When it comes to investing, I say I lean more towards the conservative end of the spectrum. I’m not much of a risk taker in general, so the thought of losing heaps of money that I worked hard to save causes enough anxiety to keep me out of the stock market beyond basic mutual funds.
That’s why I’m taking it very, very slow with Prosper.com, a popular site that basically lets anyone be their own bank. Most of my readers have probably already heard about this site (they advertise on a bunch of PF blogs), but for a quick rundown of what the site is for those who haven’t heard — Prosper makes it easy to lend money and earn back a fairly high interest rate on those funds. But, of course with “high interest” there’s risk involved.
Anyone can borrow money on Prosper, but the good news is that they check the credit scores of the borrowers so lenders can determine how much risk they want to take. For instance, someone with a perfect credit history would have an “AA” score, but the interest rate you’d earn on lending the money would be less (around 6 to 7 percent). Lending to people with poor credit ratings might earn you a much higher interest, but the chances of them defaulting are also much higher.
The site is kind of hard to understand when it comes to determining the exact interest rate that the lender will earn. To be honest, I’m still a little clear on the details. Basically, the Prosper folk want you to lend a large sum, but break that into $50 per person. Just like with any financial portfolio, diversification = less risk. Still, it’s unclear what the actual risk with any of this is. There’s a reason banks exist… they have tons of money to lend, so if a few loans default they can deal. But investing $100 or even $1000 into loans at $50 each might never provide the necessary diversification to ensure you won’t lose most of your money.
While I realize I might lose some money in this experiment, I decided to try out Prosper and invest $100 in the site. First I signed up for their auto-loan deal, where you chose your level of risk and they pick someone on the site to lend your money to. So I ended up lending $50 to someone who is trying to study abroad, with a B credit score and a 13 % interest rate. I wasn’t so happy with my money ending up going to someone with a B score (though admittedly, that was my fault, I chose the second highest “non risk” auto-invest plan)… so I decided to loan my other $50 to someone with a perfect credit score, in case I just lost $50.
What I do like about the site is that you can read a person’s story and decide what you want to loan money for. It feels good to loan to someone who needs money for their kid, or who needs to pay off a credit card bill because their interest is ridiculously high. Ideally, they pay you back within three years and everyone is happy.
I’ve read a bit about other people’s experiences with the site on various PF blogs, and it sounds like they have a lot of happy users for now. Sure, loans default and lenders get screwed over, but generally people seem to be getting paid. Everyone seems to recommend keeping the amount of your entire portfolio investing in Prosper low, but it’s a decent investment for a few hundred dollars.
Someone owes me their first payment on Feb 11, so I’ll let you know if I get it. The good thing about Prosper is that if the borrower doesn’t pay, they get a collection agency to stalk them for a few months, and then their credit score ends up sucking and they’re not allowed to borrow on Prosper ever again. Also, they sell off these defaulted loans (I’m not really sure how this works) but you might get, like, 1 percent of your investment back. Or you lose all your money. But that’s a risk everyone takes investing in anything… whether that be a stock or property.
I’ll keep you guys posted on my experiences with Prosper in the coming months. You can bet that if I lose money, you’ll get to hear all about it. 🙂
If you’re interested in signing up, click here or on the button below to get an extra $25 in your account to get started, all for free. I did this when I signed up on another PF blogger’s site, and a few days later I had that $25 in my account. Sweet.