Passive Family Income » Micro Lending

My Toxic Assets

John S. — Fri, 20 Aug 2010 11:56:19 +0000

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?

Related posts brought to you by Yet Another Related Posts Plugin.

Peer Lending – Mid Year Review (2009)

John S. — Sat, 07 Aug 2010 13:07:12 +0000

It has been a while since I last posted the status of my peer lending income stream using Prosper. There is also a very good reason why I haven’t kept up with monthly status updates. My Prosper investments have basically turned into a high risk savings account! The number of charge off loans that are in collections is increasing, along with loans moving into a late status.

As the economy continues to struggle, so do the peer loans I have made over the past 18 months. The one bright side to my status is that even as bad as things are, I am still in positive territory looking back to when I first started lending money in January of 2008. I am earning just enough interest from the good loans to offset the toxic loans.

Here is a recap of my peer lending status at the start of 2009, my current status, and where I am heading.

2008 Prosper Recap

As of December 2008, I had the following assets in my Prosper account -

Total Investments – $2,213.09
Interest Earned – $222.33
Charge Off Loss – ($148.43)

TOTAL Earnings in 2008 – $73.90
Return on Investment 2008 – 3.34%

2009 Mid Year Status

At the midpoint of 2009, I had the following assets in my Prosper account -

Principal Value – $1,373.48
Cash Balance – $904.39

Total Assets in 2009 – $2,277.81

My total assets at the beginning of 2009 in this account were $2,286.99, so I have lost ($9.18) or (-.4%). I have not contributed any additional funds to this account during 2009, nor have I funded any new loans. These results are strictly based on peer loans established in 2008.

Toxic Loans

I have my share of toxic loans that were funded during 2008 in my peer lending account. I have 9 loans that are in a charge off status in collections which I don’t expect to see any principal or interest returned. There are also 9 loans in a “late” status, with a few on the verge of moving into collections.

One observation of the late and charge off loans that I currently have is that they are widely spread across borrowers. Based on Proper’s lending grades, I have charge off loans that range from grade A – D. In addition, the original principal borrowed on these loans range from $1,500 – $24,000. The point is that my bad loans are evenly spread across borrowers with good and bad credit who have taken out large and small loans.

Final Thoughts

Now that Prosper is opened back up again for new loans and lenders, I still cannot lend any money. As I live in North Carolina, my state no longer allows me to fund any new loans. As a result, I will begin withdrawing my cash balance and using it to fund other passive income projects and investments. Based on my poor performance in peer lending, this is probably a blessing in disguise!

What kinds of returns are you seeing from peer lending?

Related posts brought to you by Yet Another Related Posts Plugin.

Tracking a Bad Prosper Loan

John S. — Tue, 03 Jun 2008 11:48:17 +0000

I have recently written posts detailing my lending and borrowing activity through my Prosper.com account. If you are interested, please check out the following posts -

Creating a new Income Stream using Prosper
Tips on How to Borrow Money using Prosper
Tracking the status of my Prosper loan – May (2008)

Today I would like to discuss a loan that has gone bad. In my post Creating a new Income Stream using Prosper, I note that one of my current loans at Prosper.com was 1 Month Late. As of today, the loan is now 2 Months Late. The details of this bad loan are shown below.

Origination Date	Title	Credit Grade	Lender Rate	Debt To Income	Loan Status	Winning Amount
1/30/2008	Paying off my credit card debt from Pepperdine University	A	14.75%	24%	2 months late	$50.00

At the time of bidding on this loan, I did not have my criteria set for placing my bids (see my post on Creating a new Income Stream using Prosper to view my criteria). The listing seemed to be legitimate to me as the individual was looking to pay off credit card debt that was incurred from college. I received my first net payment of $1.69 on February 29, 2008 which brought the principal balance down to $48.88. When the next loan payment came up in March, there was no activity. Then in April, Prosper was showing the funds were in transit and the payment would be applied. However, a few days later, the funds in transit were no longer visible on the loan and the principal balance remained at $48.88. Over the next couple of weeks, this happened several more times (at least 3 more that I can remember). Each time it appeared funds were in transit, they would disappear a few days later. Once the loan became 1 Month Late, it was then sent to collections. After a few days, it appeared that the collection agency collected the funds and the payment was in transit. Once again, a few days later the funds in transit disappeared and the balance remained the same. This happened one additional time through the collection agency. It has been about 2 weeks now since the latest attempt by the collection agency to collect the funds. There has been absolutely no activity on the loan since then and I am starting to assume the worst.

While I understand that the worst case scenario is that I lose my remaining balance of $48.88, the activity of this loan is extremely frustrating. When opening up my account, I assumed that I would have loans that would go bad and accepted the risk. However, I did not expect a loan like this (at the time of bidding) would go bad. The rate (14.75%) was not unreasonable and I thought I was helping someone get out of debt. The past few months have helped me put in perspective why you should pay your bills on time. While I am very rarely late on the payment of a bill, I now have a better appreciation for making my payments on time or even in advance. I have really never been so concerned with ~$50 in my life as I am now.

I still plan on moving forward with my Prosper lending activity. I feel comfortable at this time with my strategy and criteria for bidding on loans. To date, I have brought in $50.69 in interest, so assuming the worst and I lose the remaining $48.88 on this loan, I will still be ahead.

Do you have a story about loans on Prosper going bad? I would like to hear about experiences that other Prosper lenders have had about delinquite or defaulting loans.

Related posts brought to you by Yet Another Related Posts Plugin.