I feel a bit like Shakespeare's Shylock

Well, I've finally managed to get the initial $150 lent out on Prosper. It took awhile to find good listings and then bid on them at interest rates I considered acceptable for each credit grade. It also took a ridiculous amount of time for my deposits to "clear" Prosper's transfer system. My personal threshold for each credit grade looks something like this:

Risk/Return Limits for each Credit Grade
AA - 12% A - 12% B - 13% C - 15% D - 18% E - 22% HR - 24% NC - 24%

So, essentially, even when I found what I would consider a "good" listing, meeting all of my criteria...I wouldn't necessarily get my money into that listing because I got under-bid a couple times. Still, the average interest rate I'm getting on my three loans is a positively usurious 25.21%.

And that is the word of the day folks. Usurious...literally means practicing usury. What is usury, you ask? Usury is the practice of lending money and charging the borrower interest at an exorbitant or illegally high rate. For a practical lesson in usury and the consequences thereof, take the time to read "The Merchant of Venice". A little Shakespeare never hurt anyone. ;-)

Now, what I have done is not illegal. After all, Prosper limits you to the state lending limits on any loan, so I clearly have not broken the law. I also have not charged anyone an interest rate that they were not willing to accept, since they obviously applied for their loans at an even HIGHER rate and got bid down. Still, that being said, a 25.21% rate of return on my investment capital (assuming that they don't default on their loan) seems ridiculously high. The only reason I can fathom that someone would accept an interest rate this high is if they are either A) desperate, or B) being charged something EVEN HIGHER somewhere else. *shudder* Maybe they borrowed money from the Mob at 100% daily interest or something. I don't know.

Still, I think that I'm helping people get their lives back on track. All of the people I lent money to are attempting to rehab their credit and get out of debt. This prosper loan consolidates most of their debt into one payment with a definite (3 year) time-table for pay-off. Some people don't have the discipline to continue paying a set amount towards a credit card each month, and habitually pay the minimum payment...keeping themselves in debt for years longer than necessary.

Worst case scenario, I lose my $150 because no one pays me. Best case scenario, everyone pays me back, and I earn $217.82 (without re-investing) for my trouble over a 3 year period.

If all goes extremely well though, and I can continue to re-invest my principle into other loans, I expect to return no less than 18% annually, which would double my money every 4 years!

At $1500 invested (30 loans) the process becomes self-sustaining (theorectically) and could continue to compound at an incredible rate.

If it were possible to double your money every 4 years, then $1500 could become over $1.5 million in just 40 years, with no additional money invested. Unfortunately, that's not possible....mainly because there are a limited number of "quality" loans out there that you could re-invest your gains into with the expectation that you would not get a significant number of defaults.

Think about it. $1500 is no trouble to invest. Neither is $3K, $6K, $12K or even $24K. Once you start getting up to around $48K though...how do you spread that out and still maintain an 18% annual return? Answer? You don't. Your rate of return (of necessity) drops because you are forced to spread your principle among other credit rates and in larger denominations in order to "keep it in play". Still...even if it drops to 12% or less...that is still pretty damn good.

:-)

I'll keep you posted on my Prosper progress!
~Scott

24 Stock picks for the next 24 months

An equally balanced portfolio of these 24 stocks (in my educated opinion) has the potential to double in value over the next 24 months.

ALJ CAMD CHINA CMI CX DHI ELN EZPW GRMN HANS HCSG HITT KBH MED NUE PCU PHI RFMD RS TWGP UARM VCP WFR WIRE

It's got enough diversity to protect you in case one of them goes ka-blooey, and they've each got all the fundamental factors in place for a big rise in share price. I would like to point out that if you had invested in these stocks 24 months ago, you would currently be up 116.79% in your portfolio over-all. However, hindsight is 20/20…and past results are no guarantee of future returns…but, that being said…I'm pretty good at this, so if you had some money to bet on the stock market, these stocks would be a good place to put it.

Just my 2 cents.

My Prosper Screening Criteria

I am going to make my first loans today, but before I did that, I set up quite a few different screens under the advanced search options to see how different factors affected default/late payment rates.

I look for no more than 2 current delinquencies, and no more than 6 serious delinquencies in the past 7 years. I also screen out people that have over 30 open credit accounts, and those that have less than 5 years of credit history (though that one could be scratched, it's just a personal preference). I also don't like to see more than 2 public records for someone I'm going to lend money to, becuase that says to me they've had/have SERIOUS legal problems. Finally, and probably most importantly, I don't like to lend out to anyone with > 30% DTI ratio. Admittedly, the Prosper method of determining DTI is pretty screwed up...but all of these criteria are based on a search of the historical Prosper statistics for default and late payments.

After I get my screened list of people, then I read the listings to see if there is one that I like. I'm looking for something that personally tells me it's a good loan, and I'd also like to see that the Group Leader has bid on it. If it is over 33% funded already, that's a bonus, because it means the rest of the Prosper community agrees with me that it's a pretty good risk.

Finally, I'm a pretty greedy bastard...so I'm looking for the holy grail of investing (% returns that are > average S&P 500 historical returns of 10.5% annually). I used the default rates to adjust my risk/return minimum interest rate based on credit score. So, for example, a guy with a AA rating I would loan money to at 11% (though he probably wouldn't take it at that interest rate) and a guy with an E credit rating I'd loan to at 22% (and he probably would take it). For the record, MY credit rating came back as an "A" when I set up a loan for testing purposes. I withdrew it before my group leader could approve it because the last thing I need right now is more debt. That being said, I imagine that my "portfolio" on Prosper is going to be disproportionately focused towards C credit risks or lower...if only because they have the highest chance of paying me a "holy grail"-type interest rate. I'm counting on my VERY selective screening process to eliminate defaults and late payments. The criteria I set up (supposedly) should result in a less than 1% late payment rate and a 0% default rate. We'll see if that holds up. If it does, then I think a lot of people might copy this screen and we'll get a lot more loans funded in the high risk categories.

I think that Prosper will probably require a minimum of $1500 total to become self-sustaining (the point where monthly payments from loans exceeds the minimum bid requirements). It will probably take me two years of putting $50 per month into Prosper in order to create a self-sustaining system...but by that time, we'll know if the Prosper experiment works or not. If it doesn't, then I'm out at most $1500...if it does...then I may just move a significant portion of my investment money into Prosper, because the opportunity cost of having it elsewhere would be significant. To put it simply...why settle for 4% annual returns (ING) or 10% annual returns (stock market) when you could be getting 22% annual returns (Prosper)?

Oh Happy Day! Oh USAA!

OUT-FREAKIN'-STANDING! *lol* Man, I am so pumped right now. I just got off the phone with USAA, and let me just say...they totally rock! I originally called to tell them that my wife had gotten an active alarm system installed in her car, so could they please lower my insurance premium...and while I was on the phone with them, I mentioned that they had sent me a pre-approved offer for 7.25% financing on an auto loan...fully 1% lower than what I am currently paying. So I asked them, "Can I just get the 7.25% on my current loan?" And do you know what they told me? They said, "Actually, SSgt Webb, we can go ahead and change your rate to 6.99%!" SWEET! This will save me a month and a half in car payments on what would already have been an accelerated repayment plan. My original loan started 1 Sept 05 and was due to run for a full 72 months. With the way I had been aggressively paying it down, it would have lasted ~40 months. Thanks to USAA lowering the interest rate, we're down to 38 months total! Whoo-hoo! That will be just in time for my wife's 26th birthday, and just after my 30th. *sigh*

I'm thinking of that Tim McGraw song, "My next 30 years." Great song.

Oh, and I'd also like to say how cool it was to get my first comment from TiredButHappy! She made my day. :-) Thank you so much for your response to my post.

~L8r!

Financial Fatigue

Every so often, there are days when you just want to take the budget that you've been carefully adhering to for so long and just chuck it out the window. Some days are worse than others. Every time my wife mentions something that she wants, I wince inside. I mean, lets be real here...there are things that I want too...NFL Sunday ticket for example...or the chance to go pursue my dreams of playing on the WPT...but I know that those things can wait. Or at least, I keep telling myself that they can wait. Sirius Satellite Radio...window tinting for my car...a PlayStation 3...*sigh*

All pipe-dreams for now. I've been doing this for 5 years now. Admittedly, I haven't been blogging about it...and I've had moments of weakness along the way, times when I pissed away money gambling or drinking that could have been better spent elsewhere...but everytime it seems like I'm getting closer to debt free, another debt rears it's ugly head to be paid. Like a Hydra, I keep whacking them down, only to see them rise up twice as big someplace else.

Now, progress has been made...I can't argue that...I have a positive networth, a steady job, and I am saving (currently) 13.17% of my GROSS pay each month. Considering that I'm an E-5 in the military, that's not too bad. My take home pay is less than $3000 per month, and I feel I'm doing pretty well to save as much as I do.

Still, it irritates me to no end to read stories on other personal finance blogs about people who make anywhere from twice to three times as much as I do whine about their debt load. I gaurantee you, if I got a raise from the 33K per year that I make in take home pay now to about 75K in take home pay (like some of these other bloggers) that I would be debt free (to include my mortgage) in under 5 years. Extrapolating out a bit, that extra 42K of take home pay would have me retired as a millionare in just under 20 years...and that includes a couple serious upgrades to my lifestyle.

The worst part of it all is...it's not like I can just get a better degree and make more money. I can't change jobs any time soon either. I can get promoted, but believe me, that's not as easy in the Air Force as it is in the rest of the branches of the service, and I'm already WAAAAY ahead of the curve in that department anyway. So what am I supposed to do? It would be difficult in the extreme to cut spending any more than I already have...and I already work too many hours as it is to want to think about taking on a second job...so what is the solution here?

*sigh*

I just want to go on a shopping binge and buy some nice toys to play with for awhile.

But what would that accomplish? Nothing. It would put me a few steps backwards on my journey to financial freedom. So...with the discipline of the last few years...I will press on. Hopefully, by May of 2009, the only debt I will have will be my mortgage.

I will be a millionaire one day. All it will take is a paycheck, patience, and time.