Who’s Afraid Of The Big Bad Prosper?

The SEC is, according to NPR’s Planet Money Podcast.  That is why Prosper.com is going through its quiet period.  Apparently the SEC does not know quite how to classify peer-to-peer lending networks like Prosper.com, so it closed Prosper down pending some filings and discussions.  Hopefully Prosper will come back in a form similar to when I started investing, because I really want to keep increasing my number of loans.

P.S.  Planet Money is a great blog and podcast and pretty accessible for those without a financial background.

Prosper.com Update

Four months ago I posted about loaning money to a person through Prosper.com.  I loaned $50 of the $10,000 the person borrowed.  The interest rate was 18.65%.  So far, the person has been paying back the money.  Four months means four payments, the the 36 the person has to make.  So, I am 1/9 of the way to getting all my money.

I would have made another loan by now, but Prosper.com is going through a quiet period in order to complete an SEC filing.  With the $7 and change I have been repayed, I will only have to pay another $43 to make another loan.  So, as I get paid back more and more, loans become cheaper for me to make.

I will post more when the quiety period is over and I have made another loan.

Stop Me If You Have Already Heard This One

Eleven days ago I bought a note backed by a loan given to someone with less than stellar credit.  It pays a lot of interest.  Sounds a lot like a structured investment vehicle backed by a subprime loan, does it not?  Well, I promise I will not go down in financial flames, and here is why:

1. Most importantly, I am only using money I can afford to lose.  I consider this no different than gambling, just with fewer dice and cards involved.

2. I am not borrowing huge sums of money in order to buy even more of these notes.

3. I did research.  I checked out the credit status of the person receiving the loan.  I know their debt-to-income ratio.  I know their general credit score.  I know how much revolving debt they have and what percentage of their total credit they have actually drawn on.  In other words, I know this is a risky investment, not something I think is a sure bet that pays a lot of interest.  This is a higher-risk venture with a high-return potential.

Okay, so what kind of return am I looking at?  Well, the $50 I loaned will be repaid over three years at an interest rate of 18.65%.   Since the payments are amortized (which basically means I get the interest on the remaining money loaned and some of the money I actually loaned back every month,) I will get about $1.80 a month for the next three years, assuming this person makes every payment on time.  That means I’ll end up with about $65 at the end of three years, or just under 10% APR.

It pays better than a three-year CD, but that is because there is a real risk the person may not pay the loan back on time or at all.  Right now, the quality of borrower I loaned the money to has a higher than 91% current rate.  So, more than 91% of the loans made to people like the borrower I loaned to are being paid on time.  I am willing to get a much larger return in return for risking that this person will not be one of those 9%.

I am planning to continue loaning people money as I save up batches of $50, so I will keep you updated on how things go.  If you are curious what service I am using to do all of this, it is Prosper.com.  If you are interested in becoming a lender too, let me know, and I can send you an invite.  If you make a loan because of the invite, we both get $25, so it is better for you than just signing up.  (It is better for me, too.  I have no shame.)  If you are interested in borrowing money, I can send you an invite too, but I get $50 if you borrow, and you do not get anything, other than a loan.  (Again with the lack of shame.)

p.s.  When I said I am only using money I can afford to lose, I meant it.  This is all being funded from the “fun money” I get to keep from my paycheck.  I am not even using all of my fun money, since I put some aside every paycheck into a savings account to pay for things like birthday and Christmas presents for my wife.  I would not risk money for my retirement on something like this.