So the goal of my experimenting with peer-to-peer (P2P) lending via Prosper Lending was to expand on the high-yield fixed income portion of my portfolio. This will be an ongoing series of posts, where I will update what is happening in my loan portfolio, tips and tricks, and in general an open experiment to see what type of returns I can get.
I was interested in the pretty reasonable returns, and at the same time being able to help people that may otherwise be stuck in situations where they are much worse off, like paying 30% to a credit card. If I can help them, and at the same time make 15% lending in p2p, then we both win.
The reason that I chose Prosper instead of LendingClub was primarily the interface that to could see when I was signing up. The Prosper site has a lot of search criteria that I can customize (more on this later).
I worked up some criteria that gave a combination of good return, lower risk, and enough loans to make it worthwhile. When doing this you need to make sure that the results are robust enough (you have enough available loans is probably a good measure of robustness here) and you’re not just data mining. Otherwise I’m sure you could find something that didn’t offer any historic default risk and paid 25% annually. However, the results if you tried to implement that strategy would likely be disastrous.
My P2P Lending Strategy
Now my plan is to be patient and build up a loan portfolio over the next few months.
I need at least 100 loans in order to get proper diversification. In lending, it all about numbers. If you are averaging 10% across your portfolio with 100 loans and four default, you’re still doing OK. If you have 10 loans and four default out of random chance, you’re screwed. You need to get a large enough number of loans so that the random chance of loss is greatly reduced. Diversification is your friend here.
Since the statistics from my search criteria show an advantage over time (about a 15% ROI after taking losses into account) I just need to remain patient and build my loan portfolio. On average I look to be adding 2-4 a week, so I expect that it will take about 6 months to get to the number of loans I want as a minimum. When I reach that level, I’ll see where the return and risk is at and decide whether to continue adding loans or to let them pay down.
Current P2P Loan Portfolio
At this point I have 15 loans, with a good cross-section of Prosper risk loans, categories, and term structure.
As far as the specifics of Prosper, I thought the signup process was fairly painless, transferring money to Prosper was easy with the normal look for these two amounts and enter them when they arrive in your bank account type of verification. The first deposit took about a week, but the subsequent deposits have qualified for “instant deposit” and they credited my account immediately. As I mentioned earlier, I like the vast array of search options and the fact that I can save and filter searches quite easily.
Interested in P2P borrowing or lending?
I am in no way connected or compensated by Prosper for the above, just a lending user, though if you’re looking to borrow or lend via Prosper, please do me a favor and click on the Prosper banner below so I get a referral, as I would appreciate it very much. If you’re looking to borrow, depending on your credit rating, you can get much lower rates than you’re paying on credit cards or from a personal loan from a bank or even a credit union. If you want to lend, because you have saved so much money, you can use your extra cash or part of your portfolio devoted to high-yield bonds, and make 10-15% lending to people who need it and are credit worthy.
Readers, what is your experience with P2P lending? Any secrets to higher returns and lower defaults? Bad experiences and lessons learned?