One of my more established passive income streams that I earn residual income from is loaning money to people trying to get out of credit card debt by using Prosper. I currently earn between $25 - $30 per month in passive income through this source, spending less than 2 hours per week monitoring and growing this stream. All of the passive income generated from Prosper is then reinvested back into funding more and more personal loans. Unfortunately, there are some potential risks involved when using Prosper as an income stream. The biggest risk is that when you loan money to others, the loan is unsecured and you could potentially lose the money you originally loaned out. I believe that this risk can be managed by using a systematic approach to bidding on loans that fits with your acceptable risk level. In addition, spreading small chunks of money out over several loans instead of loaning out a large sum of money on one loan is a smart investment strategy. Diversifying your loan portfolio is no different than diversifying your stocks and mutual funds.
As I noted above, the biggest risk in loaning money to people through Prosper is that the borrower may not pay the principal back, the loan goes to collections, and they file for bankruptcy. This is a risk that must be recognized before loaning money, but again one that I believe can be managed. All that being said, I wanted to analyze one of my loans that I currently have through Prosper that is in a late status. I believe that in many cases, a loan that is late can be a beneficial thing for the lender. Let’s take a look at some of the loan details.
- Principal Loaned - $50
- Origination Date - May 6, 2008
- Interest Rate - 18.69%
After winning a $50 bid on the loan, I did not receive any payment from the borrower for the first 3 months! I was extremely frustrated and very angry that someone would simply take out a loan and not make one single payment. Then, just a little over 3 months into the loan, I received my first payment of $3.65. Now because the loan was over 3 months late, the loan value actually increased from $50 to $52.13. What does this mean? It means that I just received a nice little payment from the borrower just for their late fees and interest and not one cent of it goes to the principal of the loan! The following list shows the breakdown of the first loan payment -
- Amount Paid - $3.65
- NSF Fees - ($1.00)
- AMOUNT RECEIVED - $2.65
After factoring in the NSF fees, my net result of the first payment was $2.65. The breakdown of my amount received and the net received (after collection & service fees) can be broken down as follows -
- Late Fees - $1.00
- Interest - $1.65
- Principal - $0.00
- Service Fees - ($.13)
- Collection Fees - ($.62)
- NET RECEIVED - $1.90
After calculating all of the fees and payments, I received $1.90 from the borrower. The remaining principal after the payment was $50.00. That stat is the focus and purpose of this post. Provided the borrower continues to make payments and does not default or go bankrupt, the value of that loan increased along with the amount of interest that I will receive!
I often try to figure out how to make good out of a bad situation. In this case, I have a small loan to someone who is trying to pay off their credit card debt. I am helping them out by partially funding a loan for he/she so they can get out of debt. In return, they are paying me an excellent interest rate so I can grow my money and meet my long term goals. When a loan goes into late status, it can actually have a positive outcome.
{ 6 trackbacks }
{ 2 comments… read them below or add one }
unsecured loan 09.12.08 at 5:54 am
Everyone’s situation is unique but, if you do as much research as you can and use debt consolidation articles and other tools you find as a general guide, you can customize it to fit your situation.
Dawn 09.12.08 at 3:28 pm
So far (cross my fingers) all mine are current. I say “all.” I have three. But that is an interesting upside to what could happen if they are late.