What is Prosper / Peer to Peer Lending?
Prosper is one of several Peer-2-Peer lending companies that match investors with consumers who want to borrow money. Given the interest rates, most of these borrowers it would seem were denied financing by more traditional routes that required collateral or good credit history. Peer to Peer lending charges higher interest rates in return for an unsecured loan (no collateral); with the loan origination process doing some vetting and the sheer number of loans hoping most won’t be losers. But besides placing a black mark on a credit report, not much Prosper can do with late borrowers besides ask nicely. Peer to Peer Lending in a nutshell, at least.
“Promised” Returns & Investment Plan
One has to click only one link from Prosper’s homepage to see these current “historical returns”. I am not saying they are lying, nor that you shouldn’t invest, but [hint, hint] I did not see any where near even these low-ish returns given the risk of the investment.
My plan going in was to spread my money out between as many different loans given the $25 minimum per loan. Starting with $2,000 in mid 2014, and then reinvesting repaid principal and returns (last in early 2016), I bought $3,300 in notes across all the risk categories $25 at a time. I wasn’t too picky, except for staying away from the more frivolous-sounding loan reasons such as vacations and sticking with smaller loan amounts, and trusting the large basket and Prosper’s loan origination process to overcome the bad few with enough winners. I chose to stick with 3 yr loans, but accidentally bought a few 5 yr loans. Basic, but fit in with what Prosper promoters recommended.
Actual Results
Before talking about my returns, I will mention I am confused by some of what Prosper does. For example, they mention “Lender Promotion Returns” which bump me just over 2%, but have no idea the specifics (the * asterisk doesn’t clarify). More puzzling, although it’s probably what kept my returns positive, is the 27 notes sold by Prosper on my behalf, without me telling them to. It seems that these 27 “sold” notes were likely way past due and Prosper gave me some money for them. A wise investor said he doesn’t invest in what he doesn’t understand (hint, it’s Warren Buffet). The problem here is it isn’t worth figuring it out as the returns are low; just want my remaining few loans to be paid/charged off so I can be done.
Basically, I made some money, but only a little. But that $95 and change isn’t all profit as I discuss in my Takeaways section. Looking at my current Active Notes, an “E”-risk note has a Yield of 24.9% while an “A” note has a Yield of 8.66%; which is far from my actual results – the problem is so many failed to pay. The numbers don’t look too bad in the screenshot below, but I am sure the “interest missed out on” would be a huge number.
Takeaways
Knowing what I know now, I wouldn’t invest like this again. For the $95 I have made, it has cost me $20 more a year to file taxes because I had to upgrade to TurboTax Premier to handle the 1099-OID form I was sent. And the numbers on Prosper’s tax forms (25+ pages with a break-down for each note) never seem to neatly fit into TurboTax. It has been the worst part about tax time, to be honest.
The minimal return, the extra cost and work on my part at tax time, the fact my 401k did really well from 2014-2017, and the amount of risk this type of investment has just makes it not worth it in my opinion. But others seem to really like it.
