Prosper Review – Where to Get a High Return On My Cash?

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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.

Investors! Earn great returns with Prosper.com peer-to-peer lending

Prosper Lending-Where to Get a High Return on My Cash?

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.

Investors! Earn great returns with Prosper.com peer-to-peer lending

    34 Comments

  1. I didn’t realize that you can limit the amount of the loan. A few bad loans probably won’t affect your performance very much.

    krantcents

    September 27, 2012

  2. @VEronica, Ornella, & Krantc, ACtually, I just started investing with Lending Club as well, but don’t have any data yet, so I’m very concerned about full disclosure and responsibility. I totally understand how these types of returns are tough to believe. That’s why I always recommend diversifyint your investments and only investing a small percent of your investable assets in any one type of holding.

    Barb

    September 27, 2012

  3. I’ve used Propser since they first started and I’m a huge fan. I’ve been reinvesting my cash for 5+ years now and am very happy with the returns.

    The College Investor

    September 27, 2012

  4. Hi Barb, Glad you finally decided to write about your investing experience with Prosper. I really like the fact that you emphasized a small loan amount size. With over $30,000 it is fine to invest in $50 loan increments but I always tell investors to stick with $25 until they reach a $10,000 balance. With Automated Quick Invest it is really easy to let Prosper do the investing for you.

    So my question for you is: are you staying with your original strategy? If you are not adding new money to it (as in just reinvesting payments) you can afford to be a little more picky. Be interested to hear your thoughts.

    Peter Renton

    September 27, 2012

  5. @College-Thanks for weighing in, I like to hear from other investors!
    @Peter, I am reinvesting my loan payments and am sticking with my original strategy. I am very happy letting Prosper invest for me according to my criteria. So far I’m content, thus see no reason to switch. I recently funded an account with Lending Club and will write about that after 6 months to a year.

    Barb

    September 27, 2012

  6. Barb, what effect did this have on your tax return? Did it make it a pain to fill out with all of the loans?

    Lance @ Money Life and More

    September 27, 2012

  7. @Lance, Great question. Since I only started investing in October 2011, I only had
    $200 of 2011 income. You download the 1099 tax form and treat it like any other income that is reported on a 1099. There’s a section here http://www.prosper.com/help/investing.aspx#taxes that discusses the tax issues.

    Barb

    September 27, 2012

  8. I was very skeptical about lending sites like Prosper, but the more I read, the better it sounds. Thanks for sharing your experience.

    Kim@Eyesonthedollar

    September 28, 2012

  9. @Kim, I initially considered investing in peer to peer lending in 2007 and decided to invest in 2011…. I completely understand your apprehension. If you decide to invest I would not invest any more than 5% of your total investable assets.

    Barb

    September 28, 2012

  10. Barb, I’ve looked into this and it seems like a good spot for diversification. I do have personal moral concerns. The reason for high returns is due to the high interest rates that are charged. 31% could be considered usury, despite the fact the borrowers are willingly entering into the contract. I just don’t think I’d sleep well at night knowing I’m loaning money at those high rates.

    Brent Pittman

    September 28, 2012

  11. @Brent-You must live by your convictions and I respect that. Thank you for weighing in. Many of the borrowers are consolidating high rate credit cards at lower rates than the credit card companies charge. The E and HR borrowers have the worst credit ratings, are the highest risk borrowers and thus are required to pay the highest interest rates. You can specify only lending to A or B rated borrowers if you prefer. I look at it as offering liquidity to borrowers.

    Barb

    September 29, 2012

  12. I have been thinking about investing in Prosper for quite some time, but I haven’t pulled the trigger yet. I would love to get back to double-digit returns and the stock market is way too volatile right now.

    My question is, are your deposited funds secured in any meaningful way? Banks have the FDIC and mutual funds have SIPC. Does Prosper have any backing and is the company audited regularly?

    Bret @ Hope to Prosper

    September 29, 2012

  13. Bret, Excellent questions. No, the deposited funds are 100% at risk. Prosper is requred to file regular reports 10-Q, 10-K with the SEC. I have invested less than 5% of our total investable assets in peer to peer, and would only suggest this type of investment for someone with no credit card debt, 6-12 months of an emergency fund and a high risk tolerance. I alsobelieve in broad investment diversification so that one asset class drop in return will not sink your entire investment portfolio.

    Barb

    September 29, 2012

  14. Thanks for the detailed post Barb! Those are indeed very nice returns! Are there any stats on the number of defaults with Prosper loans?

    Moneycone

    September 30, 2012

  15. @Moneycone- You can find loss rates (defaults) at this link http://www.prosper.com/welcome/marketplace.aspx. The default percentage increase along with the risk of the borrowers. In other words, higher risk borrowers (A=low risk, E, HR = high risk)default more than lower risk borrowers.

    Barb

    September 30, 2012

  16. I lent money through Prosper back when they first came out and had a good experience with it, but I’m not sure I would do it again now because my point of view on borrowing/lending has changed. (And I can’t anyway, since people in Arizona can no longer be lenders.)

    Jackie

    September 30, 2012

  17. Barb,

    Thanks for the post and I just wanted to say that I previously used Prosper exclusively but over the past year have moved more and more to using Lending Club. I thought at first the slightly lower rates would hinder my returns, but what I have learned is that my returns are higher and should continue to remain high even after the normal rate of defaults, but I believe LC has a better vetting process before allowing a borrower to list on LC.

    While I still use Prosper at this time, I am continuing to move away and use LC.

    One of the main things that I think sets LC apart from Prosper, would be the ability to sell late loans on LC through FOLIOfn. This option is not available through Prosper, as they do not allow late loans to be sold through the 3rd party market.

    I would suggest if you haven’t already, that you give a serious look at LC. While the rates might not look as good if you are going for the higher returns, I think you will see that your returns will be higher over time, than if you used Prosper.

    Just for FYI, my returns on Prosper:
    Seasoned Only 2009 – 2012
    16.29%

    Net Annualized Return on LC:
    20.03%

    I see my Prosper loans eventually ending up around 13-14%, while I see my LC loans coming in around 16-17%, specifically due to the ability to sell late loans before they totally default.

    That’s my 2 cents. I used to love Prosper, but without the ability to sell late loans, I am distancing myself.

    RayJ

    October 1, 2012

  18. I think this is a great way to diversify your investments. I’ve looked into Prosper, but haven’t done anything yet. I like the idea of only selecting higher quality loans and limiting your investments per applicant/individual. That way if a small portion default, the remaining loans make you money.

    Little House

    October 1, 2012

  19. @Jackie, I appreciate each individuals perspective and interest in living in accord with their own personal convictions. Thanks for weighing in.
    Hi Ray, Thanks so much for all of your information. I began investing with Lending Club as well last month. When I have a better sense of my experience, (after at least 6 months), I’ll write about Lending Club as well.
    @Little House- For borrowers, it’s a positive that you can choose the credit worthiness of the borrowers.

    Barbara Friedberg

    October 1, 2012

  20. Excellent write up. I’d love to invest in peer to peer lending, but live in Texas, where I can’t.

    AverageJoe

    October 1, 2012

  21. Can you write more about your screening process?
    I am with Prosper as well and I’m seeing a lot of late payments recently. My defaults will go up soon and my ROI will drop quite a bit.

    Joe @ Retire By 40

    October 3, 2012

  22. @RayJ That’s why I’m going to open an account at LC as soon as I can. At least I’ll be able to compare the two.

    Joe @ Retire By 40

    October 3, 2012

  23. @Joe-I have my account set to invest automatically according to these criteria:
    Here are my personal investing criteria:(1) invested with Prosper before, (2) 90-100% on time prior payments, (3) made at least 15 payments. I invest in all loan grades from from AA to E rated.

    I selected the criteria on my account tab > automated quick invest > automate investments.

    Ping me if you have more questions.

    Best regards, Barb

    Barbara Friedberg

    October 3, 2012

  24. @Joe

    I think when you look at the loans on LC you will see not only see a much larger pool of loans to choose from, but a much higher quality of loans to choose from. I’m having a very hard time finding loans on Prosper that meet my criteria, while on LC I can easily fund $1,000 in less than a week doing $25/$50 investments.

    Hopefully Prosper will make some changes to their platform and also continue to increase the number of loans available to invest in. I think if they don’t get on the ball in a hurry they will continue to lose investers to LC.

    When I first started investing, I did not like LC and did not see the appeal to lending through their site. Now, I’m just the opposite and can’t see why people would lend through Prosper.

    If I didn’t have a ROTH with Prosper, I would probably stop using them altogether. This is how far I think they’ve let LC get in front of them. I hope they fix things, because I always want as much competition that the marketplace can sustain.

    RayJ

    October 4, 2012

  25. Everybody today seems to be reaching for high yields regardless of where they may be in their stage in life. The problem for seniors is acute. What do I do if my bank CD’s pay less than 2% for a five year CD. Theirs very few alternatives that provide decent yield at low risk. High yield bond funds provide a decent yield but thats not the place that you want to be with the economy in the united states growing at less than 2%. If we fall into another recession high yield bond funds could plummet quickly. Their are some exchange traded intermediate term corporate investment grade bond funds yielding around 3.00 to 3.50 percent. That a little better than a CD at less than 2%. Yet their is some risk in these type of funds as well but much less so than high yield junk bond funds.

    Financial Directory

    October 4, 2012

  26. @Ray, Thanks for sharing your experiences.

    Barb

    October 4, 2012

  27. When I get rid of my debt I will definitely investigate this and see if I can understand it enough to invest.

    Lisa @ cents to save

    October 14, 2012

  28. I have not used Prosper, but did invest with Lending Club. I used very similar criteria to yours with Prosper, but ended up with just a little over 6% return. There were a lot of defaults during 2008-2009 that could explain the relatively poor results. The other thing I didn’t like was that it tool more than 3 years to get my money back out. Definitely not very liquid.

    Bryce @ Save and Conquer

    December 26, 2013

  29. @Bryce, The 2008 and 2009 years were tough times with the economy. 6% still isn’t bad given market returns. Your second comment is the exact reason that I don’t recommend this as a place to keep “ready cash”. Because you need to wait for loans to “age out” it may take awhile to get all of your money out.

    Barbara Friedberg

    December 27, 2013

  30. That is absolutely awesome Barb! Thanks for clearing any doubts I might’ve had on this avenue of investing!

    Moneycone

    December 30, 2013

  31. I’ve also invested in P2P in the UK via Funding Circle which is now available in the UK. I also diversify and invest in A rated companies with exceptional credit history. I have achieved 5.1% so far but I’m being incredibly cautious.

  32. Barbara thanks for all your financial and investment tips. I think Prosper Loans can go far.

    Doraine Richards

    January 7, 2014

  33. Thanks for the informative review, Barbara! Hope to see more of your writing.

    Erick Brunet

    June 22, 2015

  34. I recently read on lendingmemo.com that not all states allow investing in peer-to-peer lending. Where I live is one such state. Although this sounds like a great investing vehicle, it is not open to everyone.

    Suzie

    August 27, 2015

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