The Prosper.com Investing Experiment

I’ve known about Prosper for years, but never took a good look at being an investor until recently. I very stupidly had money sitting in checking accounts that were earning pennies (OK, fine, dollars!) under the guise of, “I like to be liquid in case there is some business or opportunity I want to invest in.”

As a result, I wasn’t investing in much of anything.

Well, that’s not completely true. I have a Roth IRA and 401k, as well as a Charles Schwab account that I’ve used to successfully invest in individual stocks. But I’m actually fairly conservative and I’m not looking for possible big wins in the stock market. I want something consistent and decent.

Prosper fit the bill for me. They were the first on the peer-to-peer lending block, they’re well-funded, and they originate over $100MM in loans per month, with an average rate of return of nearly 9%. Which beats out the S&P500 index by a small margin. With a more aggressive strategy there are a lot of people who are getting 11+% rates of return.

Last month (July 2014) I added $10,000 to a brand new Prosper account and began the process of buying notes. A note is simply a piece of the loan a borrower is asking for. For example, say somebody wants to borrow $10,000 to consolidate their debt. This can be split up into many different sized notes with a minimum of $25 per note. Let’s say every investor only buys the minimum note on this $10,000 loan, that means that 400 different people invested in this one loan.

My Strategy

Prosper Peer To Peer Lending Strategy

This is my Prosper account as of August 3, 2014.

Before getting started I read a lot of articles from people who have been using Prosper for years and getting ~11% rates of return so I based my strategy on an amalgamation of what I read.

My strategy is pretty simple, and only slightly aggressive. The notes are graded from AA to HR, AA being the best (and least profitable) and HR being the worst (and possibly most profitable). These grades are based on credit score and other factors Prosper uses to determine the quality of the borrower.

$25 Notes, No More

I only invest $25 per loan. Although I accidentally invested $25 in the same loan twice I’m sticking to the $25 level with my initial deposit. Once the $10,000 is invested that means I’ll have pieces of 400 (err, 399 due to my mistake) loans.

No AA, E, or HR

I don’t invest in any AA, E or HR loans. The rate of return on AA loans is small and E or HR are the riskiest. If I were able to buy a few hundred E and HR loans I would invest in them because it would spread out my possibility of losses. As is, I feel more comfortable with the better rated loans because I can diversify and buy lots of them.

Only 3 Year Terms

My thinking is that if someone needs 5 years to pay back a loan they are not serious about paying it back. If I am wrong about this please fix my thinking. In any case, I stick to 3 year terms. (3 and 5 year are the only options.)

I Only Invest In One Category

I only invest in debt consolidation. No business loans, no wedding loans, no engagement ring loans, no other loans. Again, this is just gut feel so happy to hear about other strategies. A business loan is too risky. If I’m going to invest in businesses I’ll invest in my own, those of my friends, or through the stock market where I can at least research what I’m investing in. Wedding and engagement ring loans I simply don’t agree with morally.

I keep it simple. I understand wanting to consolidate debt so I invest in debt consolidation loans, which are the biggest category anyway.

My First Notes

Before doing anything else, I purchased about 20 A and B rated notes. Then I began the manual process of purchasing only B, C, and D rated notes. All at $25 each.

This proved to be too time consuming. Prosper adds new loans to their marketplace twice per day, and the C and D rated loans get bought up fast. I didn’t want to be stuck to my computer until I bought all $10,000 worth of notes.

Thankfully, they offer an “Automated Quick Invest” option. The way it works is you fill in your loan criteria (mine: B, C, D, 3 years, debt consolidation), a maximum note purchase value (mine: $25), and a maximum investment per day (mine: all available cash). Then Prosper automatically invests in your chosen notes twice per day.

Even with this strategy I only get about $200 in notes per day. Of the $10,000 I deposited I have nearly $5k still being used to buy up notes. There are a lot of other people using auto invest as well as the API. But at least now it’s all hands-off for me.

My targets are to have about 100 notes in B, C, and D categories and 50 A loans. I already have 50 active or pending A-rated notes and I’ll edit the auto invest as I reach closer to 100 B, C, and D notes. Ideally, I’d like to have the most C notes. (Pun! But serious.)

Your Peer-to-Peer Lending Strategy?

Do you have a Prosper (or other peer-to-peer) account and want to talk strategy and results? I’m excited about the possibilities here.

If you’re interested in talking about your strategy get in touch. All I ask is that you’re already an investor (in Prosper or elsewhere). If you’re not yet, click here to do it. (Yes, it’s a referral link, but if that’s uncomfortable go to Prosper.com directly.)

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