My Foray into Prosper as a P2P Lender
One of my key believe about building wealth is (1) never stop experimenting, and (2) always look for ways to build, diversify, and shift my income streams toward passive sources. So I got interested when Prosper became an advertiser on my blog — thank god for the blog, because I wouldn’t have known about Prosper without it.
Signing up to Lend
So I signed up to become a lender around the end of November. The process was easy:
- Join Prosper: This is similar to joining most sites. I just give them my username and password, along with some basic information and I was ready.
- Choose to Lend or Borrow: I chose to become a Lender. Prosper asked me additional information, which are a little more private — e.g., driver license ID, Social Security Number, Bank routing number and account information, etc.
- Pick a collection agency*: One key risk about Prosper lending is that the Borrower can actually not pay, and then you have to pay a collection agency to go get your money back. There were two collection agencies to choose from:
- Set up your bank account: There were two methods to set up and fund my Prosper account: (1) quick verification where I could give Prosper my bank account username and password, and (2) normal one where Prosper transfer money in and out of my bank account. I chose the normal verification process because I wasn’t comfortable giving Prosper my login information (the agreement was too long and scary looking). So I waited 2 days, and verified my account by entering the correct deposit and withdrawal amounts.
* Note that the collection agencies impose the following fees:
- 15% of funds recovered in the first month
- Fee decreases to 10.5% in the second month and to 7.35% thereafter.
- Fee increases by 5% for any payment collected which brings borrower balance current.
This means one delinquent account can really hurt my return on investment, unless I have decent amount of money invested to properly diversify and spread out my risk. This is what Prosper wrote:
“A diversified portfolio is one of the best ways to minimize overall default risk to your Prosper lending activity. Making many small loans spreads default risk across more borrowers, and will reduce the negative impact of any one default on your portfolio’s net return.”
Funding my Prosper account
Funding my Prosper account was easy. Once I verified my bank account, I just ask Prosper to transfer money from my bank. To start things off, I transferred $50. I am not quite ready to take a huge plunge, so I am taking a little dip. My plan is to use the $50 to learn how Prosper works. If things look good, I can transfer more money, and use that along with my gain to reinvest in a new loan.
I understand that when I lend in Prosper, the amount I lent is no longer accessible. Instead, I get a small amount of principal plus interest back each month. This is similar a typical bank loan where I get a chunk of money from the bank and only pay a small percentage back in the form of monthly payments.
Secondly, the minimum amount required to make a loan is $50. So I won’t be able to do anything with the small amount I get back, nor does Prosper pay any interest on that amount. Therefore, I am thinking about transferring enough money in the next month to make another loan.
Lending
There are two ways to lend. I can either search through 3,772 individual loan listings (at the time of this writing), or I can choose from the 4 predefined portfolio plans. To spend the lease amount of effort, I went with the portfolio plan.
After looking through the four plans, I decided to start off bidding $50 on the Balanced portfolio. This is where I am at right now, so I don’t have any more to tell. I will follow up on this experiment, and let you know how my new income stream is working out for me.
More about Prosper and other P2P lending:
- Diggin’ For Gold Around The Portfolios @ Prosper Blog
- Question: Do You Use Prosper Dot Com? @ Ask Jason
- Should I Loan Money to a Friend? @ Armchair Fiduciary
- Lending Club P2P Initial Review, $25 Sign-up Promotion @ My Money Blog
- Zopa, the Person-to-Person Lender, Partners with Credit Unions to Offer High Yield CDs @ Bank Deals
Carnivals:
- This article was featured in the Carnival of Money Stories #39 hosted by Time To Budget. For more information please visit the Carnival of Money Stories.
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Lending Club, income stream, social security number, Prosper, Zopa, firstsource, bank routing number, income streamsRecommended articles
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Interesting. There has been a lot of Prosper talk lately. The risk scares me off, but starting small is somewhat tempting. I may try it some day, but I am still waiting for longer track records to accumulate. Good luck!
I like how you’ve gone in depth on the process of getting started. It gives the rest of us a good idea of how things are set up.
I’d feel kind of awkward about the collection agency–I associate them with bad and scary tactics, though I know that not all are evil.
Seems like everyone is promoting prosper…I tried and dabbled for a while…the meager and unstable returns are simply not worth the risk and tremendous research effort involved.
I think people should see it as more of a vehicle to help others than an actual viable investment option.
-Raymond
So this is like legalized bookie?
I want to sign up as a lender but I am a little scared of the risk too. I guess $50 is not that much to lose but still, it is my hard earned $50.
@FinanceAndFat – Yeah, they got pretty good marketing campaign going. I didn’t know about them until they became an advertiser. I just want to experiment and I am not planning to put in a lot of money until it’s proven worthwhile.
@Mrs. Micah – You’re welcome. Regarding the collection agencies, they work for me since I am the lender, but I hope I don’t have to use them either.
@Raymond – The important thing is that you tried. That’s what I am doing here. I want to see how I can leverage it and enhance my income streams.
@Harris – No, Prosper is a peer-to-peer lending network. Basically, people ask for loans and other people lend them money. No bank is involved, except Prosper as the middleman.
@SGM – $50 is not a bad price for a lesson. Anyway, there’s a lot you can read on Prosper. I am just an action learner. So once I had enough with reading, I want to try.
Hey Pinyo – I’ve thought about doing the Prosper thing myself a time or 2, because I like new opportunities as well; but I thought I’d play the devils advocate for a few sentences…
First off, and not to sound mean, but in the same spirit as I’m not on board with the mortgage bailout for people that got in over their heads, I don’t think the world needs to empower people for not paying their bills…
Second, if I’m looking to steal identities this is a perfect place to get money and have no intention of ever paying it back –
And thirdly – granted, I think everyone deserves a 2nd chance, but most of these people that can’t get a standard bank loan are getting 5th, 6th, and 7th chances at money. I know the creator of the site is just filling a niche, but at the same time, we’re enabling people that may need to learn a hard lesson about responsibility…
Off my devils advocate soapbox… thoughts?
@hank: Those folks on the 5th, 6th, and 7th chances rarely get the loans – they just try real hard and not get too far.
@hank – I don’t think you are being mean. I view it more as an alternative way for people to lend and borrow.
Certainly, there’s opportunity for bottom feeders to take advantage of the system. However, you can always choose to lend to someone with good profile and no prior delinquencies.
Anyway, I have concerns about Prosper as well and I don’t recommend that anyone jump in without familiarizing themselves with the nuances first. I am currently investing only $50, so that I can learn. Experimenting is a good thing.
@Mike – thanks
In addition to Prosper, there are several other P2P Lending players entering the space.
In early December, LendingClub.com opened their (formerly FaceBook users only) lending application to the wider public. They do things a bit differently than Prosper, as they underwrite the loans (ie, bucket by credit grade and set interest rates for each bucket). They have a 640 FICO minimum for borrowers, as well as a max. 30% DTI, so maybe a better pool of borrowers.. plus they have a $25 minimum bid, which means you can diversify into twice the number of loans as with Prosper’s $50 minimum.
Zopa.com launched in the US in early Dec, but it’s nothing like their original UK version and is oddly “un-P2P”. Lenders just buy into a 5.1% guaranteed CD, and, from what I can tell, Zopa pockets the rate-spread between 5.1% and whatever they charge borrowers (up to 17% or so). Other weird stuff about their model, as well, including a mandatory “help” (ie, a forced donation of part of your return to at least one borrower). May be viable for borrowers, but as a (young-ish) lender who has no interest in “testing out” an unproven asset class for MMKT returns, not too interested.
Loanio.com is scheduled to launch in Jan ‘08, and, while little is known, think it may tend toward a more free market / auction-style P2P marketplace… similar to Prosper.
It’s fun to watch the space, anyway. In 5-10 years, this stuff could be huge (and reliable, too).
@PeerLend – thank you for sharing all these other sites. I will check them out. The better quality borrowers on LendingClub is definitely desirable.
I agree, Zopa model is not as attractive.
Personally, I decided to lend with Lending Club first, but I will also invest some money with Prosper in the near future. I will not loan a great deal of money with either site because the superior tax and time efficiency of index fund investing.
Before jumping in check out the late rates for yourself on one of the many Prosper statistics sites available rather than relying on any press accounts of the default rate.
@Personal Loan – I started with LendingClub.com a few days ago and I am still trying to get my account verified. I think it’s easier to start with LendingClub because of the $25 minimum to lend (vs. $50) — also, if new lenders use an affiliate link to sign-up, they automatically get $25 that they can lend out for free.
I agree that nobody should dump all their money into these 2 sites, but they could be a part of any portfolio — so far, I am looking at 11.99% return, which is not bad considering what the market is doing.
Note: Use this affiliate link to get $25 sign-up bonus.