Finance Travels

As you may or may not now, I started an experiment with micro lender Prosper.com in March, 2006, about three months after Prosper opened to the public.  Prosper billed itself as a site where folks could perform peer-to-peer lending – folks looking for money would post a listing on the the site, and folks like me would fill the loan one at a time until the loan was completely filled.  The interest rate was calculated on the borrower’s credit score, debt levels, etc… and was bid down by lenders once a loan was fulfilled.

Between March 2006 and May 2007, I deposited $1,580 into my Prosper account.  I placed successful bids on a total of 51 loans.  In most cases, I funded a loan for $50, as I felt this was an acceptable amount of risk on each loan, and I wanted to reduce my risk by funding as many loans as I could.

Here is a breakdown of how the 51 loans performed (to date):

• Charge-Offs – 12 (23.5%) notes -I didn’t receive full payment in these loans and Prosper has written them off.  I basically won’t get any payments beyond what I’ve already received on these loans.  Prosper does not do a good job of telling you why these loans have been charged off other than they haven’t received payment in 4+ months or the borrower has declared bankruptcy.  Of these 12 loans, I actually did make money on 3 of them (borrower defaulted after I received more than their loan amount in principle+interest).
• Paid – 28 (54.9%) – Over half of the notes I funded were paid in full.  These loans ranged from 8% to 26% interest.  My best case loan (the 26% interest) netted me about $20 in the course of its life.
• Active – 11 (21.5%) – I still have 11 active notes.  Of these, the last is due to be paid in September 2011.

In July of 2007, it became clear to me that Prosper was having some serious financial issues.  I had been following several forums dedicated to discussing borrowing & lending from Prosper.com and many of the “big players” were expressing concern, experiencing extremely high charge-offs, etc…  It was at this point that I decided to bow out and began systematically withdrawing money from my Prosper account as it became available.  It was a good thing that I did, because in October of 2008, the SEC mandated that Prosper no longer fill loan requests until further action was taken (Prosper “reopened” in 2009, but at a much lower activity level than they had been functioning at).

To date, I have managed to withdraw $1,591 from my Prosper account.  I still have loans worth $124 sitting within the system, so assuming no more defaults, I should be able to withdraw at least $1,715.  This represents $135 (8.5% over 5+ years) more than what I had deposited into Prosper.

So was it a success?  I guess it depends on what you mean by success.  I didn’t actually lose money (and a lot of people did), so that’s always good.  However, I could have made the same amount by opening a CD at 1.75% and letting it sit risk free for 5 years.

This has been an interesting experiment, and it was kind of fun picking and choosing loans to fund.  Apparently, I did do an above average job picking loans, as Fred93 reports that 45.3% of Prosper’s loans have gone bad.  I’m glad that I was smart enough to recognize the warning signs early and pulled out of the marketplace when I did.  From here on out, I’ll leave the loan funding to the pros

Finally, from what I have read, it appears as though Prosper is pretty much on the verge of bankruptcy.  I’m not sure what this will mean to the money that I still have in the system.

March is turning out to be one of those months I dread.  Several unexpected expenses have manifested themselves:

• Wife broke off part of a tooth: $280 for dentist visit and new filling
• Clothes dryer just stopped working: $50 for repairman visit to tell us we need a new clothes dryer.  $490 for new clothes dryer.
• Medical procedure for dog: $180

So, combine those with the $125+ we’re paying for a weekend vacation (which wasn’t unexpected, but previously committed to), and we’re up to $1,125 over what we typically spend in any given month.

Fortunately, we have our well endowed emergency fund to handle these expenditures, but it is still frustrating when we’re trying to save up for home improvements.

The one piece of good news is that the new clothes dryer should be more efficient than the ten year old dryer that it replaced.  I really need a Kill-A-Watt for 220V outlets .

Update:  Just found out that our van needs new brakes… Sigh

February ended up being a pretty significant month for us.  Not only do we have a pretty decent net worth increase for the month, but we also hit our emergency savings goal of $20,000.  We did the calculations, and the $20K should give us at least 6 months of emergency funds should one of us lose our job.  In the unlikely event that both my wife and I lose our source of income at the same time, this emergency fund will get us through 3 months easily.  While Dave Ramsey suggests that this money sit in a savings account earning a pittance of interest, we’ll be keeping it in four CDs, each spaced 3 months apart.  Granted CDs aren’t providing a whole lot more interest right now, but they are better than just a standard savings account, and we’ll have enough liquid money in other accounts to handle real emergencies (dead appliance, car repairs, etc…).

Part of the February increase was due to a$3,400 tax rebate check.

Starting from here on out, I’m going to start tracking my investment performance on this blog as well.  I’ll start with our Roth IRAs and start to include other accounts once I determine how successful I’m doing.  I’ll be taking a cue from 2million’s personal finance blog and be comparing my monthly gains or losses with the Vanguard Total Stock Market Index.

I’ve done some initial analysis, and I”m not happy with how my investments have been performing as a whole.  Hopefully this extra step will provide some guidance in how I can start to rebalance my portfolio and begin to beat this index.

Finally, now that we have reached our emergency fund goal, we are going to do a bit of home improvement once we save up the cash.  We are looking at replacing our 11 year old tube television with one of those “fancy” LCDs or plasmas, as well as some furniture upgrades.  My wife has been getting on me about replacing the desk that I bought in college (from Lowes) and while I love that desk, I can see her point.  We are going about setting a budget for the project and we will save up so that we can pay it all in cash.