Mapgirl’s Fiscal Challenge

Reader Kevin asks:
Hey there, I just signed up for Prosper yesterday. I’ve been skeptical since the whole registration process asked for access to my bank account, and now I’m reconsidering after reading your post.

Is it worth the hassle? Or is this really just a gimmick to net a few pennies extra?

Dear Kevin,

Let me address the second question, is it just a gimmick? No, it’s not a gimmick. it’s the real deal and real money. Is it worth the hassle? Well, that’s a horse of an entirely different color. You seem to have reservations about linking to your bank account, however, to do all your transactions, Prosper wants to transfer money to/from a legitimate bank account.

That’s your first hassle and it seems a pretty low barrier to entry to me, that’s why I signed up. It’s no different than signing up with PayPal or an online bank like ING Direct. (If you want an ING referral I still have some. Please leave a comment and I will privately email you.)

As far as the rest of it being a hassle, well, I am making about 5.8%APR right now. (You can see me on LendingStats.com) Before one of my loans went into late status, I was actually making something closer to 15%. I just had a loan payoff as well, so that’s probably also depressing the rate of return at the moment. But either way, 5.8% is way better than my online savings bank. Or the stock market this year. I’m willing to assume some risk here for a better return than I can get anywhere else at the moment. (Heck, even my condo is upside soon with all the condo foreclosures/short sales in my area. I checked what’s for sale in my building and I’m definitely upside down by those list prices.)

Though I’m feeling cold about the one borrower who is and has been late, I am willing to take on that risk. It’s up to you to decide your risk aversion. I’m not risk-averse when it comes to investing. I hold zero bonds. But I am extremely risk-averse about other things in life, like motorcycle riding. I wear full gear head to toe. If it’s too hot to wear it, it’s too hot to ride. Period.

So, only you can really answer the question of if it’s worth the hassle. Ask yourself what rate of return you want and if you think you can realistically get it from Propser lending.

Reader Mary asks:
I was considering putting some money into Prosper but was a little leery. I also feel like I should use whatever I can to pay off my credit cards - but I noticed you still have cc debt too, so I was wondering how you figure out how much you get to play around with investing?

Dear Mary,

If you read about investing, you’ll find that most places recommend utilizing no more than 10% of your investments for doing something like Prosper or buying and selling stocks. The other 90% of your portfolio should be in index funds, bonds and professionally managed stuff. I’m inclined to agree with that advice. Ask yourself what you have to invest or what your total investments are. If you have $10,000.00 sitting in a bank account, use only $1000.00 for investing.

I’ve written about this before, but let me reiterate, I have about $300 in Prosper. I have more money saved up in my emergency fund than that. Heck, my monthly dining bill is more than that. This money was never going to go to my credit cards. If so, I would have sent it in by now. If you have credit cards, you should probably pay that off first. That’s what conventional personal financial wisdom would tell you. (At 15%APR though, I was better off with Prosper. My highest credit card rate is 11%. You’d have to figure out what rate of return you needed to beat your credit card interest rate, figure in taxes, etc. Do your math.)

The investment in Prosper represents about 1% of my total savings/investments. It’s not a lot. I’m not sure where you are at, but if you’ve only got $1000 saved, you might not want to put it in Prosper. If you only have $50, again probably not a good idea because Prosper’s minimum lending amount is $50, and that would is a poor risk management strategy. (It’s called ‘putting all your eggs in one basket.’)

None of these questions are easy. That’s why this blog is marked as a Fiscal Challenge. I’m not that great at it either. If you’re looking for real professional advice, try writing in to a CNN/Money or Kiplinger’s, or go see a financial advisor who has a CFP or some sort of professional license. (Series 6 for stocks, Series 7 for insurance.)

A lot of Prosper borrowers tell you all the reasons they are good people and why you can trust them.

Frankly, I don’t give a crap about those things right now. I’m looking at the numbers and statistics. The reason I’m feeling cold about Prosper today is that I have my first seriously late loan. I do feel bad for the guy since he’s going through a divorce and stuff and the first time he was late, I asked if everything was alright and he replied that it’s tough going. But he did send in his payment right after.

So the question is, do I pop him another email to tell him that he’s late again? I’m sure he knows he is. Is it better for me to act as the collector vs an actual collection agency? Is a gentle nudge the way to go? What to do?

As it is, I’m not 100% sure I’ll be putting more money into Prosper right now. My first loan is in the process of being paid off right now which is great for the borrower I think. Kudos to them for early repayment! I’ll soon have another $50 to make another loan, hopefully to make up for Mr. Default. That’s about $270 total I have sunk in as an initial investment (IIRC) with a decent rate of return overall. But I’m still feeling dicey about the whole matter. But the rates for grade A loans are more attractive than a traditional bank CD so I could just stuff the money into 8%, relatively safe loans. (We’re still talking less than $500 here, money that would otherwise be languishing, i.e. not used to pay down credit cards.)

Normally my Propser account isn’t worth mentioning. I only have four loans at $200. I made a principal investment of $175 and the final $25 is interest that I earned on the initial loans.

Usually I get about $1.50 on the principal paid back on one of my loans, but recently after Christmas, I noticed that he paid me twice, and the second payment was for about $8.00 of principal. I figure that he must have used some gift money to make that additional payment.

I’m happy about this because for another $10, I can make a loan with the cash in my account at Prosper. It’s $50 minimum to bid on a loan and pretty soon I’ll have that cash available. Lately the FOMC has lowered rates (TWICE!) to jumpstart our economy during this recession, but it bums me out. I really want to make a better average return on my investments this year. Last year was terribly disappointing so I’m thinking of putting a little more into Prosper this year. Longer term CD’s have crappy rates at the moment, so I think it’ll be fun to put some more into Prosper.

I’m also looking to buy some dividend stocks as well. Of course, I have this crazy idea that I might buy some BRKB shares too with my 401k rollover money. heh. For those of you who don’t know, these are the cheap shares of Berkshire Hathaway. Full price BRKA shares are crazy expensive.

FWIW, let me lead off by saying my cousin works at PayPal. As far as I know, I don’t know anyone at Prosper.

Those things said, PayPal was one of the few things I adopted early. They gave me $5 bucks! What’s not to like?

The thing is, I don’t really like PayPal anymore. I thought it was great for moving money around amongst friends, but the fees went really high once I tried doing eBay. I used to always wait the 3-4 days for free transfers in and out of my bank account but once I did eBay, my account was “upgraded” against my will and the transaction fees are killing me. I sold two pairs of hockey tickets and a pair of tickets to the King Tut show in Philly this year. All told, it was about $130 worth of transactions and I paid out $4.67 in fees. Because I usually use my PayPal account to send money to friends in CA for things like group birthday presents, I have only earned 76 cents in interest this year. But I note, PayPal is paying me 4.7% in their money market account, which is slightly better than ING Direct.

I’ve concluded that instead of holding $48.16 in the account, I’m going to move $40 of it over to Prosper so I can add it to my $19.xx balance and then make a $50 loan to someone. I will have a better return on my money and I won’t be tempted to spend it.

I realize that Prosper is essentially a $50 3-year CD, but so far, I’ve done ok in picking my loans. My first loan is a year old now. I have three others I made this year and all four loans are current, none of which were ever late or wonky in any way. My estimated ROI is well over 14%. Way better than the S&P this year. (YTD Up 3.2% on the adjusted close reported by Yahoo for Dec 4th when I drafted this)

Just thinking out loud right now. I have a lot of stuff on my mind.

I put in $100.00 just a few months ago and right now, it’s worth $102.33 as of the end of February. As of this weekend, it’s worth $103.00 because there are payments posted since the 1st of the March.

It’s still fun and appealing to do this, but I’m staying focused on my credit cards. No point in putting more into Prosper while I have other debts to pay.

My cash balance on Prosper is approximately $7.00. I figure rather than adding anything more, once I have enough money to make another minimum $50.00 bid, I will do that instead. Hopefully by then, I’ll be in a good position to kick in more money for long term saving.

HA HA! I just bid sniped someone! (But, I’ll get to that later.)

I forgot to tell you about Prosper and how that’s going. I don’t even include it in my net worth calculations since it’s a $100.00 experiment, more of an expense right now than a receiveable in my mind, i.e. it’s gone on the balance sheet and it’s only an income statement as an expense item because it’s unaudited and extremely conservative accounting, but I digress before I even get started.

As of mid-December, I had one $50.00 loan out for about 10.40% . The credit grade is B. They have a debt/income ratio of 25%. They are interested in consolidating high interest credit card debt. It’s really a guy, but I say ‘they’ since his photo has a happy-looking couple in it. Could be a ruse. Who knows?

Right now, he’s made two payments. One for December, and a second which should clear in early January. My loan’s value right now is $50.17 cents. I’m not sure, but when I mouseover the amount, it has a dotted line and tells me the amount to the 6th sig-fig. I wonder why it does that. (Is it an Office Space ruse to deal with the fractional pennies?) The loan service fees are penny since my loan amount is so small. I’m not 100% sure yet how I feel about those service fees, etc, but we’ll see in the end when the experiment plays itself out. (Well sooner than the 3 year repayment schedule, I hope.)

The remaining $50.00 I just didn’t have time to sit around for the bids to win. I finally figured out how to beat being sniped at the last minute. I changed my bidding to win the first loan, which was to bid a few percentage points lower on the interest rate. That is how I was ‘buying’ the loan. Once I understood how the bids were being done, i.e. not like a live auction where it falls in fixed increments that are visible to all bidders, but hidden and revealed as lower and lower bids are received, sort of like a dutch auction, I got it. (Dutch auctions are weird business, which is why I wouldn’t participate in an IPO like that. And during the dot-com heyday, that’s where I learned such a term.)

So recently, I bid sniped. I looked at the soon-ending auctions and I bid on one that had about 20 minutes to go on a Friday night. I put a ridiculously low bid on it, but better than I could do with a 3-year CD, which for all intents and purposes, these are. And I won a second bid. We’ll see if all the paperwork, etc goes through, but it did pique my curiosity again about using Prosper to consolidate my stupid credit card debts. After all, this is kind of like my credit union visit 5 years ago to consolidate my credit cards.

I’ll give this a few more months before putting it onto the net worth/balance sheet as an asset. We’ll see what this is really about before I dive into it either with more money as a lender or put up a loan as a borrower.

ps - I wrote this over the weekend. As of today, Thursday, the loan paperwork has not completed for this second loan.

I lost the second bid I put out this week. Scott tried to warn me, but I wasn’t paying attention. (Too busy having a life last night to notice.) This bid watching business is too much for me. I try to make a point of bidding on on loans that are close to closing. Anything more than 1 or 2 days to closing and I’m probably not going to bother. I bid on Scott because he is active in the PFBlog community, but I bid on his loan when there was more than 72 hours till closing. My mistake.

I put out another bid this morning. This time it’s for a higher interest loan for a business that’s closing in about 36 hours. We’ll see how it pans out. I like the idea of supporting someone in their dreams of entrepreneurship.

I still get bid sniped there. But I threw my hat into the bull ring once more last week to try this out. I understand the bid process a little better and so far the bids I submitted haven’t been beaten.

I won a loan over the weekend, while I was away, so I am officially a lender! Finally! After a few months of non-starts, this thing might actually work.

The second bid is still in process. We’ll see what happens with it. I figure if all goes well for a little while, I may consider consolidating all my credit cards to a single lower interest loan on Prosper. Or else, move some of my languishing long-term savings to Prosper lending.

But at least it’s working now.