For background, peer-to-peer or person-to-person (P2P) lending is what borrows use instead of payday loans, pawn shops, credit unions, or banks that either offer poor terms and rates or won’t offer a loan at all. Additionally, the rates on P2P loans are usually less than credit cards rates, offering borrowers a clear path to saving money while repaying their debts.
So a month into my person-to-person lending experiment, I have received my first payment on the first loan that I made. I loaned $100 for 3 years to a B rated borrower at an interest rate of 14.59%. I was paid $3.50, of which $2.17 was principle and the remaining 1.37 was interest.
In the last month, I have added 37 additional loans for a total of 38 loans with $3,800 invested in various loans. At this point all the loans are current, but that’s with a single loan due. The current breakdown of my loan portfolio looks as follows:
As you can see, the bulk of my portfolio is at the B rating, with about equal portions going to both a lower risk A rated group, and a higher risk, higher rate C and D rated loans. The plan is still to expand my portfolio to at least 100 loans in order to properly diversify. If you want to see the benefits of diversification, the statistical breakdown of portfolios is in my initial post in my peer-to-peer lending series.
As discussed earlier, the primary reason that I chose to use Prosper is because of the robust loan search criteria. Based on various statistics at Lendstats.com, I came up with the following loan criteria.
As you can see, I limit the loan size to all loans below $15,000, and I want 3 or 5 year loans, no 1 year loans. I have found that the Auto category offers very robust returns and low default rates. However, there isn’t enough volume so I added Debt consolidation, Home improvement, and Other categories in order to get an appropriate number of loans. I limit the total delinquent amounts to less than $200 and only allow 1 inquiry at most. Larger numbers in both these categories greatly increase the risk without a corresponding increase in returns. I only loan to those who are employed, and make more than $25,000 a year. That means no self-employed. Sorry full-time bloggers, no loans for you, you are in a statistically poor group to lend to.
Finally, I like to loan only to prior borrowers with at least 12 payments made. This is a very common filter, as repeat borrowers are much lower risk. In fact, Prosper has reduced the loan rates to prior borrowers to reflect this lower risk. However, it isn’t quite low-enough risk for me with a simple loan, I like to see the payments made for a year. The difference in returns for those with less than a year and more than a year of payments was more than 5% points. Amazing really. According to Lendstats, here are the results of these filters:
The 14.5% return is significantly more than I’d be earning on these excess funds, but at admittedly at higher risk levels. The plus or minus .3% is a nice tight range and tells me that the returns are fairly stable.
I look forward to seeing another dozen loans starting payments within the next week. I’ve also had a bit of a shortage of available loans with the given criteria in the past week, only picking up a couple of new loans, whereas in past weeks, I’ve been able to see 10-15 loans a week.
As mentioned in comments earlier, I’m also interested in trying out LendingClub to see what I think there. Once I do, I plan on writing a comparison article about the pros and cons of each platform. Also, check out the previous entry in this series if you are interested in seeing how my P2P experiment started.
Readers, how are your person-to-person loans going? More or less defaults than you expects? Any tips on finding better loans? What about platforms, why do you prefer one or the other?