My Second P2P Loan On Prosper
By Pinyo • Jan 8th, 2008 • Category: InvestingIn the post, “My Foray into Prosper as a P2P Lender,” I shared my initial experience with Prosper. Since then, I have made a second loan and wanted to share some more information — the good, the bad, and the ugly.
The Portfolio Plan Disappointment
The last time I wrote about Prosper, I decided to start off bidding $50 on the Balanced portfolio. At first, I thought a portfolio plan works similarly to mutual funds — i.e., you buy into the plan so that you can own a little bit of multiple loans — I wish this is the case. Instead, the portfolio plan is a standing order that automatically let the system bid on loans based on criteria such as credit grade, now delinquent, debt to income ratio, employment status, etc.
My first $50 loan was made at 13.97% (pretty good considering what the stock market is do right now). The borrower has the following profile:
- Credit grade = B
- Now delinquent = 0
- Debt to income ratio = 26%
- Employment status = Full-time
Why the disappointment? Unfortunately, the borrower also had 3 delinquencies in the last 7 years. Should I be concerned? I guess I shouldn’t, but I’d be much happier if the borrower had no delinquency.
My Second Loan
It actually took me three tries before I successfully lent out the second $50. My first attempt was canceled because the borrower has not been verified. I was outbid on my second attempt. Finally, I won on my third attempt, which was $50 at 10% to a borrower with the following profile:
- Credit grade = AA
- Now delinquent = 0
- Debt to income ratio = 12%
- Employment status = Full-time
So, I am currently lending out $100 at a blended rate of 11.99%. My first payment is due on the 12th, so we’ll see how that goes.
What Have I Learned So Far?
- The portfolio plan gives you less control, but it’s a whole lot faster and easier.
- Prosper doesn’t pay interest for money sitting in my account balance, so it’s good to loan it out as fast as possible.
- It’s better to bid on 100% funded loans that only have a few hours left to go, because:
- It doesn’t lock up the money while the bidding process is active — putting the money to work sooner.
- Since loan can expire without being filled, loans that do not get completely funded can waste your time.
- It’s good to set minimum bid rate to an amount lower than the current rate to avoid being outbid
- All loans are for 3 years and it works similar to mortgage. For example, I lend out $50 at 13.97% and I will be getting back 36 monthly payments of $1.71. So, it’s not as flexible as some investment vehicles.
Now, I am off to see what LendingClub.com has to offer. I was told that I could get $25 just by signing up.
If you want to get started on any of these Peer-to-Peer Lending site, please use these links so that you’ll get $25 sign up bonus — Prosper and LendingClub.com.
More about Peer-to-Peer Lending:
- True diversification @ Brip Blap
- Carnival of Peer-To-Peer Lending #1 @ Lazy Man and Money
- Lending Club P2P Initial Review, $25 Bonus Promotion @ My Money Blog
- Peer-to-peer lending @ Wikipedia
- Faith in Fellow Humans — My Thoughts On Prosper @ Prosper Blog
This post was featured in:
- The Carnival of Peer-to-Peer Lending: 2nd edition hosted by Brip Blap. For more information please visit the Carnival of Peer-to-Peer Lending.
All posts by Pinyo
I think when you get involved with “services” like this, you have to ask yourself if you’re really providing a “service?”
Are you really helping these people, or are you enabling them?
Borrowing money almost always puts a person at risk. Unfortunately, being the lender in the situation enables this person to continue with their poor behavior.
If these people were in control of their finances, they wouldn’t be borrowing money on the internet.
Basically, you’re choosing to profit off of people’s idiocy and desperation. I don’t think that I, in good conscience, could do that to people.
You’re participating in the destruction of people’s lives. Morally, I don’t think it’s a good thing to do and I don’t agree with it.
Just my opinion.
I’ve been using Prosper for a little bit and I just started using Lending Club. I like Lending Club because you can invest with $25, which is easier to diversify your portfolio if you don’t have a lot of cash to invest (like me). However, Prosper has a lot better website. It’s easier to use, they outline all of your cash (in and out of your account).
The funny thing is I wrote a post about portfolio plans called the good, the bad, and the ugly…
http://www.rateladder.com/2007.....-the-ugly/
I am wavering between Lending Club and Prosper. A question - maybe you answered this with the word “blended”, but is the rate the APR compounded yearly or the rate on the entire length of the loan. For instance, a loan of $100 at 9% compounded yearly would end up being 129.50 total cost, or $109 after three years.
I agree that the portfolio plan gives you less control. Although standing orders may give you more control, than a portfolio plan, I still prefer manual bidding to either method. Sometimes there may be red flags (or green flags for that matter) on listings that cannot be filtered for in the standing order screener.
I don’t know if you’re still reading, Kevin, but one thing I think Prosper is good for is consolidating one’s loans. If you’re trying to change your tree–wouldn’t it be better to pay off debt at a lower interest rate? Sure you’re trying to pay it off fast, but you don’t want to pay more than you need to, right?
However, a lot of loan consolidation services aren’t too trustworthy (as a Ramseyite, you agree, I’m sure). Prosper gives you a chance to appeal to people directly and say “Look, I’m trying to turn my life around.”
Tricia from Blogging Away Debt did it and got a much better rate than she had been paying.
That said, I have issues with the site too and haven’t used it. But I could see doing so or using it to consolidate if I needed to.
Maybe I’m missing something, but what’s the risk of this? Why would people request such small loans, and what happens if they don’t pay you back?
@Kevin:
Thanks for sharing your perspective. I am not lending in Prosper to help people. To help people, I donate to charities, e.g., the Red Cross, and the Salvation Army, etc.
I agree that there are people in P2P space — both lenders and borrowers — that have no business being there. On the other hand, there are borrowers and lenders who know exactly what they are doing. I have read some of these listings and borrowers can, and do, explain what they are using the money for and why they chose P2P over banks.
For me prosper is strictly another way to invest and grow my money. This is no different than investing in the S&P500 and being part owner of companies that profit from cigarettes, weapons, sub-prime loans, etc. I know some people are sensitive to this.
Call me thick skin, but that’s how I see it.
@SavingDiva:
I started off with Prosper because I learned about it first. But I have been looking around at LendingClub and I do like the smaller minimum bid, as well as, better borrowers’ credit ratings.
I agree that Prosper has better web site, but I love LC dynamic pie charts.
@RateLadder:
I don’t normally read your blog because it’s a lot more in-depth than I want to be with P2P lending. I invest very little money in it at the moment that it doesn’t warrant the time.
However, I did follow your link and want to say that’s an interesting post. May be I should give the portfolio plan another go. And I like how you explained that $2,500 is really the minimum to achieve the level of diversification needed to succeed in Prosper.
@RocketC:
It would be the first scenario where you get $129.50 after 3 years.
@WealthBoy:
I have heard about standing orders and will be investigating that — along with automatic funding. Good tip about reading the listing carefully to spot any red flags.
@Mrs. Micah:
I have seen a lot of that too. Although, I am hesitant to lend to those borrowers. Like I said to Kevin, I use Prosper strictly as an investment vehicle — not for charity. As such, I am turned off by a borrower pleading for money.
@Harris - borrowers usually ask for large amount — i.e., a couple of thousands. Lenders usually lend in smaller chunks (as little as $50) to multiple borrowers to diversify the portfolio and reduce the risk of default.
The biggest risk for lenders is not getting their money back when a borrower decides not to pay back. As for the delinquent borrowers, I am sure there’s some kind of negative impact to their credit score; along with getting hounded by collection agencies.
Thanks Pinyo
I’m in the process of consolidating my debt and I don’t think that I would ever use Prosper or Lender Club. At an online bank up here in Canada I’m getting 7.5%. From what I’ve seen the P2P lending can’t compete, and it would take forever to fund my loan.
Of course, I probably have a better credit rating than the people borrowing on P2P. I really should check my credit score.
On the other hand, once my debts are paid off, I don’t think that I would risk lending money P2P either. How many lenders have had bad experiences on P2P?
@ Mrs. Micah:
I see your point. However, if you really take a look at debt consolidation, you’ll find that it rarely helps people.
1. Debt consolidation never addresses the problem, which is behavior (not interest rates). Overspending, no self control, poor financial decisions, etc.
2. Debt consolidation restructures all debt as one debt, which frees up the other credit sources to be used again. What happens in the majority of cases is that people consolidate and then use their newly freed up credit lines to continue their bad behavior. People who consolidate almost always end up with MORE debt, not less.
So no, I don’t think helping people consolidate their debt is a good thing. Showing them how to be financially responsible, reform their misbehavior, get out of debt, and build wealth is what helps people.
@ Pinyo:
It’s not about “not being in it to help people”–it’s about participating in something that harms people.
Regardless of your reasoning behind WHY YOU are doing it, from a moral standpoint I would not participate in something that harms others.
And no, it isn’t like investing in the S&P 500. The S&P500 doesn’t give you the choice of how your money is used. With social lending, you are directly engaging-in and advocating the behavior.
I’m not saying that you can’t do it, or that you personally shouldn’t do it. I was simply voicing that I wouldn’t do it and wanted my perspective to float around out there so people could see the other side of the coin.
Consequently, I got an interesting email from a top level person at Lending Club. I’m going to be writing an article on this whole experience soon.
If anyone wants to read, I’ll put a shameless plug in for my feed.
If Moolanomy doesn’t appreciate the plug, feel free to remove the link.
@Harris - You’re welcome
@Brian:
I agree that Prosper is not for everyone, and someone with a high credit score can probably do better at the bank.
Regarding your second question, I think many lenders got burned on P2P, but for good reasons. They are either not diversified enough, or lending out to borrowers with questionable credit. This is not much different from other types of lending. There are prime, near-prime, and sub-prime loans. So far, I have been sticking to the prime loans only and hope that it pays off.
@Kevin:
Very well said about debt consolidation; although one of my friend is using it and he made it works — i.e., informed, reformed, disciplined, etc.
Regarding the decision and the value. I respect your viewpoint. From reading your blog, I can see why you’d feel this way, and with such conviction. So at this point, I will settle for let’s agree to disagree.
By the way, I look forward to your eBook. You had mentioned that it’s a new one, but couldn’t find links to your other ones. Are they available?
Kevin, you say “Showing them how to be financially responsible, reform their misbehavior, get out of debt, and build wealth is what helps people.” Nobody’s going to disagree with that. Would you agree that providing them with reduced payments helps them get out of debt? I don’t see how it harms people. It’s like nicotine gum. If someone buys it and chews it while they smoke, then they are hurting themselves - but should we refuse to provide them with it? What about the people who use it to quit smoking?
And by the way, banks lend people money, as well - having a checking account or a savings account means that your money is being lent out to people in these situations. And if you invest in the S&P 500, you are directly investing in those companies and then they are using it for good or ill, just as the people I lend money to at Prosper are. If you buy an index fund, you are tacitly approving your money’s use by big pharma companies or Wal-Mart or defense contractors. I don’t see how you can say you can’t say how your money is used. I can’t tell people at Prosper how to use the money I loan them any more than I can tell Exxon how to use the money they got from me from my S&P 500 index fund investment.
I’m with Pinyo, I would certainly respect your right not to participate. Interesting viewpoint but it restricts you significantly in investing - no banks, no savings accounts, no funds, just real estate and individual “good” stocks.
@ Pinyo:
I guess I should have just said “E-Book Coming Soon”
I’ve written them on other unrelated topics and I guess I was just thinking “new” because I’ve done it before. But no, I don’t have any previously written on the topics my site covers.
Thanks for the interest. I’ll add you to the notification list.
@ Brip Blap:
I agree that providing them with reduced payments after they have changed their behavior helps them. If they haven’t changed their behavior, I’d like their payments to be as large as possible with interest rates maxed out.
And it doesn’t restrict my investing. You can water the situation down to create anything you’d like if you really tried. You could say I can’t invest in any given company because there is bound to be a CEO, manager, or bottom level employee who is immoral and hurts others. Since they are funded by the company, I can’t invest in that company, right?
If you want to see it that way, I suppose you’re right.
I simply choose to look at it as: I don’t want to directly participate in the destruction of other people’s lives. The majority of people DO NOT need to be borrowing money. The majority of people CAN’T AFFORD to borrow money whether they think they can or not. There is a debt and lending crisis in this country right now that is ruining everyone around us. Then I get taxed by a government who wants to solve their problem.
It may sound harsh, but so is the exponential rise in bankruptcy cases, foreclosures, repossessions, divorce, etc.
The number one cause of divorce is America is money issues.
I don’t think I would be able to sleep at night if I was contributing to that.
Just trying to understand this P2P thing better.
I read that we get $25 to join up. Who pays this? The interest the borrower pays, does it all go to the lender or does the intermediary takes a cut? Or is the intermediary’s fees on top of the interest the borrower pays?
Thanks
@Kevin: You have an interesting take on this, so I’m just trying to understand it better. Do you have a checking account or a savings account with a bank? They lend money in a far more predatory way. My bank, one of the big superbanks, for example, is now taking huge hits for taking advantage of people by giving them subprime loans. That’s not a vague connection like saying maybe the CEO’s a bad guy.
It’s probably not a discussion we can bring to a conclusion since obviously you have a different opinion from me (or Pinyo) on the role of the lender. If you think of the lender as enabling the problem rather than providing a solution to the problem, then for you (and us) it’s just a matter of perception rather than universal truth. If someone has an addiction to heroin, do you hope they continue to obtain it on the street, or offer them morphine as a substitute? I like to think I’m providing the morphine, but I guess your perception is I’m handing out the heroin.
@Fathersez: Think of the $25 as a promotional payment from Prosper/LC. It’s just like getting $500 cash back when you buy a car - they are just giving you an incentive to join.
Glad you liked it… And I am glad to have more people investing in Prosper and thinking critically about how to go about doing it right… I have made more than my fair share of mistakes and am happy if I can help others from making the same… Btw — I know I say 2% in any one loan (For me it is a comfortable margin for error), but WealthBoy on the prosper blog make an excellent argument for 30 loans being the minimum to be within 2 standard deviations of the mean ROI.
http://blog.prosper.com/2008/0.....ng-limits/
S&P500 doesn’t give you the choice of how your money is used.
Sorry, Kevin but I don’t buy your “ignorance is a defence” styled argument.
If you take five minutes to look through the names of companies that make up the S&P500 you will recognise companies that sell alcohol, cigs, weapons etc pretty quickly and you have the choice not to buy that index. It will make investing a lot more work to avoid those companies (and as BripBlap says, make sure you include the banks in this list) but it can be done.
Mike
@Fathersez
Prosper makes money off loans. I think about 1% off the lenders gain — similar to how mutual fund takes their expense fee off the performance. I have to re-read it to be sure though.
@BripBlap, FourPillars, and Kevin:
I think this is a really good discussion here. Almost similar to can I pollute more if I buy carbon offsets? There will be people who passionately argue for both side of the line. Personally, I think we all should try to live more frugally, pollute less, and do whatever we can to reduce, reuse, and recycle.
I am glad that each of you can passionately argue and present your unique perspective. There seems to be more people that agree with my viewpoint, but that doesn’t mean it’s more correct.
@Kevin - I look forward to reading your eBook!
@ Kevin
I think you’re 100% right about debt consolidation SERVICES and 100% wrong about what these people might be trying to do.
Hypothetically, Jenny has decided to change her family tree and take responsibility for her debt. She’s beginning her debt snowball for her $2000 of credit card debt. She thinks she can pay it off in 4 months with her snowball. Very exciting.
Jenny’s debt is at 30% APR. Ridiculous rates but credit cards are evil.
Jenny is eligible for a 20% APR loan from Prosper. She gets it funded and uses it to pay off her credit cards all at once.
Then she does her snowball and ends up paying evil credit card companies less in interest.
Or Jenny decides to stick with her credit card payments and pays credit card companies more in interest. Why on Earth would she do something so dumb? If she does this, she’d have more money for snowballing any other debts or for saving/investing.
It’s dumb to pay more than you have to in interest, right? Which is why Ramsey says to pay off debts as fast as possible.
Now debt consolidation SERVICES are often problems and this won’t work if Jenny isn’t committed to getting out of debt forever. But if she is, it’s good.
Prosper isn’t about public service, but it’s an interesting opportunity nonetheless.
“Or Jenny decides to stick with her credit card payments and pays credit card companies more in interest.”
As a clarification, she still pays it off in 4 months, but at the higher interest rate so the credit card companies make more money and can the executives can buy nice cars.
@ Mrs. Micah,
In a perfect world you’re absolutely right.
In the real world, where we go by statistics, Jenny has $8500 in credit card debt spread across three different cards, all of which are maxed out.
She gets a great deal on a loan on prosper and pays off all her cards with it. Then she does what everyone else who “paid off their credit cards” does–they fill them back up. Either an emergency comes up or she just gets those clothes she “needed”, or whatever.
The one payment, boom-I’m-done method gets people into more trouble statistically.
People that are forced to work through their stupidity are less likely to go back.
If you’re on a solid plan and you’ve really changed your behavior, you’ve built an emergency fund so there is no risk of having to use credit again during your snowball process, then yes, it’s better to find lower interest rates.
If you haven’t pinky swore and spit shaked and smacked yourself upside the head then you’re going to end up in a deeper hole–the statistics don’t lie.
But most people who want to consolidate to pay down their debt don’t make a plan to live debt free. They don’t cut up their cards and they don’t close their accounts.
You’d be surprised at how many people tell me “I don’t have credit card debt” because they refinanced all the debt into their house!!!! And they believe themselves.
Borrowing more money will never solve your financial problems–Ever…
Lower interest rates will never solve your financial problems–Ever…
Consolidation will never solve your financial problems–Ever…
The only thing that’s going to solve your problem is your willingness to change your behavior, permanently.
@Kevin Did you ever hit that one on the nail!
I did exactly that. My wife and I got in to debt and we were starting to have trouble making ends meet.
So we got a debt consolidation loan…and started building up more debt. We had talked to the loan officer at the bank about maybe setting up a budget, but never did anything because, well the pain had stopped.
Finally, in September, a year and a half later, we started to realize that we had to change the way thought and dealt with our money. We made a budget and started kicking at the debt. Each month we’ve got a little better.
Now, in January, we are getting another debt consolidation loan. I think that we know better now and will not repeat our past mistakes.
A debt consolidation loan is pointless until you change your behaviors with money. That’s one of the reasons I started to blog about our PF’s, to keep me honest and focused on the new habits that I want to have for the rest of my life!
Thanks everyone for the comments here, I’ve really enjoyed them.
@Kevin, @Brian: I understand your point, but it seems you are blaming the tool for the actions of the wielder. If I have a hammer, I can use it to build a house or I can use it to attack someone. The hammer is not inherently evil. Prosper (or even a bank consolidation loan) is not evil. It is a tool people can use for good or ill, just like the hammer.
So is the solution to ban all debt consolidation and all p2p lending? What about people who get themselves in trouble with too much mortgage? Should we require that everyone pay cash for houses?
I just have to continue to reject the idea that P2P is causing the problem. Using that line of thinking, all credit cards and all bank loans and all financing for houses/cars/etc. should be illegal, simply because not 100% of the population can use them responsibility.
@Brip Brap I wasn’t blaming Prosper of P2P. I was only speaking of my own behaviour.
Brian, I know you weren’t blaming Prosper - your post was just relevant to what I had to say. Congratulations on recognizing your mistakes and making improvements, by the way!
@ Brip Blap:
I don’t think I ever blamed Prosper. I was speaking from a personal position saying that I would never personally use them.
And I didn’t say Prosper is the problem or P2P or banks or even PayDay loan places. People’s misbehavior and lack of education is the problem.
Should PayDay loan places be illegal? Yes. They break the law on a daily basis. But if nobody walked into them they wouldn’t exist in the first place.
This is why, instead of attacking major institutions and trying to get them to shut down (which I don’t believe is right), I’m simply telling my side of how I believe I should live personally, so that maybe other -individuals- would do the same.
When we have so many banks with horrible interest rate loans, sub prime mortgages, pay day loans, yada yada, why do we as individuals feel we need to act much the same way through P2P lending?
Enough with the borrowing. Borrowing money will never make you rich.
Borrowing money will never make you comfortable.
Borrowing money will never solve your problems.
How about a P2P finance/education website? If you can change people’s behavior, those people will see no need to borrow money.
I had 32k in debt. The average interest rate I was paying was 24%. Some of my cards were at 32.99%. I had a truck at 14.99%.
I paid it off with hard work, focus, and a budget in less than a year without consolidating.
I will never borrow money again. I cut up my credit cards and closed the accounts. I have a $10,000 cash emergency fund. And guess what? NOW I HAVE MONEY!!!
It’s so easy to build wealth when you don’t have any payments!
Borrowing and lending is a game of slavery and bondage. I don’t think anyone has ever committed suicide over being debt free. I don’t think anyone has ever filed for divorce because they were debt free. I don’t think kids ever had to skip meals because their parents were debt free. I don’t think senior citizens ever ate Ramon noodles because they were debt free.
This culture is out of freaking control.
So no, I, as a conscious human being, will not lend ANYONE money, ever.
Bidding on 100% funded loans is not always a good idea because often times you are driving the interest rate down to unreasonable low levels
http://p2plendingwithprosper.blogspot.com/
@ProsperBlogger - true, but I doubt it will go down to an “unreasonable low levels” unless the lenders do not know what they are doing. Eventually, it will get to point where bidding it any lower is unattractive and lenders will move to a different loan instead of bidding it down further.
I’ve made a couple loans on Prosper now. I’m definitely one of those people that likes to find borrowers on my own. Its partly an emotional thing. I want to hear what they have to say, ask questions, evaluate the numbers for myself. However, I think these portfolio plans provide a good outline for which to base my evaluations. By ‘made a couple loans’ i literally mean four. That my limit for now. After careful consideration I realized that I trust the return on paying off my own debt much more than the return of someone else paying off their debt
By the way, I think Brip Blap is right on here. Don’t blame the tool.