Investing In Peer-To-Peer Lending With Prosper.

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Investing In Peer-To-Peer Lending With Prosper.com

Posted by Financial Samurai 44 Comments

High-Yield CDs

Foreclosures For Sale

Top 5 CD Rates

HUD Homes For Sale

With savings interest rates under 0.3%, the 10-year yield

under 2.5%, and stock market dividend yields under 2.5%,
investors are starving for yield. Im looking for a relatively
hands off investment class that can provide superior yields as
my long term 4%+ CDs start rolling off in 2015. I think Ive
found it in peer-to-peer lending with Prosper.com. Many of
you have asked about P2P lending forever and Im pleased to
embark on this new income stream.
Ive known about San Francisco based Prosper for years, but
Ive never bothered to invest because the industry was still
defining its own rules. P2P lenders sprang up in 2005 to
provide needy borrowers with viable alternatives to normal
commercial bank loans. The idea was to reduce borrowing
costs by removing the bank intermediary, and utilize the
internet to connect lenders and borrowers to make more and save more.
The concept is good, but default rates prior to 2008 were commonly as high as 20% vs. 1-5% default
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Investing In Peer-To-Peer Lending With Prosper.com | Financial Samurai

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rates for traditional commercial bank loans. In response to higher default rates and a determination
that P2P investing is a security asset class, The Securities And Exchange Commission (SEC) put
stringent regulator oversight on the industry and forced P2P lenders to be more vigilant in screening
their borrowers based on their credit histories and submitted information. Also, if a borrowers loan
becomes delinquent, P2P lenders will appoint a collection agency.

PEER-TO-PEER LENDING IS SAFER NOW

With regulatory oversight and now seven years of operating experience, Im finally dipping my feet in
the water. The advertised blended rate on Prosper.com is 10% and there have been no total blended
losses for Prosper investors since 2009 who have at least 100 funded loans. 10% is currently over 5X
the 10-year yield, which is also called the risk free rate. With my 3X risk-free rate bogie equaling
5%-6%, 10% is a very attractive proposition. The fact that Prosper investors showed positive returns
even during the financial crisis is also very appealing.
Before investing in any asset class, I like to spend a lot of time doing my due diligence. Prosper.com is
based right here in San Francisco, so I went and sat down with them twice for over one hour each
time to learn more. I was comforted by the fact I could shake someones hand in person and speak
about the pros and cons of P2P lending. Here are some of the pros and cons Ive learned.
Benefits For Lenders / Investors Of P2P Lending
Higher rates of return adjusted for risk.
The ability to screen applicants and individually choose particular borrowers.
Once you develop a good sense of the type of borrowers that suits your investment profile, you
can continue to find similar type borrowers given Prospers marketplace is so huge.
There are literally thousands of borrowers with various ratings you can choose from to tailor your
desired returns. The higher the risk, the higher the returns and vice versa.
If a borrower ever wants to borrow again on Prosper.com, they need to honor their loan. The
Prosper marketplace theoretically reduces default risk over the long term for investors. The idea
is similar to ones social capital online. You dont want to have many bad reviews or else nobody
will ever want to deal with you!
Prosper will hire a collection agency to help you get the non-payer to fulfill their loan obligation.
Regulated by the SEC.
Benefits For Borrowers Of P2P Lending
Access to money and credit without having to go to the bank or go through loan shark
companies.

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Investing In Peer-To-Peer Lending With Prosper.com | Financial Samurai

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Easy to use online platform walks you through step by step when filling out your application.
Entire process is easier to go through, with less documentation required than traditional loans in
most cases.
You can explain why you have bad credit and sell your story to investors. Banks are now super
stringent and are unwilling to lend to anybody with poor credit. In a time when so many people
have foreclosed on their homes, this is a big problem for potential borrowers.
If the borrower creates a second listing, after having 6-9 months of no missed payments,
Prosper shows their exact payback history with them during that time. This is only seen if the
borrower creates another listing though. In other words, borrowers can build their borrowing
reputation to keep coming back for more.
Loans through prosper are unsecured, meaning borrowers dont have to come up with collateral
such as a house or car to get a lone.
You can practically use your loan for anything.
Regulated by the SEC.

P2P RISKS EVERYBODY SHOULD BE AWARE OF

Every investment carries risks. Lets discuss the risks for investors and borrowers.
Risks for Investors / Lenders Of P2P Lending
You might lose money because you are not diversified enough. Diversification will be one of the
main topics I will write about on Financial Samurai. Another main topic will be to discuss
investment strategies to maximize returns.
Your P2P lender could conceivably go out of business, leaving you as a creditor. Ive been told
by Prosper that they have entered into a back-up servicing agreement with a loan servicing
company that is willing and able to transition servicing responsibilities in the event they can no
longer do so. The third party is a financial services company that has extensive experience and
knowledge entering into successor loan servicing agreements. Prosper also has an Indenture
Trustee named Wells Fargo that grants note holders certain rights and protections.
Prosper notes are not FDIC insured up to $250,000 for individuals or $500,000 for couples.
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Leaving your money in CDs and savings isnt sexy, but at least if the bank goes under, the
federal government will give you your money back.
Based on your state of residence, you may have to meet financial suitability requirements. For
example, if you live in California and buy $2500 or less of Notes, your investment cant exceed
10% of your net worth. And if you go over $2500 in Notes, the previous applies plus you need a
minimum gross income of $85,000 on your last tax return and for the current year, OR a
minimum net worth of $200,000 and total investments cant exceed 10%.
Risks for Borrowers Of P2P Lending
Rates increase with the length of your loan. The reason is the investor demands a higher interest
rate for a lower monthly repayment and a higher chance you decide not to repay over time.
You are generally restricted to only $25,000 so if you are looking for more than that you will
need to seek out some other sources. The reason for the $25,000 restriction is to mitigate risk to
the lender. Imagine if everybody was able to borrow $1 million dollars. The likelihood of
borrowers fleeing the country increases!
If you are self-employed or do not have any W2 income, getting funding will be more difficult.
Banks will shut you out of a loan and from refinancing, but at least Prosper gives you a chance to
tell your story.
Borrowers: If you are interested in becoming a borrower at starting rates as low as 6.59%, you can
sign up here. Its better to borrow at 6.5%-10% than pay 20%+ on your credit cards! Debt
consolidation is the absolute best reason to borrow through P2P lending.

MY GOALS FOR PEER TO PEER LENDING

I chose Prosper.com because they were the first company in America to launch peer to peer lending in
February, 2006. Ive met with representatives twice in person and plan to have a continued direct
dialogue with them as I go on my P2P lending adventure. Im also lucky to be based just a couple
miles away from Prospers office to meet up on occasion. They have over 1.3 million members with
$364+ million in funded loans.
Heres what I hope to achieve with Prosper long-term:

LendingTree Personal Loan

As much as $25,000 from 6.04% APR Easy Process, Free Quotes. Act Now!

* Diversify my revenue streams and create sustainable passive income.

* Find savings and CD investment alternatives given I think well be in a low interest rate environment

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Investing In Peer-To-Peer Lending With Prosper.com | Financial Samurai

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for a long time.

* Specifically boost my passive income by another $500 to $1,000 a month by investing $50,000 or
greater in P2P lending over the next several years. Ideally, I would like to have the confidence to
invest over $250,000 in P2P and try and make $25,000 a year in passive income.
* Continue to build my online income by providing a portfolio of P2P lending related articles where
readers can follow my journey, participate, and learn.
* Become an expert in P2P lending because I think the industry is going to continue to grow with so
many success stories of positive returns.
Investors: If you would like to join me in building wealth as an investor through Prosper you can sign
up here. I plan to invest in Prosper for as long as the returns are over 3X the 10-year yield = 6-8%
returns which is far better than any CD or money market account.
Note: Prosper allows investors in the following 31 states: Alaska, California, Colorado, Connecticut,
Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan,
Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island,
South Carolina, South Dakota, Utah, Virginia, Vermont, Washington, West Virginia, Wisconsin and
Wyoming.
About the Author: Sam began investing his own money ever since he first opened a Charles Schwab
brokerage account online in 1995. Sam loved investing so much that he decided to make a career out
of investing by spending the next 13 years after college on Wall Street. During this time, Sam received
his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series
63 registered. In 2012, Sam was able to retire at the age of 35 largely due to his investments that
now generate over six figures a year in passive income. Sam now spends his time playing tennis,
spending time with family, and writing online to help others achieve financial freedom.
Updated 12/1/2014
Best,
Sam

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