Peer to Peer Lending, Investing Outside of the Box

I never feel so old as when I say things  like… “I remember when stamps were 25 cents.” or “When I was your age, I didn’t have a cell phone, I didn’t get one till I was 22.”  I am sure many of you can relate. If you are too young, don’t worry, you’ll get there. I’ll even give you a head start. Try saying this, “When I was your age, we didn’t have self driving cars, we had to drive ourselves!” It sounds crazy now, but one day you might be saying that to some confused child who thinks you’re a little off.

Anyway, one of my “I remember statements” that I find myself saying more and more is, “I remember when savings accounts paid you 5%”. It almost sounds absurd these days. Now you are lucky to get 1%. It’s just a cold hard fact that the current investing climate does not favor savers. If you are going to get higher yields you need to chase risk. For many of us this is a little bit troubling.

Only a few years ago, the stock market crashed in a big way. It has since recovered, but another crash could be days away. Look at the war with Syria, who knows how that will turn out. Is $6 a gallon gas around the corner? I hope not, only time will tell.

If you are looking for an investment with a manageable amount of risk and an impressive yield, you might want to consider peer-to-peer investing. The concept is pretty interesting and very simple. People who are looking for loans come to sites like Prosper.com. They provide the site with their financial history and information as well as their reason for needing the loan. Credit ratingProsper creates a profile and asigns them a rating grade from AA to HR(high risk). Just like with conventional bank loans, the higher the risk the higher the interest. 

You can review all of the information and decide which loans you want to finance. I really like this site, because of the wealth of information they provide. It allows me to weigh the pros and cons of each loan and decide if the risk is worth it. For example, I was browsing the loans and I found one for a Military officer with 25 years of service. He earns 100k+ a year, is a home owner, and is looking for a $15,000 loan to consolidate his debts. Prosper has given him an “A”rating. 

As I look through this profile I like most of the data. They only troubling spot is the fact that this applicant has had 19 delinquencies in the last 7 years. That is a bit concerning, but none of his debt right now is presently delinquent. The interest rate on this loan will be 9.24% (for the borrower), with the estimated return to you being 5.78% (the lender). That’s a whole lot better than 1%, but you have to consider the risk.

This guy could default, he could die, he could get a divorce or have to pay for a relatives medical care. Anything that could go wrong in a soldier’s life could easily happen to this man. This loans comes with no guarantees, you are taking a risk and being rewarded with higher yield. The downside is that your borrower could default and you will lose money. All you can do is take in the information that you are provided with and make a decision.

On the positive side, I have been following a gentleman who claims to have over $10,000 invested with Prosper.com. His annual return is over 10%. According to Prosper’s website, 92% of their employees are invested with the company. I like that, I also like their claim that every Prosper member since 2009 who has bought 100 notes or more has experienced a positive return. The minimum cost of a note is $25, so you would have to spend $2500 to meet that threshold.

I have recently opened an account and will probably invest with Prosper in the next week or so. I will report my experiences back to you and serve as you guinea pig in this experiment know as peer-to-peer lending. Perhaps one day I will being saying, “I remember when people got loans from banks and credit cards, not other people!”

*Please remember that all investing comes with the risk of loss and returns are not guaranteed.

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