In 2006 Prosper popularized person to person lending in the US and introduced a new form of investment. Attracted by good returns with manageable risk, I invested a little bit to try it out. Unfortunately after the better part of a year I am currently only breaking even.
My lack of success is due to intentionally starting out funding risky loans with a higher interest rate. I wanted to start with the riskier loans to push the envelope and see how large a return I could get. I now have a better idea of how to distribute my money. The losses from the defaulted loans will quickly be recovered by the interest on loans to more reliable borrowers.
I also think a fair amount of these defaults were due to bad luck. As Prosper matures, more performance data is now available. By looking at this data, you can calculate the risk that any loan will default and decide for yourself.
Here is a snapshot of my account a few months ago:
As you can see from my statement, 7 loans out of 90 were late – after capturing the image above, 3 of the loans defaulted – canceling out my earnings.
Here is the message I got from Prosper for one of the loan defaults:
One of your Prosper loans has defaulted and been sold to a debt buyer. Proceeds from the sale of this loan, if any, were credited to your account upon the close of the sale.
Loan: Need to pay rent asap! (Loan #160)
Sale date: Dec-21-2006
Sale reason: Delinquency
Principal balance before sale: $49.36
Loan value before sale: $64.26
Proceeds from sale and forfeited group rewards: $1.72
Borrowers whose Prosper loans default will have their delinquency and default reported to a credit reporting agency, and will never be able to borrow money on Prosper again in the future. Learn more about defaulted loan sales.
Ouch! That’s a pretty horrible return.
Here are some tips to help you maximize your prosper earnings:
1. Use advanced search instead of standing orders.
While standing orders are great for distributing your money faster, I have come to prefer hand-picking each loan. This only takes about 10 minutes a day and prevents loans to people with good credit with questionable stories.
2. Start with low-risk (good credit rating) loans, and build your way toward riskier loans.
Starting with safer loans will build a solid stream of income that you can then gamble on the riskier loans.
3. Watch out for students and requests for loans to “pay bills”.
Many of the riskier loans list their monthly cash flow. This is good, obviously you want to make sure they are going to catch up. As a friend said – there is no “SuperProsper” for the borrower to go to as a last resort – Prosper is their last resort.
4. Astronomical interest rates (> 30%) indicate that the borrower is clueless.
Often people asking for loans have no idea what a reasonable interest rate should be, or what they have a chance of paying back. Also, when choosing high-risk loans, choose those with a low total amount – it will be more likely that the lender can pay it back.
5. Don’t take out a loan to “re-invest” in Prosper.
This was one of the first ideas that occurred to me. I thought I should borrow money at a low interest rate, and turn around and lend it at a higher rate. In actual fact, it is difficult to find enough loans to invest in. There are currently not enough borrowers to make a profit by re-loaning like this. I recommend starting with your own money (however little) and establishing enough interest income first.
If you do try Prosper, please remember that is risky. I am not a qualified investment advisor, and I cannot be held liable for your losses. Good luck!