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.
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
Past due (1-30 days): 4
Past due (31+ days): 3
Total charged-off notes: 1
Total notes paid in full: 16
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.
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.