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P2P Lending For Extra Retirement Income

by retirebyforty on March 19, 2012 · 48 comments

in cash flow, income, investing

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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.

prosper.com yield p2p lending retirement

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.

p2p lending for extra retirement income

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.

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{ 41 comments… read them below or add one }

SB @ One Cent At A Time March 19, 2012 at 4:36 am

I also have some exposure in Prosper. This month I faced a default. Keeping my fingers crossed.

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retirebyforty March 19, 2012 at 2:30 pm

That’s the risk with P2P lending. We just have to make enough loans to be able to handle the defaults. If you will need cash soon, then I would avoid P2P lending.

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CultOfMoney March 19, 2012 at 9:47 am

I don’t know, some of those folks with deliquencies or judgements in the past can be fairly good risks now, at the right rate of course. As you know I’ve been adding loans for the last few months trying to get to a decent sized portfolio. The hardest issue I have to deal with so far is finding loans that meet my filters. I have quite a few A rated that meet my criteria, but its been hard to find lower-rated borrows (with higher yields) recently… Good luck!

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retirebyforty March 19, 2012 at 2:30 pm

I’m adding loans at a pretty slow rate too, but I guess that’s not a bad thing.
Good luck to you too!

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Marianne March 19, 2012 at 10:12 am

I am soo interested in P2P lending (and recently blogged about my participation in Kiva) but we can’t do it in Canada (that I’m aware- I’d be sooo happy if any of you Canadians could correct me on that). When I’ve looked into it, Canada has some strict laws about how wealthy you have to be to participate in P2P lending- one of the stipulations being a net worth of over 1 million (or a net income of over 200,000).

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retirebyforty March 19, 2012 at 2:31 pm

Hopefully a Canadian reader can answer your question.

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Aloysa @ My Broken Coin March 19, 2012 at 12:00 pm

This P2P Lending concept is fascinating to me. But I work in the line of business that considers loans for small businesses. I am a very toough lender. :) I wonder if I ever be satisfied with anyone’s credit report and income and so on in order to loan my money to someone else. Who determined at what interet rate you loan your money?

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Kurt @ Money Counselor March 19, 2012 at 12:58 pm

I wish I’d had read your post about four years ago. In 2008 I lent $10,000 through Prosper. To make a long story short, in the end I lost about $597 and notched an annualized return of -4.3%. I really don’t know why I did so poorly, but I suspect it’s because I had the misfortune of completing my lending just as the 2008 financial meltdown got into full swing. Either that or I’m not a very bright lender. I choose to believe the former. :-)

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retirebyforty March 19, 2012 at 2:32 pm

Are you still lending or did you cash out? Did you lend out at $25/loan or bigger?
I would love to hear more from a long term lender. I can see that it would have been tough in 2008.

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Peter Renton March 19, 2012 at 8:32 pm

Kurt, You timing wasn’t great. In 2009, after they emerged from their quiet period, Prosper adopted a completely new underwriting standard and now every well diversified investor is making money. I would give them another look if I was you. They have been generating some outstanding returns for investors the last two and half years.

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Long-Term Returns March 20, 2012 at 11:09 am

Have to disagree about P2P lending such as Prosper as a good investment. Their very own returns statistics show that it’s a bad deal for lenders on average. Don’t look at their “seasoned returns” stat — it’s not much more their best-case scenario estimate. Instead look at their *actual* returns for 2005-2009. Those are atrocious, ranging from 4% best-case scenario for AA to -10% (negative 10%!!!) for HR and firmly in the negative overall.

Prosper is fun and all, but good source of income it ain’t. It’s a big lottery with break-even odds at best. I’m much rather invest in junk bonds (e.g. ETFs like HYG or JNK) and get ~5-6% annual than Prosper.

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Ray March 26, 2012 at 8:06 am

Those date coincided with the housing market bubble, market downturn and what can be called a recession. If you used Prosper as an alternative investing tool that competed with the stock market you did well to lose less than 10%.

Prosper is another investment vehicle for diversification. If the broader markets are getting hammered, so will the loans at Prosper.

Don’t take those years and make a broad assertion that Prosper is bad. If you look at late 2009-2012, the returns far outpace those losses.

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Christa March 20, 2012 at 11:20 am

My sister is into P2P lending, but I haven’t invested yet. I like your approach, and I think I would have a pretty good inkling of who I’d like to invest in. I’ll have to check it out soon.

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Peter Renton March 20, 2012 at 11:49 am

A casual observer of Prosper’s record could no doubt come to the same conclusion as Long-Term Returns. But a deeper investigation reveals that in 2009 Prosper dramatically changed their underwriting which has had a major impact on investors. Since implementing this change in July 2009 no investor with a well diversified portfolio (more than 100 notes) has lost money and most investors have earned more than 8%.

So, when Long-Term Investor says that is not a good source of income, he is really only speaking for Prosper 1.0 – that period before July 2009. I will continue to put new money to work at Prosper and watch as my passive income grows.

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retirebyforty March 20, 2012 at 10:42 pm

Thanks for your input. I’m hoping it will work out well. I’m assuming the returns looks good in the beginning when all the loans are current. Once we have a little more time, we’ll see if we get more defaults or not. Hopefully, the defaults will be similar to what Prosper is showing on their spreadsheet.

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Dan B March 27, 2012 at 3:26 pm

Peter is correct. 8%+ returns are very achievable on Prosper these days & all indicators appear to suggest that this will continue into the foreseeable future. It’s perfectly understandable why some people remain leery but at some point it just doesn’t make much sense to hold their past against them……………especially if results verify that the changes made have substantially improved results. I mean in the end that really is the bottom line, right?

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Kristina Tate March 20, 2012 at 2:38 pm

Thanks for this informative post RB40! This is great insight to the growing P2P industry that we are excited to be a part of.

If you need any additional information on peer to peer lending or Prosper.com, do not hesitate to contact us.

Kristina Tate
Prosper.com Employee

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Julie @ Freedom 48 March 20, 2012 at 7:08 pm

Such a great concept. I’m another Canadian who hasn’t been able to find a comparable program here. It seems like Canada is so much more strict when it comes to lending in general… peer to peer lending, mortgages, lines of credit etc. I guess it’s for our own good…

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retirebyforty March 20, 2012 at 10:43 pm

Can you lend to Kiva? That seems like a similar thing.

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Andrew March 21, 2012 at 5:48 am

Last time I checked, P2P was not available in my state. Good article, spurs me to check again.

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MoneySmartGuides March 21, 2012 at 3:31 pm

I was investing through Prosper for a few years and earned 12% on my money. But then I couldn’t lend anymore because of the state I live in. If I could, I definitely still would be investing in P2P lending services.

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cashflowmantra March 23, 2012 at 5:57 am

Well, I am thankful for P2P lending and just wrote about my experience as a borrower. It was a fairly easy process overall. I am paying a fairly high interest rate, but it is better than some credit cards so I am OK with it.

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Kristina Tate March 23, 2012 at 10:07 am

Where did you write about your experience as a borrower? We would love to read about it!

Kristina Tate
Prosper.com employee

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hope hickory March 29, 2012 at 10:27 am

After 4 months I have two loans that are in late payment. One of them is from a career military man on his second prosper loan. His first loan had no late or missed payments, so I’m starting to have second thoughts on lending to repeat borrowers, especially when the second loan is much larger than the first.

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Ray March 30, 2012 at 4:43 am

I only loan to individuals who are taking out a second Prosper loan if their first loan is almost paid off or they have 65% or so of the first loan paid off with little or no late payments.

There is nothing that bothers me more, than when someone takes out a $5,000 Prosper loan and has made $1,000 in payments and then wants to take out an additional second loan for $12,000. That makes me really nervous especially when they say something like, “2nd time with Prosper loan, zero risk”, etc etc.

Apparently they either wanted an initial $17,000 loan and couldn’t get it, so this was there way around it, or they are about to default on some of their loans. That’s the way I look at it.

As far as your issue Hope Hickory, I’m not sure how you could not loan to the career military man. Unless there were other issues in his credit report etc that threw up a red flag, there will always be defaults from individuals that should never default.

I’ve had people with 780-800 credit scores default. That’s the reason you keep loan amounts low so you spread the risk accordingly across multiple borrowers.

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hope hickory April 1, 2012 at 8:57 am

I now have three late payments out of 152 loans. That is a lot of late payments in only 4 months time. Two of the late payments are B loans and 1 is a D loan. The career military man who never missed a payment is now more than 30 days delinquent. I have stopped putting in any more money and am waiting to see if the late payers go into default. If they eventually pay I may continue to add more money, but I am starting to question this business model as there does not seem to be enough of a deterrent in place to prevent people from defaulting. I also question Prosper’s ability to collect funds through the use of collection agencies.

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Ray April 1, 2012 at 11:30 am

These are unsecured loans. All loans of this time get set to a collection agency. If they don’t pay then they go on their credit report. This is the same as with any unsecured loan, be it Prosper or a credit card loan or a personal loan with high interest from a bank.

It sounds to me like you either do not fully understand the risks of unsecured loans or you think 3 late loans out of 150 or so is a lot.

First that is not a lot of lates for that number and second they have not defaulted yet. If you haven’t noticed the economy is still struggling and the real unemployment numbers are said to be closer to 20% than 8%.

I have about 300 loans outstanding right now and I have 10-15 latex at at given time. Why else do you think these people come to Prosper for loans to begin with?
You are loaning money to people simply based on the credit report/profile, if they have proof of employment/income, own a house and a bank statement.

Welcome to what banks used to do 24/7 but now have stopped loaning a majority of the money out do to banking regulations and the need to keep large cash reserves on hand.

Don’t knock Prosper as I have a return rate over 19%, but even if I have massive defaults I can still easily bring home 10% net.

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hope hickory April 1, 2012 at 12:02 pm

Three may not be a lot, but it has been only 4 months. I anticipate as the loans get older they’re will be more a lot more defaults. I think you are overestimated the threat of a bad credit report will have on whether a borrower stays current on a loan. For example, if they already own a house, the need for a stellar credit report is less important.

I’ve been unemployed before but I have never, ever been late on a payment. You’re just making excuses for people behaving badly. I can tell you that a true loan shark would not put up with this behavior. Even a car dealer will repossess their property if payments are not made. With this unsecure loan business model, you only have the threat of a bad credit report.

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Ray April 1, 2012 at 12:28 pm

Hickory, you repeated what I just said.
If you already know what an unsecured loan is, then you know the risks.
I’m done giving feedback when it is apparent you know everything.

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hope hickory April 1, 2012 at 8:31 pm

Assuming my worse case scenario, three defaults out of 152 in 4 months is significant if you assume the same default rate for a yeas that’s 12 in a year. Also assuming I have about 200 loans in a year’s time and expected to average 11%. Those defaults cut down my APR to about 5%.

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retirebyforty April 2, 2012 at 10:47 pm

I have 1 default in about 6 months. I don’t like defaults either and 1 default a month would make me mad too.
That’s why I worry about the long term feasibility of P2P lending. Perhaps once you have a few more defaults, you will learn what to look for?

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hope hickory April 3, 2012 at 8:11 pm

I thought all 3 of my late payers were good bets. I verified with Lendstats but IMHO that database is unreliable when the number of loans fitting the criteria is low (<100). None of the 3 had any deliquencies or bankruptcies. I think one of them had 2 late payments on a previous Prosper loan. All three had been employed for more than 5 years, making greater than 70%. The career military man has me disturbed because I hear they can get in trouble and lose their job or clearances for not paying their debts. If I only have 3-4 defaults after a year, I wouldn't mind, but if it's at 12 based on a worse case scenario, then I would have to question the risk vs reward of this investment vehicle. P.S. My default and another late payer are "B" rated loans so it's not like I'm taking on a lot of the riskier loans.

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hope hickory April 3, 2012 at 8:15 pm

Oops, meant 70K not 70%.

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Ray April 3, 2012 at 5:46 am

retirebyforty,

Banks have been making 10%+ over the years from credit cards.
While these loans are necessarily credit cards, some of the loans are to consolidate debt from credit cards.

Also, dependent on the APR of the loans you or other people are investing it will determine your ROI after defaults. Most of my loans are HR, so my APRs are in the high 20s. I can afford to have more defaults and I expect to have more defaults. Now, if those defaults over time give me a lower ROI than should be expected, then I’m doing something wrong and I should probably consider to look at lower APR loans with possibly less risk. The ROI could end up being higher if my defaults are lower.

P2P loans will continue to grow and thrive especially with the banking regulations that are in place. We can already see this as some large investors are scooping up 90% of a loan with one bid.

The problem with any sample size as small as our is that you will always see wild deviations. Until the sample size is large enough, you will not be able clearly identify a person’s P2P strategy.

I can tell you I have no issue loaning to individuals and P2P is here to stay.

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retirebyforty April 3, 2012 at 3:21 pm

What do you think is a large enough sample size? How many loans do you have?
I have about 100 loans now and plan to expand to about 400 loans eventually.
Do you think this is a large enough sample size so my ROI will look similar to prosper’s chart?
Most of my loans are A and B rate now. I’m looking at more C and D ratings and will go into more HR as I add more funds.

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Ray April 4, 2012 at 5:37 am

It’s hard to say, but 400-500 should be a good sample size to get you constant return ROI averages. The issue as you know will depend on who the economy is going. If we have another “recession”, then P2P lending will suffer just like any other stock investments.

Think about it, if you had been invested in the S&P 500 during the downturn you would have lost close to 50% of you investment. Had you of had the same investments in P2P lending you would have came out with much less losses.

I’m using P2P investing to spread my risk across different avenues. Right now I have just $10k invested, but I can easily see myself increasing that amount to $50-$100k over the next 3years to 6-7 years.

If I need to sell my loans I’ll just trade them using Folio.

It’s not an exact science, but this is a real business model with a ROI that will blow away any money market, CD or savings account out there by a mile.

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Amsoil Discount May 28, 2012 at 8:51 am

I would like to invest enough money into P2P lending where I could earn returns of $3,000 to $5,000 per month. This stuff has to work. Banks have been giving out loans forever and they’ve been dealing with defaults all this time. The bad comes with the good. You need to do enough loans by diversification to cover the loses, just as credit card companies do. Look how many people borrow on credit cards at 19% and default on them, yet all of the banks are giving out unsecured credit in droves! Plus look at all of their overhead of buildings, advertising, employees, mailings, health insurance for their employees, building maintenance and a BOATLOAD of other expenses that we as investors don’t have to put up with when investing into Prosper. It’s best to sink in thousands of dollars and split those thousands into hundreds of small $25 loans to people. If this model didn’t work, all of the banks would have shut down years ago and nobody would be carrying credit cards. I think Prosper just got a bad rap because of the timing. Of course if you gave loans out from 2006 to 2010 you could expect defaults. Look at all of the people going bankrupt during those times because of the recession, massive foreclosures, etc. Things are starting to turn around with jobs being created now. The DOW has came up since Prosper first started becoming popular. Give Prosper a chance. I would rather take a loan knowing that small individuals made profits than big, greedy banks. I would sleep much better knowing this.

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retirebyforty May 29, 2012 at 5:25 pm

Wow, $3-5,000 a month is very nice earning. I’m starting off pretty small and I’m only shooting for $100/month right now. :)
I’m too risk averse to put a huge amount of money into P2P lending. If it works out well for me for 2-3 years, then I would considering beefing up the P2P investment more.

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Jason July 24, 2012 at 8:40 pm

I’m starting a new analytical website that deals specifically with helping people maximize their returns on Lending Club. Feel free to check it out

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kerryo January 8, 2013 at 12:39 pm

I’m risk-averse, too, but I’ve been investing through Prosper for almost two years now, and my ROI is between 9% and 10% (depending on whose calculation I look at). We are, after all, talking about lending money to complete strangers, so if defaults and delinquencies bother you a lot, find someplace else to put your money. Bad loans come with the territory. Some people believe LendingClub is a safer option than Prosper, but Prosper manages a higher return than LC by most accounts. The fact is that both platforms are growing in popularity (judging from member enrollment and loan originations), and that would not be the case if lenders were not generally pleased with the returns they offer (after factoring in defaults).

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retirebyforty January 8, 2013 at 11:41 pm

Thanks for the input. I don’t mind the defaults if I can make 9-10% ROI. I think the economy is getting better and the default rate should be stable for a while.

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