Like any investment opportunity, this is one of those “takes money to make money” things. If you haven’t heard about Prosper.com, this is one of the first Person-to-Person online lending venues. It works by connecting investors to borrowers who are looking for a loan. The benefit to the borrower is that they can get a loan at a better rate than most other loan options (credit cards, unsecured bank loans, dipping into retirment accounts and incurring fees). The benefit to the lender is that they can (hopefully) get a better rate on their money than elsewhere. Then there’s all that sentimental crap about helping other people. That’s great too.
For a lender, the idea is that you can spread your risk across many different loans and that if you diversify enough you will be somewhat insulated from the risks; basic market theory stuff. Prosper goes even further to classify the loans into different Prosper ratings (a combination of credit score and Prosper score) and assigns a risk based on that rating. The risk corresponds to an anticipated rate of return. All of this is based on historical data. So, as a lender, you have the option of picking each and every loan you want to invest in, based on various criteria (Prosper rating, credit info, loan use, cute picture they put in the listing) or you have the option to choose a portfolio plan where you can choose how conservative/aggressive you would like to be and Prosper will diversify the investment for you.
Not too long ago, Prosper was require to go through a registration process with the SEC. As a result of being shut down for several months several notable changes were made. The first is that all loans now require a 640+ credit score; the idea being the higher credit scores will be less risky and be safer for investors. Another change is that now you can more easily diversify because they’ve lowered the minimum bid amount to $25 (from $50). This makes it easier to bid on more loans and spread the risk around. The other notable change is that there is now a secondary market and you can bid on already established loans. Not really that exciting. The big takeaway is now that the SEC is involved, lending should be much safer for investors. Just like mortgage-backed securities.
Unless you like losing money you’ll need to do some research. Prosper offers all of its’ historical data, through various tables, charts and graphs, on its’ website here. There’s a million different ways you could look at it but I thought I would highlight what I thought important. The first thing I considered before jumping in was “will I get my money back?” So I took a look at the percentage of loans that were a month or more late, as of this writing that’s nearly 30% for all loans. Ouch. However if you’re a bit more discerning and look at the top three Prosper ratings (AA, A, B) you get only 4.23%. Not too bad. So if I’m only bidding on those what’s my expected rate of return? Prosper estimates this at 7.86% Better than a savings account! If you want a higher return the C prosper grade give you 11.86% return with 13.25% of the loans going bad.
My personal experience with Prosper has been real hit-or-miss. Back about a year and a half ago I put $300 in to play with. I hand-picked about 6 different loans using the following strategy: Keep loan amounts under $5K, evaluate loan usage and income statistics, consider credit history, look how others invested. The five thousand limit was to limit the risk of default, I figured no one would want to ruin their credit score for a measely $2000, $3000, $5000. I looked real hard at what the loan was being used for. I stayed away from most business uses, home improvements, other uses. I mostly looked at debt consolidation figuring that this would lead to more financial freedom which would mean fewer defaults. I took into consideration their monthly income and expenses and tried to see if it made sense or not (for example: why would you be making $500 more than you spend a month and need a loan for $3000 for 3 years…it would be paid off in 6 months.) I would stay away from credit delinquencies unless specifically addressed, look at debt-to-income ratios, stated income, job type…those types of things.
So how did I fare? So far I’ve had 1 charge-off and another that’s almost there for a total loss of about $57. There are certain extraneous factors that I attribute to the poor performance. The first being that we happened to experience one of the hardest econcomic times in about 70 years. The second being my trust in the fact that someone with a C credit score wouldn’t want to tarnish their credit for $1800.
Even though I’m in the hole at this point, I still think that Prosper has a lot of potential. I’ve learned a little bit since my first round and with the lower minimums I can diversify a lot easier. Prosper.com has a forum where you can learn about what has and hasn’t worked for other people. If you’re a stats junkie then you’ll like Lending Stats.com where you can create an account and get all sorts of personalized breakdowns as well as comparisons to how you’re doing against other investors. These are just some of the tools to get you started. If you think that you might enjoy peer-2-peer lending, I’d suggest giving Prosper a shot!
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Who would have ever thought those t-shirts with random sayings would ever catch on? I certainly didn’t. Well now your quick wit can make you a quick buck. Or if bestowing t-shirt wisdom isn’t your thing, how about uploading all of those beautiful landscape pictures you took from Hawaii (you lucky bastard!) and selling them as a calendar or postcard. Or if you spend tons of time fooling with Photoshop images, putting them onto a t-shirt or tie (or hoodie or shoes). 
To try and break up the monotony of this money making machine, I thought I would throw in a post every so often that would provide some motivation or give you something to consider. Sometimes I have to hear/see/experience something in just the right way before it makes sense to me. These posts aim to help make it click for you. Let me know how I’m doing.
The low-hanging fruit. Savings accounts can be a great way to build wealth, albeit slowly. Very slowly. In fact, many of you many of you may snicker at the “High-Interest” adjective. Most online money markets currently pay a paltry 1.70%. However, they do pay roughly 5 times conventional savings accounts and with pending inflation concerns these rates are bound to rise.