Monday, April 21, 2008

Evaluating a Prosper Loan

Back when savings interest rates were 5% or more, there wasn’t a lot of incentive to run out and look for investments that would provide a higher yield. You could earn a decent rate of return on your money with no risk and no work on your part. Now that savings interest rates are down, it doesn’t make much sense to keep a huge chunk of cash in a savings account where it’s only earning 3%, especially with current inflation rates at 4%. That means that for all the money you save earning only 3%, you’re actually losing 1% of the value to inflation.

I’m not saying that you should run out and take all the money from your savings account and move it riskier investments. Everyone needs to have some cash liquid and secure in case of an emergency or unexpected expense. You just don’t want to keep it all stock-piled in an account that’s earning less than the current rate of inflation.

So, I started contemplating the various options for investing my money. I figured that it would be worth giving Propser a try because credit card companies have been raising their rates and clamping down on consumer credit, causing people to look for other options to get a lower interest rate on their debts. After being in debt myself for so many years, I feel for those who are struggling with their credit now. When I was in debt, I was able to get lots of 0% interest offers, so I was paying very little interest on my debt. I think if I actually had to pay interest (and some people are paying more than 15% on thousands of dollars!) it would’ve taken me years longer to pay it off.

I’ve been browsing the listings for a while, trying to use my psychic powers to determine who the dead beats are and who is trustworthy enough to make good on their financial commitments. Sure, I could just use their credit rating to help me choose, but a listing offers so much more to go on than just a letter score. As I browsed, I realized that there were some very subtle, and non-subtle, red flags that (I hope) can help lenders choose borrowers that a minimal risk.

1. Financially irresponsible behavior.

Make sure that your borrowers have their priorities in line. If they claim they’re taking out a loan to pay off high-interest credit cards and padded a little extra to pay for a vacation, then you should probably take a pass. If they were serious about getting out of debt, they would wait to take a vacation until after they have paid off their debts.

2. High revolving credit balances.

If they don’t have a good explanation for their high revolving credit card balance, I assume the worst. I want to hear an explanation as to how their habits have changed and what positive steps they are taking to get on the road to debt recovery. If I don’t see those things in their listings, I assume that they are liable to making the same mistakes again.

3. Any delinquencies or public records.

I take my finances very seriously, and I would want anyone who borrows money from me to take it seriously too. Delinquencies are a big no no. NO NO I will not lend to you.

4. Vague business plans.

If it’s a business loan, I want to see a solid business plan and why it’s going to succeed. Starting your own business is a risky venture, but you can minimize the risk if you have a solid business plan in place.

5. Lots of missing or vague information.

I want to see that the person has taken some time and effort to make their listing as informative as possible. If they didn’t bother to give detailed information about their expenses, credit card accounts, etc. then that shows me that their not concerned with helping lenders make an informed decision.

6. Inadequate income to handle unexpected events.

Make sure that they have enough extra income in their budget to make all their payments and handle any other unexpected expenses that may arise. If their income and expenses barely leave them enough money to pay the minimum on their cards, than they are more likely to have to make some tough decisions and either miss a payment or take on more debt what something unexpected happens.

7. Borrowers who are also lenders.

I find this one hard to understand - borrowers, who claim to have high-interest credit cards, making loans to other people on Prosper…and then using it as a selling point! It’s like saying, “I’m not only a member, I’m the president.” ?????? My feeling is that if you have credit card debt, any money you have should be focused on paying off your own debts. That’s a guaranteed return on your money with 0% risk.

Using these guidelines, I lent about $300 to about 5 different borrowers with an average interest rate of 11.23%. I stayed more towards the conservative side, but even still that’s a lot better than 3% in my savings. I’ll be posting back to report how well my choices turned out and whether or not I picked winners or losers. I’m crossing my fingers for all winners!

Curious about checking it out? Prosper is offering a $25 sign up bonus for lenders after you fund your first loan.

Business & Personal Loans. Great Rates. Prosper.

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