Prosper Lending review has an excellent new article. It combines 11 responses (including both Lending Club, Prosper, and yours truly) to a reader’s question. It is well done on all front’s. Here is the question asked:
Reader’s Question:I am in my mid-30′s. I am not rich, but I am pretty good at living within my means and have amassed a small nest egg, which I have slowly invested in different areas. I have some money in a mutual fund managed by Merrill Lynch, some in a similar IRA, some in a decent-yielding savings account (4%) and some, the largest portion, which I keep reinvesting in CD’s. It is this portion that I am looking to try somewhere else, especially with the low CD return rates. Prosper seems like a great place to go, not only because of the higher return but because of the ability to choose whom you are helping.
My one financial question is this – if the loan is paid back slowly over 3 years, whereas a CD is usually short-term, say, 5-6 months on average, just how much better, really, is Prosper’s return rate? Let’s say you have $100k to invest and you have the following three choices:
- a savings account with an APR of 4% (subject to market changes) for 3 years
- a 6 month CD you keep reinvesting in, for 3 years, though, obviously, the market rate will fluctuate each cycle
- an average of 10% ROI for $100k worth of 3 year prosper loans
Not knowing all the fees involved with Prosper, I’m a bit confused as to which of the 3 actually gives you the most money. Obviously, at first glance, Prosper is the best one, but…
Your thoughts on this would be much appreciated. I don’t need liquidity; I just want something with a decent return. I have little faith in the future of the stock market, sensing major shifts in the world’s economy over the next several years. For me, investing is important for the long term, so that by the time I’m old, my money is generating enough money to live on. I’m not sure I’ve found any investment strategy that would bring this about.
My response to your question sounds like I am talking you out of investing in p2p lending. Nothing could be farther from the truth, but within the framework of your question p2p lending is an unknown and your question does not support investing in an unknown. The returns may materialize and they may not.
As much as I believe that p2p lending will change the world it is an entirely new asset class. You cannot assume the published rates of return will be the actual rates of return. It is different than credit cards it is different from secure debt. I would not recommend putting more than 5% of your overall portfolio in P2P lending. If your 5% of your overall portfolio is less than $2,000 I would not invest in p2p. The tax treatment of a p2p lending portfolio is harsh.
If you are still reading my answer then you may like the rest of my response…P2P lending in fun. It is a wonderful feeling to both help someone and generate a return on your money. It is financial voyeurism…once you start you cannot stop. It is highly addictive and enjoyable to invest in p2p lending, but guaranteed results (or even significant past results) are lacking… Proceed with caution, fully diversify (I think at least 50 loans), and have fun, but don’t bet the farm.