Creating a new Income Stream using Prosper

Over the past few weeks, I have read several blog posts questioning the risk vs. reward in peer-to-peer lending. One article I read on Enginero.com asks for others opinions on their experience loaning out money using these “micro-loans”. I decided that I would write an article on my brief experience in the peer-to-peer lending world.

One of my goals for 2008 was to create two new income streams other than my day-to-day job. As a result, back in January I opened up an account on Prosper.com in an attempt to create a new income stream. I opened the account with an initial $250 investment with the intent of funding 5 different $50 loans. At that time, I was learning the process of bidding on loans and was not concerned about what type of loans to bid on. I then setup an automatic withdraw of $25 each week from my bank account with the goal of funding 2 new $50 loans per month. In February, I decided to invest an additional $1,000 into my Prosper account to quickly build up my portfolio.

As of today (May 21, 2008), I have funded 38 total loans with an average credit grade of ‘B’ at an average rate of 16.4%. I have had success so far in the first 5 months of bidding, with only having an issue on 1 funded loan. The 1 late loan that has been an issue is currently in collections. I have also had 2 of the 38 loans already paid off. Below is a chart of my 38 loans that have been funded in my Prosper account:

After settling in with Prosper, I realized that I needed to focus my bidding on specific types of loans that would fit into my risk tolerance. It is my opinion that the Credit Grade alone is not enough criteria to bid on loans. In fact, the one loan that has been an issue in my portfolio has an ‘A’ credit grade. I put together a saved query in my account that I use daily to search out and bid on loans.

• Credit Grades = AA, A, B, C, D – I filter on all credit grade loans other than ‘E’ and ‘HR’ loans. I am fine with bidding on ‘C’ and ‘D’ credit grade loans under certain circumstances.
• Loan Category = Debt consolidation – I now have decided that I will only bid on loans that are focused on debt consolidation. I want to help people who are trying to get out of debt. Most of these loans involve people who are trying to consolidate their multiple credit cards into one monthly payment with a combined lower interest rate.
• Debt income ratio = 0% – 50% – I won’t bid on any loans where the debt to income ratio is above 50%. Basically, I want to make sure the people are bringing in enough money to pay their bill.
• Loan Amount = $0 – $15,000 – I stay away from any loan that is over $15,000. Any figure above that scares me and I won’t touch it. My screen is setup to include loans up to $15,000 but I use discretion on loans above $10,000.
• %Funded = 50% – 100% – I will only bid on loans that have a high probability of being funded. Any loan under 50% funded either stands a good chance of not being funded or has several more days to stay open. I was frustrated when first starting out as I bid on some loans that never got funded or had been open for several days. These types of bids hold your money up for several days while most of them never get funded.
• Delinquencies in last 7y = 0 to 2 – I give people the benefit of past mistakes and allow up to 2 delinquencies in the past 7 years. Anything over 2 will not be included in my screening process.
• Public records (in last 10y) = 0 – Basically, this criteria says that I will never bid on anyone who has declared bankruptcy in the past.
• Rate = 15% or higher – This is actually not included in my search criteria as I want to see all available listings to bid on. However, my goal is to bid on loans above 15%, generally falling into the 15% – 20% category. I also get suspicious of loans above 20% and the ability for people to pay them off.

As you may note, some of the loans in my portfolio don’t match the criteria defined above. I have modified the types of loans that I now bid on after becoming familiar with the Prosper lending process. In addition, on some occasions, I may bid on ‘AA’ or ‘A’ credit grade loans that don’t meet the criteria defined above that are under $5,000. Typically these loans are for people who want to reinvest in Prosper by taking out a loan for a certain percentage and then use the proceeds to fund other loans at a higher rate. I am willing to bid lower for these types of loans as they are not as risky in nature.

Do you have a Prosper account? If so, what type of success/failures have you experienced? Please take the time to vote in the poll found below. If not, have you ever considered opening one up?

Tagged as: Income Stream, Passive Income, Prosper