photo credit: lumaxartDuring these times of recession and economic downturn, it has become difficult for individuals to borrow the needed capital to start businesses, make home improvements, or even purchase an automobile. Even people with good credit are having problems simply borrowing money. Peer to Peer Lending has become a viable tool for borrowing money from a collection of individuals willing to take on some extra risk in return for a higher rate of return than a normal investment. There are several companies that now specialize in peer to peer lending including Prosper and LendingClub. I currently am a lender and borrower using Prosper and am starting the process to begin lending money on LendingClub.
Using peer to peer lending allows me to lend a portion of my assets to borrowers in need of capital in return for a higher interest rate than a certificate of deposit or savings account interest rate. These investments take on added risks as they are not federally insured, but the potential return is enough to balance this risk.
Loan Summary
Every month I provide the status of my peer to peer lending activity from the previous month from my Prosper account. Eventually, I will include a monthly status check of both my Prosper and LendingClub activities. My current portfolio includes the following assets -
- Number of Loans – 49
- Average Interest Rate – 16.75%
- Daily Interest Accrual – $.92
- Number of Late Loans – 6
- Charge-Off Loans – 4
- Loans Paid Off – 5
Portfolio Analysis
The average lending rate for loans in my portfolio is currently set at 16.75% and my daily interest accrual amount is equal to $.92. On an average month, I would expect to bring in around $27.50 in interest (based on my current accrual amount), which is a form of passive income (peer to peer lending can be an excellent source of passive income). I expect my daily interest amount to continue to drop each month as I am unable to fund any new loans. Prosper is currently going through a process to register promissory notes, so they have temporarily suspended any new funding. In the meantime, I will be taking advantage of lending money using LendingClub, one of Prosper’s competitors.
Loans in Trouble
Unfortunately, I have some loans that are starting to stack up in an unfavorable status. The following breakdown details these troubled loans.
- Charge-offs – I have 4 loans in this status (same ones that I reported last month). According to Prosper – a charge-off loan is one that is more than 4 months late and cannot become current again. Prosper collects on charge-off loans until they are sold to a debt buyer and any payment on the loan received after charge-off but before the sale will be credited to the lender as a recovery. I am not expecting to get back any of this outstanding principal on these loans.
- 4+ months late – I have 1 loan in this status and am surprised it has not been sent to Charge-off status with the others mentioned above.
- 3 months late – There was a bankruptcy filed by the borrower on this loan.
- 1 month late – There are 2 loans in my portfolio that are currently 1 month late. These appear to be in decent shape at this point but I will be watching them to see if they start to slip.
- Late & Late (<15d) – The 2 remaining late loans are currently less than 1 month late.
Final Thoughts
The number of late loans and ones in a charge-off status are concerning to me but will not prevent me from continuing to participate in peer to peer lending. However, I will learn some valuable lessons from these loans that can be used to reduce my risk in the future. As with most lenders, once I am able to lend again at Prosper, I will tighten my lending requirements focusing on Prosper Credit loans of AA, A, and B. The majority of my loans in a questionable status are from C loans, so I am going to limit my bidding on these loans. Ironically, I have 5 loans with a Credit Grade of D that are all in very good standing. Likewise, 6 of my questionable loans have a Credit Grade of C. I would just comment that credit scores and the Prosper Credit Grade can be a little misleading at times and you need to keep that in mind before lending.
I will be posting a yearly summary for my 2008 results once I have my results finalized in the coming weeks.
How have you managed in your peer to peer lending activities recently?
{ 10 comments… read them below or add one }
This type of lending has always interested me. Even more so after I got turned down for credit last month (even though my FICO score is over 800). I can’t imagine how hard it must be for people with lower scores or less than stellar credit histories. Should I just go to their website to get started, or is there somewhere else I can go to learn more?
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Dusty – Are you interested in borrowing or lending? Prosper is not taking any new accounts right now, so you would need to check out LendingClub. Both websites should have good information about the process. If you are interested in signing up at LendingClub, let me know and I will send you an email invite to pick up the commission they offer. I have been lending for a little over a year now and have learned a lot along the way. Overall it has been a positive experience.
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My Prosper loans are still all in the green – and like you, I have one in D status that is current. I wonder what the Prosper rating scores are based on. Is there some thing that would put someone in a “C” score that might make that group more likely to fall into default? For example, I am wondering if “C” people have a history of late payments? Maybe “D” people have too high of a debt to income ratio, but are trying to climb out of their debt. (My D loan is for repayment of credit cards.) I’m just throwing ideas out there, but it with your problem with C folks, it makes me wonder if something is going on there.
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I am not a fan of P2P lending for two reasons. First of all I think that users are mainly attracted to borrowers which promise double digit interest rates, which eventually are never repaid. I bet that if PFI looked at the total returns of his Prosper portfolio, he’d find out that the actual total returns were almost identical to an FDIC insured CD.
I do have one prosper loan, and it was an AA rating, very low debt to assets and i only risked $50. I found a chart on Prosper’s site which showed that 20% of the highest rated loans end up defaulting. The problem is that the avg APY on those is usually 8%. So if you invest $1000 in prosper loans with the highest rating at 8% you should have $1240 at the end of the third year. Assuming however that 20% of the loans ultimately default however, and you will be lucky to have the same return as a comparable 3 year CD.
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BloggingBanks – I am not done looking at the numbers for 2008, but you are probably close in your estimates. I am figuring about a 3% – 5% rate of return for the year. I am interested in your comment about ‘20% of the highest loan rates defaulting’? Are you saying that 20% of AA loans default on Prosper?
I try not to put too much value in the Credit Grades or even a credit score. For example, my brother-in-law has stellar credit according to his credit score (well above 800+). That would put him in the AA Credit Grade on Prosper. Problem is that most of his assets are in his parents name and he is the single most abuser of money that I personally know. I would never lend a penny to him because I would never see it back. He has a lot of debt, but none of it is in his name. One could be fooled into thinking he is someone you would want to lend to if you only looked at the Credit Grade. I think it is important to look at a lot of other data before you place you place a bid.
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I’ve done great with P2P lending. I’ve never had any late payments or defaults and my average interest rate is over 10%. I’ve only made 13 loans though. Unfortunately, since Lending Club is the only P2P left where you can make loans I’m shut out of the P2P market because they aren’t accepting lenders from Missouri.
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Tight Fisted – Good to hear you have had success in lending at Prosper with a rate over 10%! How old are your loans?
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I started as a borrower when this idea came out, and it made me very appreciative of those 51 lenders that trusted me. I have paid it back in full (it was a small loan to buy a used car for a new job I needed immdiately). Now I’m a small lender (around $2,000), and so far so good: 75 loans, 3 lates, no defaults so far (loan age is about 10 months).
BTW, Lending Club emailed be yesterday about this contest. Apparently, there is a new organization that is promoting social lending and plans to take the idea to Obama’s administration.
Today is the last day to vote:
Vote for Social Lending
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PFI,
It appears that 6-7% of AA loans are late, not defaulted.
http://www.ericscc.com/stats/lates-by-age
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@Marge – Good for you. Sounds like you have a nice little income stream working for you there. Interesting about the Obama thing.
@BloggingBanks – Thanks for the follow up.
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