Five months ago I made the decision to invest in peer to peer lending. With many investors achieving returns of over 9% such an investment seemed like a good opportunity. To put things in perspective my savings accounts offers me about a third of one percent interest. Prosper is offering me nearly 30 times that amount and as a result investing two thousand dollars with them would yield the same amount of interest as if I had invested $60,000 into my savings account.
The trade off is risk, theses are personal loans, to people. People are not always reliable, they can default and leave you holding the bag. My credit union isn’t going to go out of business and even if it did my funds are backed my the government. Very little risk.
To their credit, Prospers vetting has been very good. I current have money invested in 22 loans and none of them have fallen behind even once. I have $900 dollars invest do far, about 20% of the way to my goal and things seem to be moving very well. Prosper offers and automating investing option, but I have chosen to select the loans myself.
I feel that it’s important to comb through the loans offerings and select ones that I believe will offer the best value. Here are some of the things I look for:
- No past delinquencies. My thinking is that if you haven’t been late with a bill in the last 7 years it stands to reason that you will pay me on time.
- A steady job. Teachers and cops tend to have long consistent careers. I look at the applicants job and ask myself, “Will this person be okay if the recession worsens?”
- Three years, not five. I prefer the shorter terms, if you can see the end of something you are more likely to finish it. With the five year loans I am concerned about the borrower getting sloppy in the final year. This might be especially true if they have gone into debt with other obligations.
I will also try to mix in “B” “C” and “E” rated loans to chase yield. As the pie chart indicated the majority of my loans are “AA” and “A”, but they offer lower returns. My one “E” rated loan is paying me over 28%, a few months in and everything seems to be going well. If it doesn’t default it will pay me as much as five “AA” loans when its all said and done.
So as I enter my six month of investment in personal loans I can say that I am very pleased. I hope that by years end I will have between $1600 to $2000 invested. I will update you on my progress in future posts.