"Achieve A Good Return Even If One Borrower Defaults"

While watching some Grey's Anatomy with my wife I decided to make some preliminary calculations.  This includes 18 loans at Prosper.com and 2 at Kiva.org.  Let's remember that the two loans at Kiva have a zero percent return.  The 18 at Prosper are most of the $550 I currently have invested at Prosper and I am waiting on three more loans to close there.  So, my predictions are a little rough as they exclude the final three loans.  But, we can get a preliminary basic picture of what's going on and what to expect.

If I assume that on average 1 out of 20 or so loans will not be repaid, I have found that with my selections I will still receive a respectable interest rate.  In fact, many people who invest in the stock market would love to get this return every year.  I want to be clear that I have not yet received even one dollar back yet as I write this because it is so early in the process.  I am trusting the human beings who say they will pay back the loans and I am trusting the track records of both Kiva.org and Prosper.com.

Here are the interest rates I will receive from the 18 loans at Prosper:
34%, 15.16%, 18.5%, 17%, 26.7%, 19%, 29%, 26.47%, 33%, 23.95%, 33.27%, 19.1%, 26%, 27%, 16%, 19.95%, 28%, and 22%.  The loans are mostly at $25, but they range from $5.10 to $64.88.

The interest rate on the 2 loans at Kiva.org is 0%.  Both loans are for $25. 

My total invested in all 20 loans is $507.16 and I expect to receive $616.51 and now that I have found how easy it is to use Google as a calculator, I know that this return - which is MORE than I expect - would be 21.56%.  If one of the randomly chosen (among the higher risk) loans defaults without even one payment being made, then I will receive $31.62 less.  That would mean that I would get back $584.89 instead and that would mean a return of 15.3%.

To recap, so far I have loaned 2 women at Kiva $25 each at an interest rate of ZERO percent and 18 people at Prosper a total of $507.16 and even if one of the Prosper borrowers doesn't pay back any money at all, I can expect an interest rate around 15%.

Who says you can't make a profit doing some good?

"You Choose Who Gets Your Money"

There are lots of borrowers to choose from on Prosper.com.  You choose who gets your loan of $25 or more.  The borrowers are rated by Prosper and you can decide what level of risk is within your comfort zone. I choose to take on higher risk borrowers and we'll see what happens.  I'll share some facts about my first Prosper loan recipient in today's post.

My first borrower's loan originated on October 28, 2009. I purchased $25 of his loan on 10/27 - 1 day earlier. There were less than 40 lenders who had successful bids.  The borrower is paying 35% and all the lenders receive the same rate - 34%.  (As far as I understand the bidding process, all lenders receive the same rate on all Prosper loans).  The 1% difference goes to Prosper.  This loan is the borrower's second at Prosper.com and he has made 24 payments on the first one to reduce his amount owed from $2,000 to below $900.  All his payments have been on time.

This borrower is listed as military enlisted, a full-time employee with over 20 years at his employer.  The site allows for personal statements by the borrower and in his he says, "I always pay my bills no matter what."  I know that a lot of people appreciate blunt statements like this.

Prosper rates this loan in what many would consider a very, very risky category.  They estimate that loans like this will not be paid back 25% of the time.  Because of his personal statement and the fact the he is long-term military, I decided to take a chance.

Keep in mind that when you bid, you might say that you are willing to accept 17% interest, but if all the lenders together only bid the loan down so far, or not at all, then you will receive the interest rate that everyone else receives.  In this case, that is 34%.  Many would say that that rate is fair given the high risk rating he has received.  Until I am proven wrong, I will look at this as receiving a very generous interest rate from a military man who has given us his personal assurance that he always pays his bills "no matter what". His track record with Prosper backs that up.