Prosper Investing Tips and Testimonial

I’ve been lending on Prosper for a bit over 7 months now. I’ve seen quite a few loans move in and out of late status. I suppose some borrowers prefer to “optimize their cash flow” by allowing their loan payments to lapse a few days. This is just fine with me, as long as they eventually make the payments. Unfortunately, I also have some other borrowers that have allowed their payments to lapse more than just a few days and I currently have four loans in collections. Here’s a summary of my earnings on Prosper so far:

• Cash deposited into account: $2,500
• Earnings from referrals: $50
• Principal Loaned: $3,000 (includes reinvested principal received and referral bonuses invested)
• Principal Received: $376.45
• Interest Received: $219.78
• Late Fees Received: $0.70
• Servicing Fees Paid: -$10.23
• Collection Fees Paid: -$0.24
• Net Profit: $210.01

Now of course, there is a high probability that at least one of my four loans in collections is going to default if not all of them. The net principal balance for the four loans in collections is $191.61, so even if all four loans defaulted, taking into account my net profit I’m still ahead of the game by $18.40. That’s about a 0.74% total return so far or about 1.1% annualized. Although EricsCC and LendingStats have my estimated ROI much higher than that, I prefer to take a more conservative approach. Warren Buffett’s first rule of investing (and mine too) is don’t lose money. So far I think I’m doing well in that regard on Prosper.

I still think that Prosper is a good investment vehicle, and a good addition to any investment portfolio. As long as you can outpace your defaults with your average interest rates, you can make money investing in Prosper loans. Here are a few simple rules I try to stick by when I’m investing in prosper loans:

• Don’t invest in charity cases. I’m investing my money not giving it to charity. If you do lend to someone in a charity case, don’t get mad if and when you lose your money.
• Don’t invest in start-ups. Without proven results, investing in a start-up is more of a gamble than an investment.
• Don’t lend for working capital. If someone needs money for working capital it typically means they do not have the positive cash flow necessary to run their operation.
• Invest in those consolidating debt. These are my favorite kinds of loans, particularly if it will improve someone’s cash flow situation.
• Draw a line in the sand as far as your minimum interest rate. For example, if your target rate of return is 7%, then you shouldn’t invest in loans at a rate any lower than 7%.

I haven’t always followed these rules, but it is because I hadn’t yet formulated them in my mind. If ever I do break any of the rules now, I need a very good reason for doing so. If you’re dealing with a small portfolio (less than 100 loans), it’s easy to stick to these rules. If you’re dealing with a larger amount of money and a higher number of loans, you’ll probably want to use a portfolio plan. Either way, you should try to be as consistent as possible with your loan selection in your lending portfolio.

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