Early this year my wife and I decided to spread out our investments a little bit. During the recession we had a lot of money parked in a money market account, but with the FED printing money like crazy and pushing interest rates down the effective interest we have been earning is way below the rate of inflation and so we are actually losing money. It is a bad investment, but if you want to have some liquid assets in case I would lose my job it’s what we decided to do.
So, earlier this year we put some money into Prosper.com – a website where you can invest into loans. To be more exact, you can do so-called micro-lending or peer-to-peer lending where you invest small amounts of money into high risk loans. By spreading out the risk among many loans you reduce the risk of a loan going belly up. So, if you have $2,500 to invest you would not invest $2,500 into one loan, but you would spread out the risk and invest into 100 loans of $25 each. In addition, you spread out the money across several risk levels to further water the risk down. In return you can earn interest rates of almost 20% because the people who take out these loans usually do not get a loan from a bank for whatever reason. Please note: Micro-lending is not the same as Payday loans. The loans you invest in are regular loans with higher interest rates. Below is a screenshot of how this type of investing looks like.
Prosper (and their competitors) provide statistics for investors. These stats provide information about risk, loan failure rate, and average rate of return on investment and the odds for investors are actually very solid. With the risk spread out across several risk levels an investor at Prosper.com can expect an average return of about 9.02% according to their information. I also read an article in INC magazine and they even reported about a higher ROI under a certain investment model. While this information is based on historic data there is (of course) no guarantee that your specific investments will deliver the same return.
We spend a lot of time discussing the risks and then decided to take $2,500 and give it a go. Anything above 2% annual return would be a major bonus compared to the money market investment. In addition, loans at Prosper are paid back month by month – so, we would still get access to liquid assets after a while without being locked in. We decided to not invest into a certain loans because of certain people trying to get these loans for stupid reasons. As an example I saw a listing where somebody request a loan to finance the purchase of an engagement ring. His loan request was for the amount of $12,500. I think this is just crazy and it does show bad financial habits of that person. Getting engaged is exciting and really something to look forward to, but starting the path down to marriage with such a financial booby trap – I just don’t get it. Ok, in general I don’t get why people go into debt for their weddings and anything that comes with it. The financial stress that comes from that debt puts the marriage at risk right from the start.
Now, about 7 months into this investment things are looking quite good. Overall we already earned more interest from these $2,500 compared to a much larger sum in our money market. Some loans even have been fully paid back by the person who took out the loan. But not all is sunny in Prosper land, we have 1 loan already in collection and another one is limping with a few missed payments. It will be interesting to see how this will develop in the long run, but I still believe that Prosper is a good option for our overall investment strategy. Mix low risk, medium risk, and high risk investments and at the end of the year determine the average ROI of all combined investments.
Of course this is a moderate amount of money and certain does not pay our bills, but look at it from the mix of assets perspective again. Add up all your investments at the end of the year and then calculate out how you did.