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Peer to Peer Lending Investment Midyear Update

by retirebyforty on July 23, 2012 · 52 comments

in investing, side income

One of my financial goals in 2012 is to generate $100 per month from Peer to Peer lending by December. Peer to Peer lending companies like Prosper and Lending Club channel funds from lenders to borrowers. A lender can browse a list of loan requests and lend $25+ to the borrower that he/she likes. I signed up with Prosper about a year ago and started lending with $1,000 and I have been slowly adding to the account over time. I know that when I quit my job, I won’t have a lot of extra money left to invest so this month, I added $1,250 to push my account value over the $10,000 threshold. If I can get 12% return on investment, then this account should generate about $100 per month.

I think Peer to Peer lending is a great way to borrow and lend. As a borrower, you may be able to receive a lower interest rate from Prosper than from your credit cards. I have a great credit score and my current credit card interest rate is 13.25%. I avoid this charge by paying off my balance every month. The cash advance rate from my credit card is even higher at 15.25%. If I need to borrow $10,000 for any reason, I would definitely check with Prosper to see if I can get a lower rate. People with great credit scores can borrow at 6.5% to 11.5% interest rate on a 3-year loan. This is a pretty good alternative to borrowing from the credit card company. So if you need cash, check with Prosper to see if the rate is lower than your credit cards.

Now, let’s get back to my P2P investment. When I first started out with $1,000, I was more conservative and invested mostly in A and B rated loans. Once I added more money, I felt like I could take on a bit more risk and diversify into higher interest loans.

Here are the current statistics of my P2P portfolio.

prosper peer to peer p2p lending borrowing

I have about $2,500 in Cash and Pending.

Annualized return: 11.03% (The return should rise a bit soon because I’ve been adding higher risks loans lately.)

Note Status Summary

Principal value of active notes: $7,516.15 ( This mean I have about $2,500 left in Cash or Pending bids.)

Total active notes: 282

Current: 274

Past due (1-30 days): 4

Past due (31+ days): 3

Total charged-off notes: 1

Total notes paid in full: 16

Performance Summary

Payment received: $1,191.12

Principle paid off: $883.05

Payments in excess of principal: $308.08

Principal charge-offs: $40

Gain/loss to date: $268.08

Overall, it seems I’m doing pretty well at the moment. We’ll be seeing more charge-offs soon though because loans that are more than 30 days past due usually go to collection. Defaults are unavoidable when you lend money. To minimize the losses, we need to diversify the loans. That’s why most of my loans are $25. That way I can lend to more borrowers and if I lose a few loans to defaults, I should still be able to weather the losses.

My criteria for the loans are still evolving, but here is how I’m screening the loans at the moment.

  • Loan type: I like home improvement loans because that implies the borrower has a home and is investing in it. I don’t like new business loans because I think that’s a bit too risky. What happens if the business fails?
  • Employment status: I tend to avoid unemployed borrowers.
  • Revolving credit balance: I avoid lending to someone with over $10,000 in revolving credit balance. That’s a lot of debt already.
  • Debt/Income ratio: Anything over 50% is to be avoided.
  • Stated income: Of course, higher income is better, but I saw one $100k+ income earner with $220,000 in revolving credit balance and I didn’t take that one up.

At this point, I’ll stop adding funds and just see how it all works out. I’ll reinvest all payments and take advantage of compound interests. I’ll report the annualized rate in my cash flow report each month so you can see if the rate goes up or down. It was 12% before that $40 charge off. :(

Peer to peer lending gets a much better return than the 1.3% interest from a 3 years CD. If this works out, it will be a great way to diversify my investments. Have you tried P2P lending or borrowing? What do you think?

Invest in P2P lending and you could get 10.69% Returns With Prosper.

Residence: Prosper is currently available only to lenders who reside in the following states: Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming.

Lenders in the following states may be subject to suitability requirements: California, Idaho, New Hampshire, Virginia, Oregon, Washington and Maine.

{ 49 comments… read them below or add one }

RichUncle EL July 23, 2012 at 6:51 am

Thats a great return on your investment, hopefully your luck will contiune. I will consider prosper in the near future.

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retirebyforty July 23, 2012 at 2:50 pm

That ROI will probably come down a bit over the next few months as we see more defaults. You can start small with $1,000 and see if it works for you.

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Shane @ Beating Broke July 23, 2012 at 7:11 am

I’ve been using Lending Club for my P2P lending because it’s the only one of the two that will allow it. I’m in a state that doesn’t currently allow either, but, with LC I can at least use their trading platform to buy and sell investments. Does Prosper have a trading platform? If so, you might consider trying to sell off the 30+ late loans for cost to try and deter having any write-offs. I’ve done that once, and it worked well for me.

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retirebyforty July 23, 2012 at 2:51 pm

Yes, Prosper has a trading platform, but I haven’t use it. I think only loans that are current can be sold. I’ll have to double check. Thanks for the tip.

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Lance@MoneyLife&More July 23, 2012 at 8:20 am

How much work is involved to pick new loans and manage your portfolio. Do you have to fill out extra tax forms at the end of the year? These are the questions that prevent me from buying in to the programs…

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retirebyforty July 23, 2012 at 11:20 am

Picking out new loans can be a lot of work if you do it manually. There is also a Quick Invest option that you can use to screen the loans. I’ve been doing it manually and it is slow. That’s why I have $2,500 cash left at the moment. I take about 10 minutes every few days to buy 4-5 new loans.
Tax form is pretty easy. Prosper sends you a 1099.

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jefferson July 23, 2012 at 8:43 am

Very interesting.. You really c an get a solid ROI from prosper.

I would love to hear more about the loans that DO end up going to collections.
What percentage of the balance would you expect to recoup in this scenario?

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Paul N July 23, 2012 at 9:28 am

How much is left over after you pay taxes on your profits?

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retirebyforty July 23, 2012 at 1:20 pm

It’s taxed at the same rate as your earned income so yes it’s reduced quite a bit.

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Crystal @ Prairie Ecothrifter July 23, 2012 at 11:09 am

Awesome! To my knowledge, I couldn’t participate in peer to peer lending programs because I live in Texas. But you have inspired me to take a look again just in case that has changed. Wow!

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Bryan July 23, 2012 at 11:23 am

Crystal, what is the deal here in Texas? It’s just not right. :-)
I have found one company that you can work with in a round about way. Still looking into that.

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retirebyforty July 23, 2012 at 2:53 pm

I added the residence requirement at the end of the post. It’s still not available in Texas. :(

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Bryan July 23, 2012 at 11:20 am

I have been looking into P2P lending since reading about it here on your site.
There seems to be some issues here in Texas where I live as some companies do not work here. I appreciate the information you are sharing. Opened a concept I was not familiar with.

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retirebyforty July 23, 2012 at 2:53 pm

I checked and it’s not available in Texas. Sorry!

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20's Finances July 23, 2012 at 11:28 am

I have yet to consider P2P lending. It still seems risky and I am saving for a down-payment right now. Once I get more established, I may look into it to diversify my income.

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retirebyforty July 23, 2012 at 2:55 pm

It is risky because it depends on the borrower as well as the economy. If the economy tanks again, we’ll see a lot more defaults. I wouldn’t invest all my saving here. The portfolio is just a small portion of my total investment and it’s a good diversification for me.

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CF July 23, 2012 at 1:04 pm

I was really interested in getting into p2p lending but apparently it’s not really done in Canada. :/

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retirebyforty July 23, 2012 at 2:56 pm

Sorry to hear that! I’ll keep that in mind for the next article.

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JW @ AllThingsFinance July 23, 2012 at 5:27 pm

Peer-to-peer is not something I’ve invested in, but the concept seems great. Especially with returns like that Corey. Now, you say that you only lend $25. Do you receive a higher rate if you lend a greater amount? It seems like you would taking into account risk vs return. Also, fixed income products such as bonds, will become more attractive when you purchase more (lend more), so it seems like this would as well.

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retirebyforty July 23, 2012 at 7:35 pm

The rate is the same no matter how much you lend. They have a VIP program for lenders with over $25,000. I’m not exactly sure what this entail. I think the rate is the same, but they help you reinvest so you don’t have to spend much time finding a suitable loan.

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Julie @ Freedom 48 July 23, 2012 at 6:07 pm

Those are some pretty good returns! I’m bummed that peer to peer lending isn’t available in Canada – but if and when it does become available… I’ll be first in line!

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Roshawn @ Watson Inc July 23, 2012 at 6:56 pm

This is an area that I have not dabbled in,but I am very happy about you coming out ahead. Tell me, are you ticked about the delayed payment or the charge off? Are you able to separate your emotion from this type of investing?

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retirebyforty July 23, 2012 at 7:36 pm

The first default was quite depressing, but after that I don’t get emotional anymore. You just have to accept that there will be defaults.

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SB @ One Cent At A Time July 23, 2012 at 7:24 pm

Now with additional $75 loss how much would be your ROI? I see 3 30+ DPD borrowers there.

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retirebyforty July 24, 2012 at 7:13 am

The 3 loans will go to collection for four months before showing up on the charged off list. We’ll see how they affect the ROI then. I expect ROI to go up until then and come down again.

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SavvyFinancialLatina July 24, 2012 at 11:43 am

They are not in Texas, bummer. I don’t have enough income to invest in this, as I am just starting off. But something to consider definitely.

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retirebyforty July 25, 2012 at 12:29 am

I think you should start with other traditional investments first. I wouldn’t put a large % of your net worth here because it’s still risky.

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DaveL July 24, 2012 at 11:44 am

Maybe I’ll try this with a small amount of money. Im not sure how I feel about trusting in these people to pay me back but I have no large expenses at this time so I might give it a try. Thanks for the specifics on your results.

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retirebyforty July 25, 2012 at 12:30 am

You just have to accept that there will be defaults. I’ll do another update in a few months. :)

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Noah July 24, 2012 at 4:30 pm

If you are going to invest in p2p lending, I highly recommend looking at lendstats.com and coming up with a filter criteria that works for you. I’ve seen people ignore red flags and have 20-30% of their loans default while some people have 2-5%. Once you nail down your filter, save it and use it whenever you want to invest, open the filter and select from that list only. I spend about 10 minutes per month total picking new loans. It’s really that easy. I like the idea of making $100/month. Currently I’m at about $30/month so I usually pick 1-2 loans monthly.

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retirebyforty July 24, 2012 at 4:42 pm

I was just looking at lendstats, but they seem to be down right now. I already bookmarked them and will check again soon.

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Noah July 24, 2012 at 4:44 pm

Now that I think about it, that site might only be for Lending Club. I should do some research and figure out what the difference is between the two sites.

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Matt July 25, 2012 at 12:29 pm

According to the guy who runs the site, Ken, lendstats is down permanently. Which is a shame because it was an incredibly useful tool.

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Noah July 25, 2012 at 1:12 pm
retirebyforty July 25, 2012 at 1:20 pm

Sorry to hear that.

Annie July 28, 2012 at 10:28 pm

I don’t think I had ever heard about P2P lending until I saw your tweet so I checked out Prosper and Lending Club’s websites. I was so excited about the opportunity then I checked the states open to lenders and NJ isn’t one of them. :( I’ll keep checking back in the hopes it opens soon.

Anyway, I read about your other methods of generating passive income but didn’t see anything about earning passive income by taking advantage of energy deregulation. Have you heard about this opportunity and know how it works? If not, I can tell you more about it. I recently found out about it and signed up. I’m currently on maternity leave and my goal for now is to go back to work part-time by relying on my passive income to make up for the pay cut so that I can spend more time home with my kids. My long term goal is similar to yours where I’d like my passive income to grow to the point where I don’t need to work but we’ll see how that goes. ;)

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retirebyforty July 29, 2012 at 11:35 am

I haven’t heard about the energy deregulation. How do you actually make money? You have to call and sell something?

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Annie July 29, 2012 at 1:46 pm

OK, so by 2015 all 50 states have to provide us with a choice in energy suppliers. The utility company in each area still delivers the energy and we would still contact them in case of emergencies/pay them every month so nothing really changes except we save money on our bill. This deregulation is similar to what happened with the airline and long distance telephone carrier industries.

As for how you make money, you make one time bonuses as people join your team and you receive monthly checks (passive income) when you and other people pay their electric bills. This is “guaranteed” money because who isn’t going to pay their electric bill, even if they pay it late? The 2 things I like about this are: 1) I approach family and friends instead of going door to door or cold calling (1st time telling a stranger about it haha) 2) I don’t sell anything – instead I market the chance for people to make money while also saving money on their electric bill. Unfortunately, our company isn’t in Oregon yet (I think I read that’s where you’re from) but I can let you know as soon as Oregon opens up.

There’s also another opportunity for passive income just presented to us where we can help the environment by encouraging the production of 100% wind power energy. This will be open to all 50 states starting next week so you could start this now, and then when our energy company comes to your area you’ll already have a team ready and will have added 2 extra sources of passive income to your list. :)

Sorry this is so long but I hope everything I wrote makes sense. If you’re interested in learning more, I can do a 20-30 minute webinar anytime for you that explains both opportunities in detail. It’s free to watch and there’s no pressure to buy/sign up for anything so it’s worth checking out.

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Squeezer July 29, 2012 at 8:14 pm

Reading this article made me check, and one of my prosper loans just went into 15 days late. It’s my first time having this happen! All of the others have always been on time. I’m getting a little worried now.

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Noah July 29, 2012 at 9:14 pm

Why would you be worried? It’s virtually impossible once you get a certain number of loans to not have any be delinquent. Of course if you have 10-20 loans, you might want to be concerned…

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retirebyforty July 29, 2012 at 11:25 pm

Yeap, defaults are inevitable and you’ll just have to live with it. If you really can’t stand the defaults, then perhaps P2P is not for you.

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JasoninNYC July 30, 2012 at 9:12 am

Retire,

What is your plan for taking money out of the P2p platform? I’m a prosper user, and I am worried that I’ve taken on the hidden risk of Prosper going out of business, and the value of the notes dropping significantly (if not to zero). I know Prosper has a deal to service the notes when they go out of business, but that would generate real loss in value, and the liquidity of notes in the market would be severely limited or eliminated. Anyway, are you planning to withdraw your principle? If so, on what schedule?

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retirebyforty July 30, 2012 at 11:17 am

I haven’t thought much about that, but you’re right. A lot of the loans will become losses at that point. I don’t have a good plan for withdrawal right now. I’ll have to work on it. Maybe I’ll have to change over to Lending Club. They seems to be doing better as a company.

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Michael Carroll November 8, 2012 at 12:27 pm

Prosper is a fantastic P2P lending site. I started with Prosper a few years ago when suddenly Texas put a hold on them…now I can no longer lend. I’m still making money from my prior investments, but those are nearly paid in full. I’m hoping Texas gets their act together and soon. It’s quite frustrating and unfair.

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retirebyforty November 8, 2012 at 8:46 pm

Sorry to hear that. You can still buy and sell loans right? I don’t know where to check that info though.

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Keith February 11, 2013 at 9:31 pm

I am currently trying out a small amount of cash with Lending Club. I have diversified in the riskier notes over the last 3 months. I have 6 18%-23% interest $25 notes. So far 100% returns. So I’m at approximately $125 in principle and have a return of $8.82 in interest earned! See if a bank will return this? I have to buy my notes from FolioFn because in my state they don’t allow direct acquisition of notes. How was the tax situation with your notes? Are you doing the investing is a tax sheltered vehicle, like and IRA? I would really like to participate on a grander scale, and keep reinvesting my returns in new notes every month. Money should grow dramatically fast!

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Investment Fiduciary July 24, 2013 at 12:00 pm

Udo,

Do you know what is preventing Prosper to offer its service in Maryland, my home state. What is the regulatory authority in charge of decision?

Michael

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retirebyforty July 24, 2013 at 1:37 pm

I’m sorry Michael, I don’t know. Did you look at Lending Club? They have a different list. I guess each company has to work with the state to set up business.

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Zig December 29, 2013 at 12:33 pm

Hello Everyone, do you know any p2p lending companies in NJ?

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