Taking out a micro loan (or peer loan) can provide an opportunity to individuals looking to consolidate debt. The poor economy has changed the way banks and other traditional lending institutions lend out money. A growing trend for people needing financing is to turn to individuals looking to lend out small chunks of money to earn a competitive interest rate. These small chunks of money are combined and lent out to borrowers after an agreed upon interest rate.
Micro lending is a way to consolidate debt if you are the borrower. The money from one of these loans can also be used to make home improvements, pay for college, and much more. Another option is to take out micro loans at a low interest rate and reinvest the funds into assets that can produce a much higher return.
Just over a year ago, I took out a micro loan through a company called Prosper for $1,000. I was fortunate enough to get approved for this loan with an interest rate under 7%. My plan (or experiment) at the time was to take the funds from this loan and reinvest them into passive income streams that would earn greater than 7%.
The past 15 months or so have been a little rocky with my experiment as the economy and stock market struggle to get out of a huge recession. I have detailed my updated status below.
Prosper Loan Recap
I took out a Prosper micro loan back in 2008 with the intent of generating positive cash flow with it. Here are some details of the assets I currently own as well as any additional income generated from taking out this $1,000 loan.
- Stock – I purchased 46 shares of HTE in 2008 with the capital from my Prosper micro loan.
- Cash Generated – As a result of selling Covered Call Options against my HTE position, I have generated $58.68 in positive cash flow. It is important to note that selling a Covered Call Option contract requires 100 shares. I have combined my $1,000 Prosper loan with additional funds to meet the 100 share requirement.
- Remaining Cash – I had $14.55 remaining in leftover cash after making the purchase of HTE.
- Dividend Shares – I have received 13.015 shares of HTE stock through dividend DRIP payments up through May 2009. The total number of shares currently owned is 59.015.
June (2009) Status
I recently received my monthly dividend payment which increased the number of HTE shares that I own. As of the close of the stock market yesterday (June 16, 2009), I estimate the value of the assets listed above at -
- Shares – 59.015 @ $6.11 per share = ~$360.58
- Cash – $73.23 (from selling covered calls and leftover from original loan amount)
- GRAND TOTAL – ~$433.81
Final Thoughts
The value of my Harvest Trust Energy position as well as the cash generated increased by 44% since I last posted a status back in March (2009). The total payments required over the course of the 3-year loan are $1,095.07, so I am now ($661.26) in the negative. I have 21 months remaining on this loan before it is paid off. I would need to make up an average of ~$31.49 per month over the course of 21 months to break even.
It was nice to see that shares of HTE finally stabilized with the rest of the market over the past several months. I finally broke my streak of monthly double digit losses (which is nothing to get excited about). I had also reported back in March that Harvest Trust Energy slashed their dividend which cause a sharp decline in the stock as well.
I have basically written these assets off at this point. My original goal to take out a micro loan at a low interest rate and use the capital to earn more money per month has not gone in my favor. This is partly because of bad timing and the overall economy. In addition, my assumptions going into this experiment were not accurate. While I did research on investing in HTE, to simply believe I could earn a monthly dividend payment returning 10% each month while paying off my loan at less than 7% was a bit farsighted.
I will continue to stay the course with this investment and watch how it plays out. The most important thing is that I document lessons learned from this passive income stream (or lack of), so that I don’t repeat my mistakes again.
Related posts:
- Tracking the status of my Prosper loan – June (2008) Part 2
- Tracking the status of my Prosper loan – June (2008) Part 1
- Peer Loan Status – March (2009)
- P2P Loan Status – September (2008)
- P2P Loan Status – August (2008)
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I love covered calls, but it is interesting that the leverage you used is, on a small scale, how some parts of the economy went to hell.
While your use of leverage was nothing compared to lets say, Lehman, its just an interesting analogy (or at least I thought it was which is why I commented!)
My Journey’s last blog post..Reader Question – Inheriting Trusts & IRAs
@My Journey – Covered Calls are my second favorite option play behind trading deep in the money calls. Agree with your point about leverage. Fortunately I decided early on when planning out this experiment to keep it at $1,000 max investment.
pfincome’s last blog post..Micro Loan Status – June (2009)
PFI,
I’d love to hear more about your options strategies (guest post? Post it here?)
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