I recently wrote a post about my experience as a Prosper lender. Today, I would like to switch gears and discuss my experiences as a Prosper borrower. Yes, I am a lender and borrower on Prosper. After opening up my lending account back at the beginning of the year (2008), I came across several bids where people were taking out loans on Propser to fund other loans for a higher rate. The idea of this intrigued me, but also scared me at the same time. On paper it seems simple – take out a loan at 7.5% (if fortunate enough to land that rate) and use the money to lend to people with worse credit above 10%. Not a bad idea? My only concern with this was my lack of experience using the Prosper lending system and the fact that these loans were unsecured.
At the same time I was considering opening up a borrower account, I was also tracking several high yielding stocks that I was interested in making purchases on. I decided that if I could find the right stock with a high yield maybe I could take out a loan on Prosper and use the money to purchase this stock. So I set out the following goals -
- Get a loan for 7% or lower – I decided that I would open up my Prosper borrower account and list my loan for the recommended 8.16% and see what happens. If I didn’t get funded at or below 7%, then I would withdraw the listing.
- Find a stock that paid 10% or higher yield – At the same time, I would look for a stock that I wanted to own that paid a yield of 10% or higher.
My Results
- I placed a $1,000 loan listing at 8.16% and it was eventually bid down to 5.98%. My credit grade on Prosper is ‘AA’ which helped get the rate knocked down. Placing a small $1,000 loan also helped with getting the rate lowered.
- I received $975.00 in funds after the $25.00 Prepaid Finance Charge paid to Prosper.
- The loan was for 3 years (as are all Prosper loans) with 36 monthly payments of $30.41. The APR on the loan is 7.688% and I will pay a total of $1,095.07 over the course of the 3 years. The total interest paid over the course of the loan will be $120.07.
- I took $970.09 of the $975.00 and purchased 23 shares of FRO (Frontline Ltd.) at $42.18 / share (commission included). At the time of the purchase the yield was 18.97%.
Tips for taking out a Prosper loan
- List the loan for at least 7 days. Prosper allows a loan to list from 1 – 10 days. I actually listed my loan for 10 days (as I didn’t need the money) to see if it could be bid down. Lenders don’t really like this, but it really helps. My loan was actually 100% funded within 1 minute of the listing. I believe this was because of lenders who had setup a Portfolio Plan.
- Work on your credit score! I know this is obvious, but having the ‘AA’ credit grade really helped me get funded quickly and allowed the rate to get bid down. Prosper does not charge any service fees on ‘AA’ loans, so this is a plus for lenders.
- Personalize the listing. I added a picture of our new home that was being built. I also took the time to explain exactly what the loan would be used for. I was honest in my listing and I also responded to each inquiry that was sent to me from potential lenders. This is one thing that I also really look at when lending money. Does the person take the time to fill out the details in the listing? If they don’t, I move on.
- Keep your requested amount low. This was just a trial for me anyways, so I wanted to take out the minimum amount possible ($1,000). However, as a current lender, I look for lower loan amounts as I feel they are safer. A borrower stands a much better chance paying off a $1,000 loan instead of a $15,000 loan.
I will post my updates on my 23 shares of FRO and the dividends in comparison with my loan payments periodically.
Are you a Prosper borrower? Would you ever consider taking out a Prosper loan to generate positive cashflow?
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Ingenious arbitrage method! Nice!
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Interesting concept. The problem that I see with FRO is that its dividend payments are pretty volatile. Try something like ACAS.
A different way to play interest arbitrage is to apply for no interest, no balance transfer credit card like citigroup, where you basically get a zero interest credit for 6-15 months.. Then buy an FDIC CD and make the credit companies’ money work for you..
As for playing arbitrage on Prosper.com where you borrow money from prosper at 6% and lend it at 10%.. In theory this sounds great. But in reality over 20% of prosper loans default ( and the number is increasing as the loans get older). So you might really be better off if you didn’t try it..
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Dividend Growth Investor – Yes, I am looking at ACAS right now. I have read many good things about the stock and dividends. I like your ideas about no interest credit card. I will explore that option further in the future. As far as taking out a Prosper loan to fund other Prosper loans – I have made the decision to not go down that avenue. In the future, I would only consider taking out another loan to purchase another high yielding stock. Thanks for the visit to my site!
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No, I would not borrow money in order to invest. For me, investments need to be earned money I have on hand, not money borrowed form someone else. But then again … I just don’t “do” debt anymore.
I hope it works out well for you, however!
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