Am I going to Prosper with

It’s close to 18 months to date since I’ve joined and started Peer-to-peer lending. My hope was to be able to get a better return than what I would be getting from a typical bank deposit, but with not as much potential violatility as stocks. It was also an experiment to see what problems, difficulties, etc. may come up durng the process.

Surprisingly, things have been pretty smooth, and I’ve been able to generate about 7.4% seasoned returns, or a 7.7% overall return. So, I felt it was time to share in my experience, some of the strategies I deployed, and hopefully, others can benefit, or can suggest improvements in my methods!

Q3 2013-2014 returns
Before jumping in head first, I did read others’ experiences and “best practice” strategies. From the info, I concluded that:

1. To be successful with P2P lending, you generally need to split your original investment between (100+) loans. From each of these loans, you would be given a “Note.” Knowing that most notes will not default – but not knowing exactly which notes will default – having a larger number of notes will help minimize the overall risk of loss.

2. Higher risk does not mean higher return. The general problem is that as risk increases, the chances of a loan default also increases. It’s best to stay in the A or B grade loans, or with select C or D loans only if it meets certain characteristics (more on that later). E or HR are generally not worthwhile – they are likely lendees that have been rejected by banks, have too high debt-to-income ratios to be considered for a bank loan.. long story short, the risk is too high to be considered. (i.e. you’ll likely lose money)

3. Keep reinvesting the funds as loans are paid back. Did someone pay back the loan? That’s great – but it’s also time to reinvest those funds!

Armed wth the above knowledge, I took a small sum of $3500, and as a experiment / test – set to lend out (100) $35 loans. Surprisingly – the process was pretty simple and painless!

Using the built-in Prosper search engine, I was able to narrow down the potential loans to only AA to B class loans.

From here, I sorted by the amount of interest offered, purchased the highest interest loans from the AA, A, and B classes. After about an hour or so – I was the proud owner of about 100+ Notes!

List of my Prosper notes

After that – there’s honestly not much to do. As per #3, check in every so often, reinvest what’s been paid back – and repeat!

So after about 18 months, what do I like about the Prosper and P2P lending experience? Pretty much everything! Some huge pluses:

1. Filings during tax time is pretty easy – you get handed a SINGLE 1099-OID to handle ALL of your notes! Unlike individual stocks / mutual funds, all transactions, earnings, etc. is tracked with a single entry into your favorite tax software. Simple.

2. Since Prosper is all web-based, you can check progress, buy new notes, etc. at any time! I usually do ths during my weekend downtimes, when there’s a boring movie on, or nothing else better to do. It’s nearly passive, and…

3. Compared to the return rate that someone gets at the local credit union (an outstanding 1% /s) – the additional (minimal) effort is well worth while.

Now, some of the minuses (which I felt were small):

A. Any gains are taxed yearly via the 1099-OID, so it doesn’t enjoy tax deferred compounding like stocks / mutual funds. However, I see Prosper / P2P as an alternative to CDs, savings, or money market accts – all of which are taxed yearly anyway.

B. Any money put in are usually put away into 3-5 year notes, so if the cash is needed shortly, CDs, money market, or savings accts would be better. However – Prosper has an integrated “Note Selling” market – so that if you need to liquidate, it’s always an option. With proper planning, this shouldn’t occur.

Since the start, I’ve added some criteria to narrow down the loans I will lend to / notes that I will buy, to, namely, minimize risk of default, as follows:

– Credit score between 620 to 990
Statistically speaking, folks with fair-to-high scores are more likely / more incentivized to pay on time keep their scores high. The lower the score, the less likely timely payments will occur.

– Accept C and D loans
C and D loans offer much higher interest. As an additional variable in this experiment, I’d like to see if C and D class loans will fare better in net total returns (defaults included), then simply going after AA, A, and B class loans.

– Deliquencies = 0
To further minimize risk, I’m only viewing loans / purchasing notes from folks that have 0 deliquences. Chances are – if they’ve missed other loans, they’ll likely late (or just not) pay yours too.

– Bankcard utilization < 90%
A 90%+ utilization usually indicates all other credit lines are tapped out. Chances of an imminent late payment / default is quite high, with just my gut feelng. It’s another setting I’m adding in for risk mitigation – let’s see if it pays off.

So far, all is well with these new loans – but to be very frank, not too much time has passed at all (i.e. less than 3 months) since I’ve implemented these changes, so I will write again around Q3-Q4 of this year with the results, regarding:

– Net Results from Q3 2014 (since changes were started) to Q3-Q4 2015
– For loans that defaulted, what were their common characteristics? Maybe C & D loans are still a bad risk, regardless of credit score, and having no deliquencies?

Stay tuned!

~ Steven W. C.

Can “Gurus” reliably provide stock market guidance? (TL;DR: No)

In my younger years, I was open to many different sources for information – from Investors Business Daily (IBD), to MSN Moneycentral, to discussion forums, as well as paying for select newsletter subscriptions.

From personal experience, I haven’t seen paid newsletter subscriptions being worthwhile in terms of performance compared to just putting one’s funds into a passive index fund.  So, this begs the question – how does “free” stock market info / guidance compare?  Is there perhaps an independent study of how their stock recommendations perform over the long terms?

I happened to find this article this weekend – and it answers the question quite well, complete with raw reference data.  Enjoy!

Why Investors Are Pouring Billions Into Stock Index Funds

Unsurprisingly, more and more investors are pouring money into index funds, instead of actively managed funds.

There are mountains of evidence that passive index funds, over long periods of time, will always beat out actively managed funds or stock picking.

So, between the ease of just picking a single fund, low annual fund fees from companies like Vanguard & Fidelity – why bother with high cost, actively traded funds?  (Please – do convince me otherwise.  I’m always looking to learn and get feedback!)

Read on for more:


Does Credit Karma really offer free credit reports?

Credit Karma
After my last article, someone pointed out that Credit Karma also provides a full credit report for free as well, no payment info required.  It seems too good to be true, but it’s apparently “the real deal” – you do get credit report info, no payment info required!

However – it’s worth noting from their terms & conditions of use:

I further understand that by submitting this registration form I am authorizing Credit Karma, once it has obtained my credit report(s) and score(s) for me at any time, to retain a copy of such credit report(s) and score(s) in its records along with the other information I am submitting through this registration form (collectively, the “Registration Profile”), to use that Registration Profile to match me with product and services offers from time to time from its marketing partners, which offers it will send to me either by e-mail (based upon my communication preferences) or through the display of advertisements and to further use that Registration Profile to provide statistical analysis, reports and summaries of my Registration Profile in comparison to other users’ Registration Profiles. I understand that Credit Karma will not be sharing my Registration Profile with any of those marketing partners and that it is completely up to me to decide whether I would like to accept any of the offers I receive.

So in short, if you’re ok with having third parties access your credit reports and personal financial info in order to market to you.. Is that worth having free credit reports?

In short, while your personal info isn’t revealed to advertisers, it is aggregated / segmented into “groups” where Credit Karma can then sell advertising to financial companies looking to market to these specific groups (i.e. by tailored, targeted advertising.)

For example, if one has a home mortgage on file, a mortgage refinance company may find targeting this specific person & group would be far more fruitful then simply doing “shotgun” approaches to promoting its offerings. In a similar fashion, someone that’s falling behind on their bills, have multiple latenesses, and/or delinquencies, may be a prime target for “Debt Consolidation” or “Credit Counseling” companies’ ads.

In the world of advertising, user data is definitely worth money – so in the case of Credit Karma, one would be trading in “letting a third-party read & access their financial data profile” in exchange for “actually being able to access said data without cost.”

Read more about Credit Karma’s business model here:

Just keep in mind: “When a service is free.. YOU are the product!”

– Steven W.C. : Free US Credit Reports, by FTC mandate

While you may have heard of many advertisements and websites offering “free” credit reports, remember that the ONLY truly free site is the one mandated by the FTC –

As some background this site was created back in 2003 by the three major U.S. credit reporting agencies – Equifax, Experian, and TransUnion – to fulfill their obligations under the Fair and Accurate Credit Transactions Act (FACTA).  This website allows US based consumers to receive up to (1) free credit reports per 12 month period from each of the (3) agencies, for a total of (3) credit reports per year.

Since the (3) agencies limit you to (1) report per 12 month period, I usually recommend getting (1) report every 4 months, and “rotating” through the 3 agencies, in alphabetical order to eliminate choosing the wrong agency, as follows:

Jan. 1st – Equifax
May 1st – Experian
Sep. 1st – Transunion

There should be absolutely NO NEED for ANY credit card for a truly free credit report.  (If the site you’re visiting needs payment info, then it isn’t free!)  I recommend checking once every 4 months at / around the suggested times. It will help:
– make sure that the credit agencies have accurate info, with time to fix the credit report if inaccuracies are found
– make sure no new credit lines have been opened without your permission, helping catch identify theft sooner rather than later!

Steven W.C.