Don't they always say to invest in what you know? Well, I don't know anything. I don't understand the stock market and I'm not motivated to educate myself. I mean, I turn on CNBC and it's like trying to learn Spanish by watching Telemundo. For me the market has been a crapshoot running on fear and bullpucky. And what I know about real estate is that my home is worth less than what I paid for it six months ago.
But I can grasp the basics of a loan. I lend someone a few George Washingtons, they pay me back with a little extra on top. Yeah, I like that, but how does an ordinary schmo enter the loan sharking business?
Well, hello,
Prosper.com.
Prosper is a Peer-to-Peer (P2P) lending site that has received backing from
eBay's founder, Pierre Omidyar. Imagine
eBay as a bank -- people coming together to ask for and bid on loans. Genius!
Borrowers put up a loan request and lenders make bids starting at $50. It's like you're a mini-Godfather, but without the goons. (
Prosper has hired several collection agencies.) Potential borrowers post a plea on
Prosper, and essentially they're like, "Oh Godfather #2345712, I really need to renovate my kitchen to properly feed my growing family, can you please help me?" And you're like, "Well, maybe, if you can explain the delinquency on your report, here is $50 @ no less than 10.75%."
Most lenders bid between $50 - $200, so their risk is spread out over several loans. Bidding on
Prosper occurs in a Dutch auction format -- winning lenders get varying sized slices of the same loan, but everyone gets the same interest rate. After the loan has been fully funded and approved, Prosper debits the accounts of all the winning bidders and sends the borrower the proceeds.
The borrower makes monthly payments to
Prosper, who collects the money and distributes it to the lenders.
Prosper can be a great opportunity for borrowers with either good or bad credit ratings. If your credit rating has taken a hit or is non-existent, let's face it, you're lucky to get a loan at all. (There is no guarantee your listing will get bids. Two potential Prosper borrowers sought my advice on their unsuccessful loan requests. The first had a very risky credit rating with a low interest rate. The second party showed current delinquencies, and they had withdrawn several listings already which didn't inspire confidence.)
If you have good credit, you can get money for things a bank wouldn't finance -- like an office move. And if lenders continue to bid on your loan after it's fully funded, your interest rate drops. Experienced lenders are even asking for loans to reinvest in Prosper!
I love
eBay as both buyer and seller, so I found
Prosper.com appealing on so many levels. In fact, I dove right in with $1000. This is the most fun I've ever had investing. Actually, it's the only time I've had fun investing. It seems less risky than rolling the dice on a stock pick, and I feel like I'm sort of helping someone. But mostly what I love about
Prosper.com is that just like
eBay, strangers are trading together and depending on each other to do the right thing. Getting to stick it to the banks is just gravy.
It took about a month before my original $1000 investment was fully vested. The loan request has to be 100% funded by the end of the auction to qualify for review. And then several of the loans I bid on were withdrawn because
Prosper couldn't verify the borrower's income.
Bidding Strategy.
I don't really have one, other than trying to reduce risk by sticking to the prime select category -- AA and A credit ratings. Prosper provides a tool that helps you choose a rate depending on the return you want. I used to use this, until I realized I was getting outbid by .01% since Prosper only lists increments of .25% or .5%. You can type in any rate you want, so now I will enter a rate that's off a little, like 13.99%. I also look for a low DTI (Debt To Income) ratio. Although I have gone slumming in the Near Prime Select Category -- I have one "B" rated borrower -- I feel my loans are safer than most other investments, and the rates are much higher than my online savings accounts.
There are two ways to bid on loans. You can browse listings and manually place bids. (When you are outbid,
Prosper emails you.) You can select a Portfolio plan which is an automatic bidding tool. The Portfolio Plans are customizable, or you can build your own from scratch. I haven't used the Portfolio Plans as I don't have a lot of money sitting in my account, and I like to know the story behind the loan I'm bidding on.
I always snipe any
eBay auctions I'm bidding on. That means I place my bid in the last few seconds before the auction ends, either manually or through a bid sniping website. (
JustSnipe.com is free.) This way I don't get sucked into bidding wars, I don't encourage others to bid on auctions I'm watching, and I pay the lowest final bid price possible.
I suppose you can manually snipe Prosper auctions, but I don't feel the same compulsion to get the best deal (in this case, the highest rate). It doesn't bother me if the borrower's rate drops a little more than if I had waited until the end. Plus earlier bids have precedence over later bids with the same interest rate. I figure the lower the rate, the less likely he'll default. It almost makes me feel like a philanthropist.
Loan Standings.
As of March 23, 2008:
| Member Since: | Jan 2008 |
| Total Invested: | $1,840.64 |
| Account Value: | $1,825.05 |
| Number of Loans: | 15 |
| Avg. Interest Rate: | 14.95% |
| Payments Received: | $34.54 |
| Net Income: | $8.92 |
| Defaults: | 0 |
The account value goes down as the loans are paid off (I didn't realize this immediately). I invested another $1000 since February, so there is $210.15 still tied up in bids. The credit ratings of my borrowers range from AA to B. My goal is to accrue enough interest so I can reinvest in a new loan every month. I figure I'll need about $5,000 invested.
If you join through
my link, Prosper will give you $25 when you fund your account. You can only get this bonus if you are referred by a current member, and the offer expires June 30, 2008. (The $25 bonus showed up about three days after I transferred money into my Prosper account.)
Here's my link again to Prosper.com
That's it for now. I'll be updating my loans' progress so stay tuned!
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