Peer lending can provide an excellent opportunity for individuals looking to take out a loan. As the recession deepens and the banks continuing to tread lightly on lending out money – peer lending has become a viable alternative to traditional lending. There are several companies out there who specialize in bringing individual lenders and borrowers together to help both parties out. Investors looking for higher interest rates and an alternative place to put their money are turning to sites like Lending Club to invest their money. These investors then bid and fund loans at a higher rate than a traditional certificate of deposit or savings account. With the higher interest comes an increased risk as the loans are not FDIC Insured. Proper diversification across many loans can help to reduce this risk and make peer lending a great investment.
There are many reasons why individual borrowers look to take out peer loans. Some people are looking to consolidate their credit card debt. Using a site like Lending Club may allow you to bring down a credit card interest rate over 20% to around 10% depending on your credit. This is an incredible opportunity for people to consolidate their bills and get out of debt. There are also individuals looking to take out loans to pay off medical bills, raise money for home improvement projects, and even pay for college. I took out a $1,000 loan last year on Prosper as an experiment to see if I could leverage my good credit. The details of this experiment are below.
Monthly Prosper Loan Recap
Each month, I provide a status on my Prosper loan that I took out last year. When I last posted the status of my investments using this $1,000 Prosper loan, I had accumulated the following assets -
- Stock – I purchased 46 shares of HTE.
- 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 7.653 shares of HTE stock through dividend DRIP payments. The total number of shares owned as of January (2009) was 53.653.
Current Status
I recently received the February monthly dividend payment, which was reinvested back into the stock using DRIP (Dividend Reinvestment Plan) -
- February Dividend Payment – I received approximately 3.066 shares of HTE as a result of the February (2009) DRIP payment. This brings the total number of shares owned up to 56.719.
As of the close of the market yesterday (March 18, 2009), I estimate that value of the assets listed above at -
- Shares – 56.719 @ $4.02 per share = ~$228.01
- Cash – $73.23
- GRAND TOTAL – ~$301.24
The value of my Harvest Trust Energy position in regards to this loan decreased by another (13%) compared with the previous month. The total payments required over the course of the 3-year loan are $1,095.07, so I am now ($793.83) in the hole. There are now 2 years (24 months) remaining on this loan, so I would need to make up an average of ~$33.08 per month over the course of the next 2 years to break even.
As I noted last month, the value of my HTE position continues to deteriorate each and every month. I have been reporting double digit losses consistently over the last several months on this investment. As expected, HTE also slashed their dividend recently which had caused the stock to drop significantly prior to this announcement. Hopefully the bad news is all out and we are seeing a bottom as it appears that things may have stabilized for a little while. Maybe I can start reporting an increase in my assets next month!
