Editor’s Note: This piece originally ran in February in our sister publication, Wealthy Retirement. You can go here to subscribe if you haven’t already. It’s free.
Last year, I wrote an article in The Oxford Income Letter that resulted in a flood of emails and questions – and those emails are still coming in today.
People are hearing more about peer-to-peer lending and are curious about whether they should get in on the action.
It’s not surprising, considering that you can make 6% or more lending money to individual borrowers.
But don’t worry, you don’t have to become a loan shark. There’s a way to “put money on the street” without hiring a goon to be your enforcer…
There are several internet platforms where you can deposit money and select which borrowers you’d like to lend to.
You don’t get personal information about the borrower. Rather, you’ll see something that looks like this…
This listing is from Prosper, one of the largest peer-to-peer lending sites. The borrower from North Carolina is seeking an $8,000 loan for debt consolidation.
The nice thing about peer-to-peer lending sites is that they allow a group of people to lend money to a borrower. One individual doesn’t have to come up with $8,000.
This was a loan I funded, along with many other people, with just $25.
Prosper rates this borrower “AA,” its highest rating. It takes into account the borrower’s credit score, income and other information that any other lender would consider. As the actual lenders, however, we don’t see all of that detailed information, just a range.
You can see that this borrower’s FICO score is 680-699, their income is between $75,000 and $99,999, and other details that will help you decide if you want to lend to them.
Prosper and the other peer-to-peer platforms rate their borrowers according to these variables. The higher the rating, the lower interest rate they will pay.
In this case, the borrower has Prosper’s highest rating and is paying about 6%. Someone with the lowest rating may pay as much as 35% per year.
For the lender, 35% may be very attractive, but the risk of default is much higher.
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Will I Get My Money Back?
Like any loan you’d make to a friend or brother-in-law, you get your money back only if they repay the loan. Peer-to-peer platforms generally don’t do a good job of retrieving your money if the borrower stops paying.
They’ll send it into collections and try to recover your money, but good luck. You’ll probably never see it again.
That being said, a default here hurts the borrower’s credit rating like any other default.
As with other loans, each month, the borrower pays back interest and principal. He sends in one payment, and Prosper divvies up the funds among the lenders.
I funded the listing above in October with $25. So far, I’ve been paid back $2.57.
I’ve had two types of experiences with Prosper.
Between 2006 and 2008, I funded 19 loans. Because that period was in the middle of the financial crisis, five loans defaulted, four of which were discharged in bankruptcy.
Due to the defaults, and after collecting …read more
Source:: Investment You
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