated 'AA' on Prosper) default on their loans, on average, about 7% of the time. The interest rate they borrow at will be set at 15%, so that a lender can expect an 8% return on average.

Say the lowest rated borrowers (rated 'HR' on Prosper for High Risk) default on their loans, on average, about 20% of the time. The interest rate they borrow at will be set at 32%, so that a lender can expect a 12% return on average.

These numbers are made up to explain the concept, but are not far off from the actual numbers. Because the default rate is built into the interest rates, I feel that the risk is mitigated somewhat. The debt is unsecured, meaning you lose your investment if the borrower defaults. To me this is no less risky than playing the stock market agressively.

 

[theSpaniard]

Ok, debt is super cheap right now. If these people really are such great credit risks, why are they paying 8% plus whatever % that Prosper skims off of you to borrow money?

You may not have had any defaults yet, but all it takes is one default to wipe out all of your gains. When that happens, you're no longer getting the returns you need.

Not all of the borowers are high credit risks:

Marketplace Investor Performance - Prosper

The average weighted credit score of a AA rated borrower is 806.

 

[efil4stnias]

Not much info to glean from that site.

What are the terms of the lend? 12 mo/18 mo or more?

I did find this little nugget:

Because a Note cannot default until it's missed five payments, the return for a portfolio composed solely of young notes will be based entirely on those loans that remain current. This can result in a temporarily higher return for young portfolios than should be expected.

Is it 5 consecutive payments? What are the actual terms of default? Can a borrower extend the term of the loan by sending in half a payment? Because any of these will reduce you ROI that they tout on that website.

Interesting concept. But unless you are ready to play "bank", i wouldnt expect much return. 6% return on $5000 over 12 months, man you can get that from a mutual fund.

 

[FullMonte]

On the Prosper site, they talk about how they build the default risk into the interest rates.

For example:

Say the highest rated borrowers (rated 'AA' on Prosper) default on their loans, on average, about 7% of the time. The interest rate they borrow at will be set at 15%, so that a lender can expect an 8% return on average.

So, if I understand correctly....

You loan $100 out 100 times. That's $10,000 in loans. You get an 8% return on that. So, your $10,000 investment returns you $800.00. However, 7% of those loans default, which means that you lose $700 in defaults. Your net is $100, minus 15% capital gains taxes, which means that your $10,000 investment returns you $85 after taxes?

Or am I misreading what they are saying?

 

[Maxp]

So, if I understand correctly....

You loan $100 out 100 times. That's $10,000 in loans. You get an 8% return on that. So, your $10,000 investment returns you $800.00. However, 7% of those loans default, which means that you lose $700 in defaults. Your net is $100, minus 15% capital gains taxes, which means that your $10,000 investment returns you $85 after taxes?

Or am I misreading what they are saying?

He said the interest rate was 15%, however, he also said those numbers were not the actual rates.

 

[theSpaniard]

Not much info to glean from that site.

What are the terms of the lend? 12 mo/18 mo or more?

I did find this little nugget:



Is it 5 consecutive payments? What are the actual terms of default? Can a borrower extend the term of the loan by sending in half a payment? Because any of these will reduce you ROI that they tout on that website.

Interesting concept. But unless you are ready to play "bank", i wouldnt expect much return. 6% return on $5000 over 12 months, man you can get that from a mutual fund.

Terms are available in 12, 36, and 60 months. And you are right, you could get 6% from a mutual fund. But the reason I am trying this is because of the 10-12% annualized returns this method claims to bring.

 

[FullMonte]

He said the interest rate was 15%, however, he also said those numbers were not the actual rates.

Ok...I wasn't sure if they were saying that the return on the investment was 15%, or if the interest rate was 15%, and that the company kept 7% as a fee, returning the investor 8%...which was then offset by the defaults.

 

[FullMonte]

Terms are available in 12, 36, and 60 months. And you are right, you could get 6% from a mutual fund. But the reason I am trying this is because of the 10-12% annualized returns this method claims to bring.

My only issue would be the risk.

If I can get 6% from a mutual fund, or 10%-12% from them, that's something to look at.

But, then I look at the fact that it's almost impossible for me to lose *ALL* of my investment with a mutual fund....unless I misunderstand how P2P lending works, there is an actual risk of losing your entire investment. I'm not sure that *I* would be willing to risk that for the possibility of an extra 4% return. But, that's my personal opinion, and I tend to be a bit more conservative.