As I like to have a diversified stream of revenue I try to look at all of my different options in generating a return on investment. One of the avenues I dabble in is prosper.com, this site allows me to become a creditor for small consumers or businesses that aren’t getting loans in the traditional sense. Peer to peer lending is a relatively new wealth building tool and one that carries its own set of risks. What if the market gets weak again, will the borrowers be able to pay? What about people who are out there to game the system? Will the big boys get involved and scoop up all of the lucrative loans?
All of these are viable questions and the reason why I try to keep my exposure to peer to peer loans somewhat small as an overall risk. My account is also only two year old so it is relatively small. Whether I decide to grow it faster will be determined by the annual returns over a couple of years as I get my feet wet in these uncharted waters. So how does Prosper rate their loans for those of us willing to invest. Below is a table with the results into 2014. Not completely up to date, but stille relevant for my purposes..
As you can see there are seven different loan qualities with average yields from 7% all the way up to almost 27%. While this was relevant in 2014, I tend to find that the AA loans are a little lower right now on their yields. AA loans are obviously the highest quality, while HR loans are extremely risky. Although I see it on their table, I have yet to see an HR loan make it to the marketplace. This is probably due to some of the larger players buying them before the general public. At this point I’ve dabbled between AA and E loans and while most loans have paid their principle and interest payments on time, I’ve found that I have issues with C rated loans the most. This has skewed me into a more conservative lending rate and focusing on the AA and A loans primarily, with the odd B-E loan making it in.
What’s nice is that Prosper will also break down your returns based on if they are “seasoned”, those loans that are ten months or older, and then the all in number. Loans on prosper tend to stay up to date once they make the ten month window. There is apparently a lot higher default rate before then. So what are my returns after dabbling with peer to peer lending for the last year? Below is my current breakdown and account size.
Small account size, but not bad considering I maxed out my roth, 401k, and added about six grand to my investment account last year. I like the fact that I get paid monthly on the loans and that I can. quickly reinvest the proceeds on a monthly basis. It’s a lot like having a dividend stock that pays you ever month instead of quarter, it allows you to build up the capital to purchase more faster. I don’t have any loan that is over $25.00 which allows me to spread the risk across a great variety of individuals. This helps to mitigate any risk that any one individual can cause to my portfolio. As of now, prosper claims that anyone with a portfolio over $2500.00 has not lost money in the marketplace. As my account grows, it will be interesting to see if this is the case or not.
How about you? Have you tried peer to peer? If so what experiences do you have with peer to peer lending?