Peer Lending – Review of 2008 Prosper Rate of Return

photo credit: Andres RuedaEarly in 2008, I set out to create a new passive income stream using peer lending as a tool to generate some extra income. I used Prosper to setup my account after reviewing their site as well as their competitors. My goal for 2008 was to fund around 50 new loans at $50 each using peer lending. Any passive income earned was to be recycled back into funding a new loan. My long-term goal was to setup my Prosper account to be self-sufficient by earning enough interest every month ($100) to fund 2 new loans. Unfortunately, the economy started to slide and my goals changed.

In order to limit my risks, I opted to bid only on loans where the borrower was working to consolidate credit card debt. My belief was that individuals with multiple credit cards could take out a Prosper loan at a lower interest rate in order to consolidate much higher credit card rates. The other types of loans I funded were for borrowers with AA or A credit that had a loan amount of $1,000 (minimum loan limit for Prosper).

I have detailed the results of my 2008 Prosper investment below -

Capital Invested
I had planned on investing around $2,250 throughout the course of 2008 into my Prosper account. This would have been enough capital to fund 45 loans at $50 each. I stopped just short of this investment goal in order to free up some extra cash during this recession. In addition, Prosper stopped the creation and funding of any new loans late in the year – so I stopped investing any new capital at that point.

• Investment – Over the course of 2008, I invested $2,213.09 into my Prosper lending account. I actually stop putting any new money into my account starting in November because of Prospser’s suspension of any new loans due to the process to register promissory notes with appropriate security authorities.

Income Earned
The following items detail the breakdown of income earned and fees paid during 2008 for my Propser loans.

• Interest & Collected Late Fees – I earned $235.81 in interest from over 50 funded loans during 2008. I also collected $1.39 in late fees from a few of my loans.
• Paid Fees – I incurred $13.34 in service fees paid to Prosper as well as $1.53 in collection fees for going after late loans.
• Income less Expenses – I earned a total of $222.33.

Return on Investment
Factoring in the capital used to fund over 50 loans during 2008 with interest earned less fees paid – I saw a nice return on my investment (see below).

• Rate of Return – 10.04%

Adjusted Return on Investment
A rate of return over 10% would have been an excellent return for the capital that I had invested with Prosper for the prior year. That rate would have been very hard to meet in any other form of investment – especially with the drastic drop in the stock market. Unfortunately, that rate of return was too good to be true and the struggling economy had an impact on a few of the loans I funded. I had 5 loans that went into a charge-off status which basically means they are over 4 months late. Several of these borrowers have declared bankruptcy and the chances of recouping any of the principal on these loans is slim. I lost $148.43 as a result of charge-off loans which brings my Prosper income from 2008 down to $73.90. I have included my adjusted rate of return factoring in these write downs below -

• Adjusted Rate of Return – 3.34%

Analysis
An adjusted rate of return of 3.34% is not the end of the world. Considering, my 401k was down well over 30% for 2008 – I will take any positive return I can get. While I am disappointed in the charge-off loans that were in my loan portfolio, I still earned money during the year. Is this investment worth it? I don’t know at this point as I could have probably earned a higher return from investing this same money into a certificate of deposit. Once Prosper opens up new lending again, I will continue to bid on new loans. I have enough cash in my account to fund 8 new $50 loans, so I will start with that money and not invest any new capital until I feel more comfortable with the economy.

I have actually learned a lot in the year that I have been funding Prosper loans. As always, I believe it is important to learn from mistakes and this is no exception. I will be altering my search criteria for loans that I bid on in the future to try and limit my risks. I have also recognized that a rate of return over 10% is probably not very feasible. If I can change my lending practices and shoot for a return between 5% – 10%, I can bid on more secure loans and lower my overall risk.

Do you participate in peer lending? Did you notice an impacts from the credit crunch on any of your loans?

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