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Peer to Peer Lending isn’t as passive as I thought

by retirebyforty on February 14, 2013 · 58 comments

in income, investing

Prosper peer to peer lending allocationOne of my passive income streams is peer to peer lending, which can be described exactly as it sounds. You can lend money to borrowers directly and receive interest payments, but you also take on the risk. This type of investment is attractive because of the high interest rate and minimal work; however, it is not really passive either. There is a lot to learn about peer to peer lending and I found that I need to do more work here.

When I first started out I knew that diversification was key. If you are investing $1,000, you don’t want to put it all on one loan. You need to spread it out your investment to as many loans as you can because the fact is, borrowers will default. After that, I really didn’t know what I was doing. I gravitated toward home improvement loans because I figured homeowners are more likely to pay back what they borrowed. I also looked at the borrower’s income, revolving credit balance, Debt/income ratio, and other stats. However, it wasn’t an exact science and I didn’t have a good set of filters to screen out bad loans.

Loan Filters

It took me a while to find and figure out how to use the Prosper statistics page. Here, I can review the historical data and come up with a filter that should give me fewer defaults. If I look at the loans that originated between September 2011 and February 2013, I can get an idea of how the loans performed.

prosper lending

My inclination to lend to home improvement loans was right and I should have less delinquency than if I just invested broadly in all types of loans. Up until now, I invested in 509 loans total.

Out of those 509 loans: 55 are paid in full, 14 defaulted, and 24 loans are in various stages of lateness.

peer to peer lending prosper

Dropping ROI

In 2012, I slowly increased my peer to peer lending investment at Prosper from $1,000 to $10,000. Things were going well in the beginning and my seasoned return was quite good at around 12% for a while. Over the last couple of months, I had a rash of defaults and my ROI dropped to around 8%. Now, I realize I need to do more research to reduce my defaults. However, I don’t have a lot of time to crunch all the numbers and run them through the statistics page.So, it looks like I’m doing better than if I had just invested in any loan. The Past due loans are quite high though and it could drive up the default soon. Also, my seasoned ROI is lower than expected. Seasoned return is the annualized return of loans older than 10 months.

8% seasoned ROI is less than the advertised 9.69% average seasoned return, so I need to make some changes.

A little help from Lend Academy

Luckily, Peter @ LendAcademy.com had done quite a lot of research already. He has been lending for a while now and he put a lot of effort into analyzing the statistic. See How he is investing in P2P in 2013. I picked up some tips from Lend Academy and I’m starting to implement them in 2013.

Let’s run them through the filter at Prosper Stat.

peer to peer lending

Of course after running all these filters, the number of loans originated drop from 20,067 to 3,549. From what I understand, you want the sample size to be pretty big so the statistic is meaningful. If we keep adding filters, the number of loans will keep reducing. I read somewhere that the number of loans should be over 1,000 for the statistics to mean something. Also as we increase the number of filters, it become more and more difficult to find a new loan that fits the criteria. If the filters are too restrictive, your money will be invested very slowly. It’s not good to have idle cash in your P2P account since it is not generating any income.

Still hopeful

My loans still have some hope yet. My All note ROI is still doing OK at 11.60%. For now, I am implementing these new filters as I reinvest the payments. My original goal was to generate $100 per month from P2P lending and I think we’ll be pretty close in 2013.

Original Investment: $10,000

Current value of the account: $10,941.19

Prosper ROi

The D rated notes are killing me

This year I am also planning to open an account at Lending Club. Lending Club is bigger and they originate more loans than Prosper so I want to compare and contrast it with Prosper. I’ll also keep reading Lend Academy because Peter is writing great articles to help investors like me who doesn’t have time to dive into the statistic.

Investing in Peer to Peer lending requires some efforts too. It’s like investing in the stock market. You get better as you keep doing it. Have you tried peer to peer lending? How is your ROI?

How to start lending

The first thing you should know about P2P lending is that you will see defaults. To protect yourself from defaults, you should have at least 100 loans. Don’t invest a large amount of money in one loan because if it defaults, then your ROI is shot. The minimum amount you can lend is $25 so 100 loans means $2,500. It’s probably fine to start at $500 and increase it to $2,500 over time.

Not everyone can lend

The bad news is not everyone can participate in peer to peer lending. You have to be at least 18 years old and have a valid social security number.

Prosper – Open an investing account at Prosper.com

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

Lending Club – Open an investing account at Lending Club

Lending Club is currently available to investors in the following states: CA, CO, CT, DE, FL, GA, HI, ID, IL, KY, LA, ME, MN, MO, MS, MT, NH, NV, NY, RI, SD, UT, VA, WA, WI, WV, or WY.

It’s a bit strange that there some of us can only invest with Prosper or Lending Club.

Good luck!

{ 55 comments… read them below or add one }

My Financial Independence Journey February 15, 2013 at 2:45 am

This was insightful. It kind of drives home the point that P2P lending, just like stock investing has its own set of criteria and valuation markers that you need to develop an understanding of in order to produce average or above average returns.

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Dividend Growth Investor February 15, 2013 at 9:54 am

P2P lending was really popular in 2007 – 2008. Most of the biggest cheerleaders for P2P lending that started in around that period lost a lot of money. Why? Because all new investors cre about is yield, without really understanding whether it is sustainable. I have made a few small loans, and they have fared ok, but it was just pocket change ( or whatever $100 – $150 is called these days)

However, if you have some experience lending on LC or Prosper, you get to understand why credit cards charge such high interest rates.

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retirebyforty February 15, 2013 at 3:39 pm

That’s right. It’s not like you hand the money off and can expect 10% return. You need to work at it to get good ROI.

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mayanqueen February 18, 2013 at 6:10 pm

When you give this type of loan to people why don’t you ask for some type of collateral back up such as pieces of gold? Write a note and sell it if they default, I think gold is good as cash. Everybody owns gold.

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writing2reality February 15, 2013 at 6:54 am

RB40 – Nice post! I have only had Lending Club accounts, and have had great success with them. Your writeup really illustrates the important of understanding some basic credit metrics and how filtering out some of the loans can increase your returns. LendAcademy can be an invaluable starting point, and I’d recommend you also peruse the forums for news, discussion, and more.

Recently, I rolled over 10k into a Roth IRA with LC, and have detailed my own investment criteria for this account. It certainly isn’t passive to find what works for you and your personal risk criteria, but once you have developed that, you can “tweak” the system and the time commitment will drop significantly.

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retirebyforty February 15, 2013 at 3:44 pm

Thanks! I’ll read up more on P2P lending, but I really don’t have anytime at all. Good luck with your Roth IRA at LC. I was thinking about that, but I figure I’ll go with an after tax account for now.

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writing2reality February 15, 2013 at 10:08 pm

Knowing that time is an issue, I would pick a very basic filter set that gives you a good starting point from a risk/reward standpoint (LendAcademy is a great resource for this). Good luck with your LC investments, and your continued peer-to-peer lending investments as a whole! Looking forward to seeing more updates!

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sin camisa February 15, 2013 at 7:09 am

6 years at Prosper, and my ROI still has a minus in front of it. Starting to invest just before a great depression is NOT great timing!
I just started at Lending Club, and I used their preset options. The only problem is that I noticed they put $25 towards a B rated loan, and $75 on a D loan. By the time I caught in, I had already pressed the “order” button. Oh well.
I also noticed that “debt consolidation” accounts to about 95% of loans; which I guess makes perfect sense.

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retirebyforty February 15, 2013 at 3:45 pm

Have you added money? If it’s not working out, it maybe time to get out…

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WINSTON July 28, 2013 at 6:50 am

Be careful of debt consolidation loans, at first it seems to make sense, *someone trying to get their act together, * a great d/i ratio, (called capacity in the lending world, of the 3 c’s,,,, and also of note, I have not seen the 4 P’s mentioned anywhere,,, ) anyhow, the biggest factor is to review their history as much as possible, b/c we humans are great at repeating history, and just b/c you may wipe out a current money situation, you may not have changed their mental / emotional habbits,,, and they will be right back again where they were, hopefully after they pay off your loan,,, Now all of this is from a lending perspective, but from a coaching perspective, I recommend doing consolidation loans immediately, the best is with a mortgage, and then sell the house asap to allow someone else to pay off your debt, and then start over the right way,, and nothing conventional, but beware, I will kick your butt if you end up doing the same thing 6 months later,,, lol,,, W

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JW @ AllThingsFinance February 15, 2013 at 8:15 am

I’ve been lending with Lending Club for almost a year now and I’m loving it. Like you, I haven’t done a great deal of research before funding most of the loans in my portfolio, but my default rate is very low at this point. Since April of 2012, my net annualized return is 15.42%.

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mayanqueen February 18, 2013 at 7:26 pm

What is a Lending Club?

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retirebyforty February 19, 2013 at 1:00 am

It’s another peer to peer lending company. They don’t take collateral. It’s all based on credit like when people borrow from a credit card company.

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mayanqueen April 4, 2013 at 1:10 am

Oh! Thanks for the feedback. I thought that P2P were just personal loans to people you knew. So, those companies are sort of “risky”. The money is not secured, the high rate of returns makes up for the loss? So that type of investment falls under aggressive investments/ high risk? Obviously I don’t know zip about investments, I am just good with numbers and money. So far I have no debt, no mortgage and have been able to accomplish that just because I enjoy math! I do want to learn how to invest. I have been reading your blog and want to thank you for all the information that you provide.
I had financial advisors in the past but did not help at all! They were in so much debt themselves and all they wanted was to get me into annuities. I am still trying to get out of one of them, I stop making contributions to the annuity, was that the right move? Can it be rolled into a Roth IRA?(just to have more access to it)
I have been playing it safe,just with CDs when interests were high.
I have a secure job and a husband that trusts my understanding and respect for our money, our last mortgage payment five years ago was just the cherry on the top. I am not that convinced with the Roth IRAs, I opened one at my bank and it is growing extremely slow… I want to learn to invest but haven’t been aggressive ,I read as much as possible and try to learn, have you had any experiences with Scottrade? I will attend one of their seminars because when there is no mortgage I am sure there is more to do with all that money! Once again thank you for being truthful and for sharing your knowledge! God bless you all RB40s!

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retirebyforty April 4, 2013 at 10:09 pm

I wouldn’t invest in P2P if I was in your situation.
You should look at stocks and bonds. I haven’t tried Scottrade, but I think they are a pretty good choice.
You can buy a few Vanguard funds (ETF) and see how it goes.
For new investors, you need to keep buying through the downturns so you can come out ahead.
That’s hard to do.

WINSTON July 28, 2013 at 7:24 am

To MayanQ, and RB40, I think your comment’s among others are great examples of why we all do well to listen to yourself first and be open to listen to many different money coaches/advisors like RB, for obvious reasons,,, First off, I think you have the advantage to understand the numbers you say, and managed to be debt free, you need to start your own blog,, b/c I preach living debt free, and would to hear what you folks did to get there and how you stay there,,, otherwise, know that all investments are risky, whether they are secured or unsecured, however, I TOTALLY disagree with “conventional” investing, but it is not my blog,,, so I will leave it at that,,,

W

WINSTON July 28, 2013 at 6:54 am

JW, I have not yet invested in either of these, but believe it would be a great thing to recommend and do myself, prior to that,,, can you comment please on the monthly income , I keep seeing comments about a return of $ 100 to $ 200 a month,, surely, the returns can be better than this,,, open to your comments and others on this, thanks!

W

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Financial Samurai February 15, 2013 at 10:44 am

8% really is still excellent. I never expected to get what they advertised. I’m shooting for 5%, but I guess I’m just easy to please.

Nice analysis. How do you mentally deal with folks who default? What do you want to do to them?

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retirebyforty February 15, 2013 at 3:49 pm

5%? That’s quite low. I wouldn’t be very happy with 5%.
I worried about the first few defaults, but then I got over it. If I could sit them in a chair, I would lecture them for 2 hours on personal finance and responsibilities. What I can do? I’m sure they are already doing more damage to themselves than I can.

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WINSTON July 28, 2013 at 7:05 am

Dear Samurai, the answer to dealing with default is simple, it is a fact of life, or a statistical certainty, all of the large institutions look for a default under 3-7 percent, but 1-4 percent is more “par”, depending on the level of your risk and the level of your return,, i.e., you may be working on that 5 % roi, so, anything over 1 % default would be huge for you,, but if you are bringing in 13 or 16 %, then 7% default is not that bad, in greater proportion, so you need to expect default, it is part of life and part of your business, “just part of the business” don’t make it personal, there are VERY few people that live a perfect life and go thru their entire life without ever having a financial hiccup or struggle, I have made or seen hundreds or thousands of loans, and I have NEVER seen anyone intentionally default,,,,

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krantcents February 15, 2013 at 10:45 am

I have never done peer to peer lending, but I think you need to measure your ROI against alternative investments. The savings account is not relative because you are assuming a higher risk. Is the stock market a reasonable choice? I think in most cases, no! Lending, particularly to non prime individuals have more risk that AAA companies. I would want a better return before I would participate.

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Mike February 15, 2013 at 12:24 pm

I can see how this would be a potentially interesting scenario. One hand, you can get decent returns and on the other hand you can wind up losing a lot of money. I think one has to be able to look further into what your goals are as well as other mediums to get a good income.

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retirebyforty February 15, 2013 at 3:51 pm

I think if the economy is doing well, there shouldn’t be mass defaults like in 2008. Hopefully borrowers understand the consequences of defaulting.

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WINSTON July 28, 2013 at 7:14 am

Mike, yes,, the cool thing about these type of investments as they become mainstream is that the average day john/jane doe now are forced to re-think where to invest and the concept of investing, i.e., running to a “safe” and “standard” investment like a savings, annuity, bonds, etc,, is boring and will not produce any return that you will need to survive, so when john/jane look at these type of things, they are forced to understand risk from a totally different perspective, and I think in the long run, will propel the average folk to move faster on to greener pastures with these venues,, and as you said, other mediums as well,,,
W

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Nick February 15, 2013 at 2:29 pm

This is a very helpful post. I have read a lot from people who use P2P lending as part of their investment strategy, but this is the most comprehensive, “real” post I have read. I will definitely be trying this out on my own eventually so it is great to have this perspective on it.

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retirebyforty February 15, 2013 at 3:51 pm

Thanks! I have a lot to learn too and will write more about P2P lending. Good luck!

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chubblywubbly February 15, 2013 at 5:59 pm

Originally I was very interested in p2p lending but my husband talked me out of it because of the default ratio.

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Peter Renton February 15, 2013 at 6:20 pm

Thanks for the plug and I am glad you found my post helpful. Like any investment it pays to do some research before investing. Mind you, I didn’t heed my own advice when I first started in p2p lending – after 9 months my NAR at Lending Club was around 4%. But you can learn from mistakes and now I think long term returns of 10% or more are possible. Best of luck.

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retirebyforty February 17, 2013 at 8:59 am

Thanks for doing all the number crunching. You are helping so many investors. 10% long term would be great.

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John February 16, 2013 at 6:58 pm

Thanks so much for pointing out that peer to peer lending isn’t completely passive. Like you said, there is so much you have to learn and know to make the right decisions with these types of investments.

Stocks are looking pretty appealing to me! I wonder, how much are you investing in peer to peer and how much in other investments (percentage wise)?

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nicoleandmaggie February 17, 2013 at 6:54 am

No, I’m pretty happy with stock market investing (in ETFs and index funds) for the risky part of my portfolio. I’m not really clear on how P2P lending would add to diversification (or to returns, really).

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retirebyforty February 17, 2013 at 9:03 am

I’m pretty happy with stock market investing too. P2P lending is just a small part of our portfolio. It would be interesting to see how P2P lending does during a bear market. I’ll stick it out until then and see if it’s sustainable in the long run.

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Sarah Park February 17, 2013 at 8:00 am

Very good insights. I guess enough knowledge is very important before getting into this.

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Elizabeth @ Broke Professionals February 17, 2013 at 4:57 pm

I’m not sure this is anything I’d ever try – it sounds risky, even though much of that risk is couched. I think 8% does sound like a strong ROI – I mean, you rarely see that in other investments these days, and never in real estate (like we used to).

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JT February 17, 2013 at 5:30 pm

Nice write up. I recently found out that Lending Club is available in Indiana so I think I will be looking to them in considering a consolidation loan to see if I can decrease my overall interest rate for consumer debt. I will let you know if I end up doing that. I want to pay down a little more debt to improve my credit score so I can get a better interest rate so it might end up being a few more months before I take the plunge.

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Roger the Amateur Financier February 18, 2013 at 1:52 pm

I’ve been investing with LendingClub for a while now (about two years, if memory serves), and my account has done fairly well. I’ve had a return of about 5%, on an investment of roughly $300, which isn’t too shabby of a return. (If we’re being technical, $100 of that money was provided by LendingClub in one of their promotions, so my actual investment was $200 and my real return is closer to 7.5%, which is even more impressive.) It would probably be even higher, but one of my first investments ended up defaulting. It was a good lesson in the importance of watching to make sure that your debtors keep up with their payments, and the need to watch P2P investments as much as, if not more than, other investments to ensure that your money is returned to you.

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retirebyforty February 19, 2013 at 12:43 am

Thanks for sharing your experience. $300 is a very small amount for P2P lending. Just one default will kill your ROI. I think 5% is quite good with the one default.

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Integrator February 20, 2013 at 4:44 pm

I have done some work in the consumer lending industry and they have extensive credit scoring and algorithms to work out the risk of default. In spite of this, they still have high rates of default. As appealing as P2P lending is, my experience in seeing the level of work required to determine credit risk and the rates of default that still arise has scared me away from this category as a mode of investment

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retirebyforty February 20, 2013 at 11:06 pm

Thanks for your input. I’ll keep that in mind. Maybe I should hold off any new investment for a few years to see how the current investment pan out.

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Glen @ Monster Piggy Bank February 21, 2013 at 7:00 pm

Great post, this is exactly the information I was looking for when it came to P2P lending.
Keep us updated with how it progresses throughout the year :)

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retirebyforty February 22, 2013 at 11:56 am

The ROI is creeping up slowly. I hope to get back to 10% at some point.

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Ray February 22, 2013 at 3:44 pm

I went to check out Lending Club, and it turns out that some states do not allow you to invest in this. Quite interesting.

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Motor Ryder March 29, 2013 at 5:30 pm

I’ve been on Prosper for quite a while with an after-tax account. I started in 2007 under their “old” version of the site and business model. The initial results were not good on the $13,000 or so that I invested. I had a significant number of defaulted loans and a resulting negative return. When I was between jobs for a while, I withdrew whatever had accumulated between visits to the site to cover my expenses.

Then I took a look at what had been going on with the “new” version of the site and the few loans I had made with their newer ratings and screening of borrowers. The results were much better — in fact, that bunch of loans had no defaults. Employed again, I have gotten back in, with about $25,000 invested. I have recouped all that I was down from the early days and am modestly ahead.

In addition, just under a year ago, I opened a rollover IRA account at Prosper with just over $77,000. So some of those loans are “seasoned” while others are relatively new. My return is just over 8%, in significant part because I have most of my investments in lower-rate, higher-grade loans. That is in part because I take it a bit personally when someone defaults, but also because my concern is to earn “enough.”

I think one of the considerations for someone investing — particularly investing for retirement — is not necessarily trying to get the highest net return possible, but to get what you need in order to make the retirement plan work. So my Prosper investments are between 15% and 20% of my “financial” investments — not counting about $2.1 million in real estate, or maybe $1.5 million net of loans. If I earn 6 – 8% on what I have with Prosper, that makes the whole plan work. I won’t be missing any meals in the next 35 years, by my calculations.

As far as the time required to invest in loans, yes, that is a consideration. With the $75,000 in the IRA account, I have received payments of about $35,000 in the past 11 months. Those funds have had to be reinvested to keep the program moving forwar. However, it doesn’t seem burdensome, as studying SEC filings would be for stock investments. I find each loan request to be a look into a slice of someone’s life — kind of like a financial reality-TV show. And once you have a significant amount invested, it makes sense to make larger investments in each loan. So, I’m no longer wondering whether to go for $235 or $50 on a loan. Propser’s recirds show that no one who has nvested in more than 100 loans (since thenew launch) has lost money. If you have $75,000 — or now $80,000 working for you, then you can put $200 – $800 into a loan and still be diversified. Of course, when a larger loan defaults, it’s exasperating, but when the others keep making regular payments and the total account value keeps climbing, it all seems worthwhile. So while this might not be for everyone, I like the idea of using technology to cut out the banker middlemen and let borrowers and investors share in the benefits. I know I’m not going to double my money in a year as I might with the latest “hot” stock, but I’m also not going to see 40% of my investment vanish in the space of a week. ANd, once an investment is made in a loan, there’s really nothing further to worry about. FOr better or for worse, you’ve pretty much got to ride that tiger to the end. For that reason, you can easily take a week or a month off and not worry about what’s going to happen. Overall, you’re going to make a steady, decent return and you don’t have to worry about whether you should sell last week’s hot stock before it crashes.

It’s working for me.

Questions?

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retirebyforty March 31, 2013 at 7:39 pm

Thank you for the detailed response. I really appreciate your insight.
My return is right at 8% and I would love to raise it to about 10%.
My big concern is what happens if we have a big economic downturn like in 2008. It seems the default rate will go through the roof if the economy tank again. I would like to see what happen during the next big stock market correction too. For those reasons, I’m not planning to add a lot more to my investment at this time.
Currently I have about 450 active notes. Most of them are invested at $25 increment.
If I add more money, I probably will have to increase the amount so I won’t have to spend a lot of time reinvesting.

Question – Have you thought about Lending Club? Over there, you can sell notes that are late and they are quite a bit bigger than Prosper. I’m thinking about adding investment at Lending Club instead of Prosper.

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Motor Ryder April 2, 2013 at 6:18 pm

Those are certainly interesting thoughts. And you seem to have understood my post despite what I now see are a number of typos.

I’m also concerned about a future downturn, but I guess the question is where to invest. That is, if your concern is about a major stock market decline, then you definitely don’t want your money to be there. Rental real estate might hold up reasonably well, since moderate-income renters aren’t heavily invested inthe market, so wouldn’t be hard-hit by such a decline. But real estate (which I seem to have plenty of) is not liquid and has high transaction costs.

Also, I think there may have been something of a turn in consumer behavior as a result of the Great Recession. Today’s report is that the delinquency rate on credit card debt — which is mostly what is being consolidated these days on Prosper — is the lowest it’s been in almost two decades. In the past 4 or 5 years, a lot of people have lost their homes — some against their will and some who could pay, but have walked away as a stratgic investment decision — and some have had their cars repossessed or had to move to an older model. But in today’s economy, you really NEED to have a credit card, whether it’s to rent a car or make a hotel reservation. So I think sentiment has turned somewhat from thinking the mortgage is the essential bill to keep current to the thought that, whatever else happens, you have to have a working credit card. With luck, together with people perhaps having (permanently?) changed their debt-management practices, the next dip may not see so great an impact on credit card delinquencies.

So I’m thinking (hoping!) that credit card obligations and the like — and I think Prosper loans might fall into this category — will perform reasonably well even if we have a rough patch in the future.

For my retirement account, initially my average loan size was about $300 – $400. Now that I have been reinvesting payments pretty quickly (you need to keep that money working, right?), the average size is coming down. If I have $100 to $300 in payments that have some in, I’ll spread that over a couple loans, so newer loans average $100 or so, unless a large loan pays off early. But whether I have 200 loans at $400 each or 500 loans at $160 each, once the invetment decision is made, the platform takes care of the rest, and it really doesn’t care how many loans there are in my portfolio. And if X% of the loans go bad, once you have a large enough number of loans, it doesn’t matter if it’s X% of 2,000 loans at $25 each or X% of 200 loans at $250 each.

I haven’t really looked at Lending Club, and can’t comment on the differences between the two. Maybe diversification would suggest I look there as well, but it also means more paperwork and more log-ins and more sites to check every day or two or three.

It would be interesting to know how the sale of a delinquent note plays out on Lending Club — what kind of return you get on the outstanding balance. My simplistic thought would be that you’re only going to get what it’s worth, so if that’s what it’s worth, you might as well keep it. That would be the Efficient Market Theory in action.

For me, as I think I tried to say above, the question is whether Ithink I can get a high enough return to achieve my goals. I started saving early enough and aggressively enough that I don’t need to double my money every four years — so I don’t need to chase high returns. If I get 8% — especially in a 0.0001% bank interest rate environment — that’s all I need. Heck, even 6% will do. I make sure my projections will work out at a less-than-3% return in a 3% inflation world.

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WINSTON July 28, 2013 at 8:53 am

Folks,
I keep seeing language about concerns of the economy, and stock market crashes, etc,, these are all standardized lingo terms for the standard type of investments,, I keep preaching, forget the standard investments, and go find other investments that pay a fortune more on ROI, and minimize or negate any economic issues, such as mobile homes, life settlement contracts, and many more,,,

W

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WINSTON July 28, 2013 at 7:39 am

Wow, a lot of solid and good info,, and great to see the amount of diversification into RE, etc,, question,, about the IRA you created or started, was that with Prosper, or one of the lending groups,, if so, how does that work,, thanks,,, W

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WINSTON July 28, 2013 at 7:46 am

Motor, you should have your own blog, I don’t agree with everything you have here, but you are well educated and give great detailed advice to help bring a great deal of info to the table,,,

W

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Jamie April 22, 2013 at 9:56 am

Thank you for this post. I’m slowly getting onto my feet for, well, having any money in the future. I’ve never heard of Prosper.com or peer to peer lending but it sounds like another option to help diversify an investment portfolio. I tried to retain what I read through the comments, and I’m sorry if this has already been covered.. With where I am at now, I really can’t afford to put in a thousand dollars into 10 or 20 different loans to spread it out. Rather, if this were a route I’d be interested in considering my current financial situation, I could maybe put in $25 every month or every other month. I could see myself starting out giving just $25 in one month to Loan “A”, then $25 in the next month to Loan “B”, and another $25 in the next month to Loan “C” and so on to spread out and help against defaults hurting too badly – is this a good way to start taking baby steps? Or, because it’s literally just pocket change in that scenario, would it be worthwhile to wait until I can actually make some sort of dent with more cash? This is usually where I sit on the edge to doing or not doing. Would it be worth my time and money, or not, for such a little starter amount. I already do contribute to a 401(K) at work only up to where I get the maixmum company match, and then I contribute to a Roth IRA monthly (this is not maxed out at all to the $5,500/year maximum – it just gets a fixed manageable/small amount each month). I always like seeing other opportunities out there, but it’s hard to know where I should focus before branching out to diversify. Roth IRA or other investment (like Prosper). This gives me good food for thought. I should maybe find a financial advisor to discuss this with me. Again, thanks for writing about this new peer to peer lending venture!

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Motor Ryder April 22, 2013 at 11:40 am

If I were in your position, I think I would be inclined to get my feet wet by opening an account and making (small) investments when you are able. To start, I would go with the higher-rated loan requests — “AA” or “A” on Prosper, or maybe a “B.” Going with a lower-rated, higher-rate, higher-risk loan might provide a better retirn, or it might be one of the ones that goes sideways on you and ruins the whole experience.

Start with the “better” loans — and I would also suggest not too large a loan. Look at the monthly payment that’s required in comparison to monthly income. Prosper has recently increased it’s maximum loan to $35,000, but the payment on that is significant — even on a five-year loan. Prosper doesn’t (yet) show higher income ranges beyond “over $100,000,” so I think it will be hard to know how easily a borrower can afford the payment on these new larger loans.

Once you have a few loans in your portfolio, you can start to move down the credit grades, if you choose, to get the higher anticipated returns — net of defaults. But you have to be ready to see the loans go delinquent. Some will get caught up, some will go to collections and you’ll see occasional recoveries, some will file for bankruptcy and you’ll never see another dime.

My experience with the retirement account I have invested at Prosper is that about 1/3 of the gross interest payments get “lost” to charge-offs on other loans. That’s irritating — you can’t help thinking that if only those deadbeats had paid their loans, what a GREAT return you would be getting! You just have to remember you’re in it “for better or for worse, for richer or for poorer.” In the long run, my returns are better than a savings account — and even better than paying down my mortgage(s). I have a total of over $970,000 in debt, and none of it is worth paying off if it would mean reducing my monthly investment into Prosper.

Good Luck !

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retirebyforty April 22, 2013 at 11:51 pm

Hi, I would prioritize maxing out Roth IRA first, then maxing out 401(k) eventually.
Just the tax saving is already going to give you good return.
I think P2P lending is pretty risky and you should build up a stable portfolio first.
I wouldn’t put more than 5% of my net worth into P2P lending. Good luck!

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WINSTON July 28, 2013 at 7:53 am

Jaime, I think Motor spells out some great “textbook” advice here for you as well, the old school of thought is that yes, you can invest everything you have whenever and where ever you can, it IS better than nothing, but if you can, try to get or put more money into a more concerted effort, i.e., I had a client one time that put $25 or so into a savings bond every chance she got as she moved from state to state with her husband in the oil business. Now, 40 plus yrs later, she literally had an entire notebook of hundreds of bonds, great for the roi of savings, but a nightmare from an estate planning perspective,, and they had 7 kids, I had advised at the time to convert all to an annuity for the sake of the kids,, or 7 annuities for each child, and then decide what they wanted to do from there, but more over, your situation is the reason, I HIGHLY suggesting investing Co-ops, with others in your shoes,, I can go into that further if you like,,, but the fact that you are starting is the main ingredient,,,,

W

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Anton Ivanov July 2, 2013 at 10:24 pm

I still haven’t tried peer to peer lending – just haven’t had the time. Your reasoning for implementing the new filters sound logical. I wonder how default rates are affected by macro-economic conditions in the US. I don’t think we are nearing another downturn, but that’s something to consider in the future.

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Rich July 30, 2013 at 9:00 pm

I live overseas, but both of my US properties are in the state of Ohio, which apparently doesn’t allow P2P lending. Any ideas how to set up an account regardless?

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WINSTON July 31, 2013 at 8:16 am

What an Awesome question w/ re: to a posing a challenging question. The most direct issue is the contractual jurisdiction or capacity to uphold any contractual obligations if it were to be ruled that you are still not an american citizen an obama citizen, or of whatever country,,, of a side note, most people do not know that a loan application is a contract, and the Very First line after your name is the Purpose of the loan, I have actually seen on 3 occasions where money was borrowed an used to hire to take someone out, which interestingly would “void” that contract as it would be considered an unlawful act,,, in your case,, simply a matter of what can be held up with your contractual relationship with Peer to Peer or anyone else in that regard,, I do not have the answer,, I would attempt to ask them directly, it may take some time for a reply,,, of another quick note, each country allows for different provisions to invest, mainly in real estate,, i.e., Mexico used to say that no foreigners can own land in Mexico, so you can buy a home, but not own the land,,, however, I understand that has recently changed, it is different in each country,, and same applies of course, as you know to business, and or investments,,, All the BEST, Good Luck,, W

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