How To Prosper - Welcome

How To Prosper was Originally Posted on May 9, 2013 by lavarock

A while back I reviewed my finances and decided to diversify my investments. As you know, banks and even credit unions are paying paltry interest. You also know that credit card debit in the United States is high, although not as high as it used to be.

For a number of reasons people may be maxed out on credit cards at a high rate and unable to move that debt to a lower interest card. They may have had medical expenses or just not managed their debt correctly.

That makes an opportunity for you. You can loan them money! Now wait, before you discount this idea and run off, let me explain. This is called CROWD FUNDING and you can invest in very small amounts (micro loans).

There are groups of people who need money and who are a good risk. There are also groups of people who need money and are not a good risk. Imagine if you could act like a bank, review peoples request for a loan and look at their credit worthiness. Imagine if there were some tools to help you and the decision on your part is pretty easy.

That is what crowd source micro-loan websites are about, and one site I use is Prosper.Com. A micro-loan is a small loan (although you can loan more). You do not need to loan a large amount to one person, in fact, it is better if you loan a small amount to many people. This allows you to “prosper” even if a few people don’t keep up their payments.

So how little is a loan you can make? In my case I have invested $200 and spread that out over 4 to 6 loans. That is not a lot of money, but I wanted to test the waters. So far it works well and my rate of return is 8.5% which is about 8% better than the bank or credit union.

So how does it work? Well, people who need money will create an account and fill out financial information. They will supply information such as how much they wish to borrow, for what purpose, how long they have been at their current job, and so on. Before the loan is made available for investment, their credit score and information is verified. Thus Prosper knows quite a bit about them, You will too, although their name and identifying information is hidden. You then review this information and decide if their loan is one you would like to help fund.

The borrower may have gotten in deep with credit card debt, is paying it promptly but not getting anywhere quickly. The credit card company may have limited their credit and boosted their rate very high. Perhaps the borrower is paying 18% interest on money but is a good risk. They might be offered a rate of 12% and if enough people invest, he will get ta loan from Prosper that he might not have gotten through a traditional lending source. He pays off his higher interest loan and now has smaller monthly payments.

Some loans are not deemed good and if enough people do not fund it, it will not be made, so you also have co-investors helping to decide about a particular loan.

Some loans are for debt consolidation (making one payment instead of many), it may be to pay unexpected medical bills or to start a business. Some loan reasons are not explained and some I won’t invest in.

If a person wants $10,000 to hold a wedding or go on a honeymoon, sorry, but I don’t invest in anyone who is starting out in a marriage with debt. I think that is just wrong. Perhaps they should have saved in advance or gotten a civil service.

I helped fund a farm that wanted to offer their product by trucking it to town rather than have customers come to them. The farm sells unpasteurized milk, which was a red flag to me, but they had been in business many years, had a quality website, already had customers and the sale of such milk was allowed in their state. The item they wanted to buy was a refrigerated truck, which, should their delivery business not work out, could easily be sold to many other businesses. Thus it seemed like a good investment.

Another investment I made was to a doctor. He has a high credit score (800-819), makes over $100,000 a year, has had credit since 1988, has no delinquencies in the past 7 years, owns a home, but has used 62% of his credit card limit. He owes $83,000 which shows that he has credit of well over $100,000. He has been employed by his current employer for 12 years. Thus it looks like he is a very good risk. He wants to borrow $12,000 for 1 year and was offered (by Prosper) a loan at 5.65% He may well be paying off the highest credit card interest of over 10%. Who knows. Anyway, he was offered and accepted the loan. My part of loan yielded 4.65% and my investment was $37.10. He will be paid off in February unless he pays it off sooner. If he does, I don’t get as much interest

There are a few people that will default on their loans, so it is in your best interest to spread your investment out over many loans, rather than chance just one person. As you might expect, as the chance of default is greater, you take more risk and thus the borrower pays a higher interest. Thus for more risk, you get more money.

To encourage people not to default, there are consequences. Their payment history IS reported to the credit bureaus, just as if they went to a traditional bank, etc.

I am ready to invest more money and take a bit more risk, so that I can increase my return on investment. Since the site reports expected default rates (based upon historic rates), it is easy to see your chance of investing in any particular loan. The default rates for the best borrowers is 2% or less and their worst borrowers default at perhaps 15%. That is why they charge more than 15% for those loans. By spreading out money in that particular class of loans limits your chances of defaulted loans. I personally don’t invest in those risky loans, but your mileage may differ if you like more risk than I. Perhaps you want to try a few dollars in a few risky loans (like playing a slot machine). Your payback would be a lot better with the loan, by the way.

Anyway, if you have some money you would like to invest, this is a pretty good way. You can limit your possibility of loss and get a pretty stable interest rate. You also can invest money and create cashflow (money available to reinvest or to withdraw).

There are other microloan sites but I chose this one.

Here is Clark Howards take on them: http://tinyurl.com/cphwjf7