Don’t you just love the phrase “Toxic Assets”! I am tired of hearing about it every time I flip on the television or listen to the radio. Unfortunately, it seems as if some of these toxic assets made their way into one of my passive income streams known as peer lending.
I started a passive income stream over a year ago through peer lending or micro lending as it is now being referred to by some. I setup a plan to invest a certain amount of money each month to fund new micro loans that would hypothetically yield a return on investment of over 10%. The concept was to spread several small sums of money ($50) across many micro loans to diversify as much as possible.
The poor economy has taken it’s toll on this stream of income in my portfolio. I had reported an adjusted rate of return of 3.34% for last year, which was not all that bad considering the economy. Unfortunately that number has dropped to (-.3%) over the course of the last year and a half. So far in 2009, I am actually down (-4.4%) since I last reported my status.
Why Micro Lending is Still Viable
The numbers I posted above are obviously not anything to get excited about. In fact, they are downright depressing considering I could have gotten a +3% return at the time by investing the same money into a certificate of deposit. All that said, I still believe that the micro lending environment is a viable option for passive income creation. Here are a few reasons why I still think it can work.
- Rate of Return – The possible rate of return cannot be ignored if you are a serious investor. Lending Club notes that the average rate of return for their investors is over 9%. Regardless the risk level, an average rate of return of almost 10% from micro loan investing should at least be investigated.
- Bad Economy – OK, so my numbers don’t look very impressive over the past year through micro lending. However, if you put those numbers in context with the overall economy – they actually don’t look too bad. I have basically broken even since starting this passive income stream. Almost 10% of my micro loans have defaulted and I still have not seen a huge loss. By diversifying across many loans, I have been able to reduce my exposure and risk. If I can break even on these investments during the worst recession in years, then I would at least like to see what kind of return I can get in a good economy.
- Other Investments – Comparing micro lending to the stock market as an investment, breaking even doesn’t look so bad. I saw losses of over (-30%) in secure (or at least I thought) investments through my IRA and company sponsored retirement plans last year. A very small loss through micro lending during the same period shows me there are some signs of hope for this investment opportunity.
- Help Someone Else Out – There is just something about micro lending that is appealing to many investors looking to do good. Sure, there are some borrowers looking for loans on various sites who cannot afford to pay them back. However, there are also a huge number of borrowers seeking capital to start a business that would make their lives better. This is especially true for people in third world countries. New sites like MicroPlace bring in this added element of doing the right thing. Would you feel better lending to person in Latin America trying to get out of poverty or give it to some bank executive who can go buy a new car with it (Ok – a little extreme but you get the point)?
Micro lending is not a perfect or completely safe investment. There is the possibility of losing your entire investment on a loan with no insurance policy to back it up. There are still plenty of borrowers out there looking for loans who can’t afford to pay them back.
For every questionable borrower, there are several good borrowers out there who can and will pay back their loans. The key is to invest wisely and study up before making a bid on a loan. Micro lending is a fast growing alternative to traditional lending. I believe it has a place in my passive income portfolio for a long time to come.
Micro Lending Resources
Are you interested in joining the micro lending revolution? Here are a few places to start your investigation process. Keep in mind that most micro lending investments are not FDIC insured, so be very careful before investing a lot of income into this passive income opportunity.
Are you a micro loan investor? How has your portfolio fared during the economic downturn?
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There is a reason why Prosper is shut down, and Lending Club, Microplace and other similar places are doing business just fine. It seems you fell in the trap like many of us at prospers.org, so I’m with you in calling it a toxic asset. Quite fitting. However, I’m pretty happy with my returns so far on Lending Club: 7-8% after a bit more than a year and a few defaults (about 4% of my initial investment). That’s double the payout from the best CDs!
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My Prosper portfolio was doing quite well. I still have 3 loans there. One though has gone into collections and is over 1 month old. interestingly, it is the one with the A rating – the D rated one is still paying right along.
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I’m sorry to hear that you are in the negative at all. I would have expected there to be very few defaults with the protections put into place by the sites themselves…it is very similar to defaulting on a bank loan, with similar consequences. I hope things turn around for you as the economy picks back up!
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My Prosper and Lending Club portfolios have done okay. I only invested any account bonus points that I received when opening accounts there. I invested in the highest rated debt, with lowest debt to assets possible .highest credit scores and no delinquinces. It also pays to check if the person would actually afford the loan.
I have always been afraid that I would fund a loan from someone whose identifty has been stolen.. Anyways, i prefer bank CD’s to P2P lending.. P2P is too toxic
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I signed up for the Lending Club earlier this year. Then, I forgot about it until I read this post. Just checked my account and the blended return is 8.12%. While the account is young and certainly high-risk (i.e., loans to pay off credit cards), I’d take 8.12% return on pretty much anything right now. Despite some downturn with your account, I agree with you that there is a limited place for it in a passive income portfolio. Good luck.
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