Monday, June 24, 2013

Prosper: You Be the Banker

Personal finance has always been a passion of mine.  In another life, I'd be an accountant.

One investment service I really enjoy is Prosper.  Assuming you're first out of debt and already saving for retirement, you probably want to start making whatever money you have left work for you.  The stock market can be complicated and confusing, especially for small investors like myself.  Prosper fills a niche for people like me by letting me make informed investments cheaply. 

Prosper is peer-to-peer funding, essentially replacing banks with everyday people.  You can browse loan applications, and choose to fund loans for as much or as little as you like.  So someone taking out a $7,000 loan might have hundreds of people chipping into fund it.

Prosper gives you a nice financial snapshot of the people attempting to take out the loan.  You can see their credit history, their stated income, whether they have any accounts in default, etc.  Just like in the banking industry, some loans are riskier than others, but the rate of interest they pay is much higher.  For example:

Candidate A has good credit and is likely to repay the loan.  You can fund his loan at 8%.

Candidate B has terrible credit and there is nothing in his credit history to make you believe he will pay you back.  You can fund his loan at 30%.  High risk, high reward.

I've done really well with the website over the years, returning over 11%.  I've funded well over 75 loans.  While some have gone into default, most have been repaid.

My rules are simple:

1.)  Never invest more than $50 in one loan.  My standard investment is $25.  If I really like the application, I will invest $50.
2.)  Know who your're investing in and never fund someone who doesn't fill completely fill out the financial profile.  There is an option for loan candidates to state why they are a good candidate for the loan.  Many people answer this thoughtfully and thoroughly.  Some just skip it.  Most of my defaults fall into the later category.  If they didn't take the time or effort to share their story when asking for your money, then they aren't worth funding. 

3.)  To ensure you follow rule number two, skip the autoinvest option. 

Best of all, the customer service is very easy to work with.  They have a laid back West Coast vibe.  Today I needed to update my bank info.  I called in, pressed the option I needed, and was immediately connected with a guy who sounded like he drinks Chai tea and rides his bike to work.  He took my info and got my bank account linked in about a minute, and I was able to make a transfer as soon as I got off the phone.  Easy peasy.

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