Person-to-person (P2P) lending is the 21st century’s answer to personal lending. Previously, if we needed money, we borrowed it from friends or family and if that failed, we turned to the banks. Now, there are more options for borrowers. If your credit is good, then online P2P lending is a great option. Let’s say you need to pay for a wedding and you don’t have enough savings. You can sign up at prosper.com and borrow at a Fixed Rates as low as 6.59% APR. This is a much better rate than than putting everything on a credit card.
P2P lending is also an alternative way to generate extra retirement income. I’m pretty new to P2P lending and just started lending at prosper.com in 2011 months ago. I started with $1,000 and if you followed my monthly cash flow post, you could see that I have been generating about $10 per month from the prosper.com account.
The rate of return is quite good, but if one loan is over 30 days late and is sent to collection. I guess that’s the problem with lending. When someone defaults, you will lose the rest of your money. The way to mitigate this problem is to have a lot of loans so the loss will be a small portion of your P2P portfolio when it occurs.
We can see that the default rate is not too bad @ 2.4% with the AA rating loans and then it goes up quickly from there. The interest rate (yield) also goes up so it could be worth it to take a chance on C and D rating loans.
The minimum amount you can lend is $25. This means 40 loans with $1,000. This is not diverse enough because even if 1 loan default, I would lose 2.5% of the portfolio. So with this small investment, I think it’s better to mostly stick with the low default rates. Once I have more money to add, I will look at more D rated loans. With more loans, we should be able to get something similar to prosper.com’s aggregate yield. Sign up to be a lender and make 10.69% Returns With Prosper.
Before you make a loan, you can see the borrower’s credit profile.
Delinquencies – I generally avoid borrowers with recent delinquencies.
Revolving credit balance – I pay special attention to the credit balance. If the credit balance is $50,000 for example, then they already have way too much debt. I generally like a low credit balance. You can also check the debt to income ratio for similar information. This borrower has high balance, but he/she also has high income so I think it’s an ok bet at 21% debt/income ratio.
Home ownership – This is a big plus in my book.
Employment – I avoid unemployed borrowers. How will they pay back their loans?
Length of employment – Longer is better and I like to see at least a few years in employment.
Stated income – I like high income here, but anything over $50,000 is ok if the other aspects of the profile are good.
Type of loans
There are all kinds of reasons why people need to borrow money. At this time of the year, many people have to make a tax payment to the IRS. People also may need to pay for a car, debt consolidation, business loan, home improvement, wedding, and more.
Business loan – New businesses have very high failure rate and the money will be spent very quickly. If the business fails, there is pretty much no way we would get the money back.
Wedding – Many parents want to help pay for their kid’s wedding. If their finances are in good shape, then I think it’s a good loan.
Debt consolidation – It depends on other data. If they owe too much money, then I’ll pass.
Home improvement – I like home improvement loans. The owner will stick around after the home improvement.
Fishy stories – Borrowing @ 25% to refinance the mortgage? That seems fishy to me. Why would someone do that? I saw another one that said he/she is just trying to build credit. Wouldn’t it be easier to apply for credit cards? I’ll pass on these “opportunities.”
So my main strategy is to increase my P2P lending portfolio so my ROI is similar to prosper.com’s chart. It will take a lot of time to lend out at $25 per loan, but I’m not in a huge hurry. The goal is to eventually generate about $100/month in interest. We’ll see how it goes. If I get too many defaults, I can always sell my loans and exit the P2P market. I think this will be a nice supplement to our dividend portfolio and also should give us a little diversification.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.