Prosper Loan Investment Returns-Where to Get a High Return on My Cash?
Since October 2011, I’ve invested in Prosper Loans. This is the fourth update of my experience investing in Prosper loans.
In October, 2011, I decided to take a small percent of my investment money and lend it to Prosper borrowers through the Prosper Marketplace. Prosper borrowers must meet minimum credit score ratings and go through a vetting process. These borrowers typically want to borrow money for short term needs such as debt consolidation, homeowner remodel, or business expansion.
The borrowers are graded according to credit worthiness from AA to HR. Typically, the lenders return varies based upon the percent of loans in their portfolio from each specific credit grade. For example, if you had a portfolio of all E rated loans, then you could expect a return of 12.51%. Whereas, if you were a more conservative lender and only lent to the AA borrowers, you average would be approximately 5.21%.
As you would assume when considering ‘Where to get a high return on my cash‘, the lower quality lenders; C, D, and E have higher returns because they are riskier borrowers with a greater chance of default.
That said, lending to others through Prosper is increasing my income as I serve as a banker to those who need money to build their businesses, pay off debt, or for other short to medium term uses.
Caveat; this type of investment has a greater risk and may be considered a speculative investment.
Why I Invest in Prosper Loans
I believe in the concept of peer-to-peer lending directly to borrowers in need. I diversify my investments across many loans, in order to reduce the risk. And, I want to get a high return on my cash!
At present I have 1,108 notes and of those notes, 35 are past due. That’s about 3% of the total. Fortunately, when Prosper approximates the return, they take into account the default rate.
By diversifying across many loans, if a borrower defaults on her loan, it’s only a small loss to me. As in any riskier investing endeavor, with higher rewards, the lender also expects more losses. I expect defaults and that’s why my money is spread out across many loans.
I also automate the process so Prosper invests my money for me in the types of loans I specify.
Another benefit of investing in Prosper loans, I can choose to invest in only certain types of loans. There are several screens which allow you to drill down into certain loan grades. If you want to go for riskier loans, you can choose only C or higher borrowers. If you want only borrowers with confirmed employment, or those that have borrowed from Prosper before, those options are available as well. And if you’d prefer, you can automate the whole system and Prosper will select loans for you, based upon your criteria.
Although lenders benefit from higher returns, borrowers, may receive lower interest rates than are available on comparable loans.
Your Prosper Questions Answered-Where to Get a High Return on My Cash
How much has Prosper loaned?
Prosper has more than 2 million members and over 2 billion dollars in funded loans according to the Prosper Website, Company Overview.
How does the lending process work?
Set up an account and transfer funds to Prosper. Decide on the types of loans you want to fund (borrowers are ranked from AA to HR ) and your investing criteria.
Can you choose who you want to lend to?
Yes, you can manually fund individual borrower’s loans. Also, there are lots of filters and plenty of staff to help you eliminate certain borrowers. Here are several sample investing criteria:(1) Invested with Prosper before, (2) 90-100% on time prior payments, (3) Made at least 15 payments. If you don’t want to fund someones wedding, you don’t have to!
What are the interest rates charged, credit scores, and default rates of the borrowers?
The chart above was taken directly from Prosper’s website on June 18, 2015. When aggregating all loans together, the average effective yield is 15.94% with an actual loss rate of 6.62%. That equates to an actual return of 9.33%. If you’re worried about default rates, you may want to stick to AA, A, and B rated loans. The weighted average FICO score of all borrowers is 703.
How much might I lose?
I’ve never lost a dime investing with Prosper. Defaults typically just reduce your return by a small amount. It’s great to make double digit returns on your money, but you need to know the downside. The average estimated loss increases from 1.61% on a AA rated loan all the way up to 16.04% on an HR rated loan. Thus, if you’re worried about default rates, you can choose to invest in higher rated loans. But the ‘actual return’ column on the above chart takes default rates into account.
What is the lender yield or return?
Returns vary based upon the loan quality. Higher quality loans provide lower returns than riskier loans. In general you can expect returns between 5.48% for AA rated loans up to 11.35% on the E rated loans. Your individual return will depend on the percent invested in each loan grade.
Prosper Lending Takeaway
A general rule of thumb is not to invest more than 5 percent of your total investment portfolio in speculative investments. Since Prosper is a new investing platform, it’s shorter time in existence makes is a bit riskier than some stock and bond index mutual funds.
That said, if you’re wondering “Where to get a high return on my cash?” and can handle a bit of risk, then you may want to try out the Prosper Lending Platform.
Please ask any questions, I am happy to share more details about my Prosper lending experience.
Have you ever loaned money through peer to peer lending? Share your experiences here.
Disclosure; This is not a recommendation to invest in Prosper loans, I am not a registered investment advisor and recommend you contact your own professional advisor with any investment related questions. If you become a borrower through a link in this article, this website may be compensated through the Prosper affiliate program.
The comments from this original article remain, please add your own current thoughts and questions.