Is it worth it to loan money to random people?
We’ve all heard of the downfall of the American economy. It’s not new news. Ever since 2008, the fiscal world has undergone a tribulation of sorts. So what are the alternatives to throwing money into the rollercoaster ride known as the stock market? (I won’t delve into the crazy swings from day-to-day that no longer seem to resemble the daily news.) Besides sticking money into your pillowcase, it’s worth exploring some new options. The rise in internet investment possibilities seems to coincide with the “Economic Fail of 2008.”
After extensive research and application of my money, I’m highly suggesting that everyone diversify their investment portfolios by investing in Prosper.com. For those of that aren’t familiar with the process, I’ll explain it in five steps:
1) Prosper.com facilitates the match of lenders with borrows looking to fund a loan. For example, if someone needs to consolidate two $10,000 loans, they can log on to Prosper and seek a loan of $20,000 at a better interest rate. Other examples would include loans towards medical bills, starting a business, buying a car, home repairs/improvements, etc.
2) The person seeking a loan will undergo a credit investigation to decide the interest rate of the loan. Depending on the investigation, Prosper will assign a “credit grade” of either AA, A, B, C, D, and HR. The loan will then be posted as a loan seeking funding.
3) Investors are then able to set up an account with Prosper and appoint an amount of money to any of the available loans. Different investors than pool money together to fulfill the loan requirements. Each investor can invest at least the minimum amount of $25 per loan.
4) It’s worth noting that the loans aren’t risk free. Obviously, every loan assumes a general level of risk. Prosper does a great job of grading each loan (as mentioned in point #2) so that the better the grade the lower the risk. You’ll get a higher interest rate by investing in D-grade loans, but there is also a higher chance that the loan will default.
5) Finally, the completed loans will pay back each month with interest (as long as it doesn’t default). The monthly payments are in the original write-up of the loan. Every loan will payback depending on the principal amount, the interest, and the length of the loan. Please note that Prosper earns money by grabbing a small percentage of each monthly payment.
Prosper.com is a great alternative to the normal investing avenues and offers a great reward in helping others as well as a high percentage of return. An investor can select based on preference. As someone who likes to support small businesses, you can select business loans. If you prefer to help people get out from under large debt, you can choose to select only debt consolidation loans. Also, the returns are fairly consistent. There will definitely be times of bad luck in which a loan or two default inexplicably. However, I’ve had over 90 loans selected and have a very low default rate. The money I’ve made through interest has been far greater than the principal that I've lost.
In terms of fair evaluation, I have a few complaints with Prosper.com in terms of available data and responsiveness. Originally, I received updated information on my average return percentages (usually every week or so). More recently, my return data has only been updated each month. Since the graphs and charts relate to this data, I’m not getting the same detail with the same timeliness. Similarly, Prosper sends out a monthly PDF to show me how my loans are performing on loan-by-loan detail. It has great data and helps to give a wonderful month-end snapshot. However, the timeliness of the report has been a bit disappointing. Since it refers to the results at the end of a month, it’s a little frustrating that it gets sent out a week to almost a month and a half later. It just hasn’t been consistent. Lastly, I’ve sent a few questions to the customer service department that haven’t been answered as quickly as I would have hoped. Although they’ve been informative and helpful, the response time was a concern (especially since my money is at stake).
To sum up, Prosper.com may have some inconsistent communication to its lenders, but the results and investment tools are very good. This is a wonderful opportunity for most investors to diversify (it’s probably a helpful place to get a loan as well). I highly recommend Prosper.com. Please leave any of your own experiences in the comment section or if you have any remaining questions I would be glad to help.