You Asked for it; My Experience with Peer to Peer Lending

By on Dec 3, 2011 in Investing, Make Money | 17 comments

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In Where to Get a Loan; Help I’m Really Struggling last week I wrote about peer to peer lending for those of you who need some extra cash. Many commenters asked about my experiences as a lender. Full disclosure, I started lending to borrowers through Prosper.com in October, 2011 so I don’t have too much history to report. As of January, 2012, my annualized investment return is 7.66%. This return is quite short term and not of too much value yet, but I’ll continue to update my results as time goes on.

Prosper advertises over 10% returns which includes a quantified default rate on some of their loans.

10.69% Returns With Prosper

Why Am I Lending? Like many out there, I’m looking for a higher return for some of my portfolio. In fact, like a banker, there is a possibility of 10.69% Returns With Prosper.

Why Prosper? I read about the concept many years ago, but not until I met one of the key employees and grilled him endlessly, spoke to another large investor, Peter Renton of Social Lending Network, and read through the SEC corporate documents did I decide to invest.

What is the risk of lending in this platform? A borrower might default and you lose your investment in that particular loan. The company might fall on hard times and you lose some of your investment.

How do I compensate for the risk? I only put a small amount of money in each loan. I invest in many loans to diversify the risk. Ultimately, I will invest less than 3% of our overall investment portfolio.

How does it work? You can either automate your investing, or read about each individual case and choose which loans to fund. Want to narrow your choices even more? Set specific parameters for your loans.

Investment returns? It is too soon to analyze my returns as my dollars have been invested slowly over the last 2 months. Check out Prosper’s site to read more about lending money with Prosper. For the thorough investors, there is a link to Prosper’s Securities and Exchange (SEC) legal documents as well!

Caveat, this is not a recommendation but an introduction to an investment product. Please consult your own financial advisor before considering any investment product. As stated in my disclosure, per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise.

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Carnival of Personal Finance in Personal Finance Journey published my article about True Wealth

Novel Investor featured Investing Rule #1; Know Thyself

What are your thoughts on the peer to peer lending format? Would you consider lending or borrowing?

    17 Comments

  1. When it comes to investing, you are adventurous *and* cautious! I love that about you Barb!

    Exotic investments has the potential for good returns but so are the risks. Always limit your exposure.

    And of course, thanks for the mention Barb!

    Moneycone

    December 3, 2011

  2. Just curious, if/when interest rates start rising will you still use the P to P lending or move out of it?

    And thanks for the link back.

    JP @ Novel Investor

    December 3, 2011

  3. Barb, I’d be interested to hear what kind of interest rate you get, what if any losses you had, and what your overall yield was after a year’s time.

    Maggie@SquarePennies

    December 4, 2011

  4. With the small percentage of your portfolio that you are investing and the diversification that you employ, I can see that you are exercising caution while exploring this vehicle. It’s interesting. I’ll be happy to read your update.

    Roshawn @ Watson Inc

    December 4, 2011

  5. @Moneycone-I spent a lot of time looking into this invetment opportunity. For me, I have some capital allocated to “riskier” investments. As always, one must analyze their own personal financial situation for suitability.
    @JP-Excellent question-Every 6 months to a year I evaluate our portfolio. It depends what other investments are available for my risk tolerancewhether I will continue with peer to peer lending. But, it is likely when interest rates rise, so will returns on these investments.
    @Maggie-I intend to publish that information. I will keep you posted.
    @Roshawn-ABsolutely, I would not caharacterize myself as a huge risk seeker.

    Barbara Friedberg

    December 4, 2011

  6. Marie, I set my parameters from the available options and the loans are selected automatically for me. It would be too time consuming to individually select the loans.

    Barb

    December 4, 2011

  7. How did you decide to go with prosper vs lending club? From what I’ve read, lending club is better (and it’s what I use)

    Daniel

    December 4, 2011

  8. Thanks for your perspective Barbara. I would definitely consider lending. I wouldn’t invest a large portion of my portfolio, but I would risk something for a fair expected return.

    Hunter - Financially Consumed

    December 4, 2011

  9. Daniel,
    Purely personal reason. I was familiar with Prosper from the early days. I met one of the top employees and spoke with him at length. I also talked with Peter Renton of Social Lending Network dot com. So, I didn’t even investigate lending club. Although Prosper had some problems in the beginning, those have been tackled and the SEC docs were satisfactory.
    @Hunter, I like to be very clear that this investment is for the risky part of your portfolio.

    Barbara Friedberg

    December 5, 2011

  10. Barb,

    Great article and thanks for covering Prosper. Looking forward to seeing your results over the coming months and years.

    Glenn G. Millar
    Prosper Employee

    Glenn G. Millar

    December 5, 2011

  11. @Glenn-Thanks for stopping by. I’ll keep you posted :). I like a company representative checking in on the articles. It makes the company seem more “human”!

    Barbara Friedberg

    December 5, 2011

  12. I’ve used both Prosper and Lending Club. At the moment, because North Dakota isn’t on the list for direct usage for either site, I’m restricted to using Lending Club, as they allow me to use their note trading platform. Currently, I’m seeing returns that are in the 12.5% to 12.7% range. Interest rates would have to jump significantly for me to dump them and move my money back into the safer savings accounts. I should note that I haven’t had any defaults yet, and I imagine that they will come eventually. But, even if that does happen, I can’t imagine that putting a big enough dent in my returns to make me consider a safer investment for this part of my portfolio. Is it risky, yes. So risky that you shouldn’t consider it? Absolutely not.

    P.S. I don’t want to spam my links here, but I’ve written a couple of posts on Lending Club on my site. If anyone is interested in reading them, simply click on my name, then do a search on the site for “lending club”.

    Beating Broke

    December 5, 2011

  13. Peer-to-peer lending has been pretty small fry over here in the UK, until very recently. As a generally risk averse person I’m cautious about social lending, especially at the moment when many people’s job security is questionable and prospects are looking gloomy.

    Harri @ TotallyMoney

    December 6, 2011

  14. @Beating Broke-Thanks for your input. I believe that for this type of investment you must get as much information as possible. Check out Beating Broke and Social Lending Network, and Prosper dot com for more info. And if you’re really adventurous, read the SEC documents on Prosper’s site.
    @Harri-If you are uncomfortable with any investing platform, avoid it. Your mental health and risk tolerance are most important. Thank you for chiming in from across the pond.

    Barb

    December 6, 2011

  15. Probably the greatest benefit of obtaining an unsecured loan from peer to peer lending is the reasonable rate of interest.

    prime lending dallas

    December 17, 2011

  16. @Prime-Actually, the rates vary based upon ones credit. Although if your credit is good, then the interest rates can be low as well.

    Barb

    December 18, 2011

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