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
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
posted by ~Scott~ at 9:01 PM
1 Comments:
Hi, Scott.
I've kept quiet because I feel conflicted about Prosper, especially about getting really high interest rates on Prosper. Well, you wanted me to speak up, so here I go. I'm thinking aloud here, so bear with me.
I have been reading your posts on Prosper with interest. Your screening criteria are much more stringent than mine, and I can certainly learn a lot from your method.
However, I have to agree with you. The rates you are charging ARE usurious. I feel uncomfortable earning more than about 15%, even tho I know I'm taking a big risk lending to high-risk borrowers. I just don't think it's fair that I, with all the advantages I've had, can fleece somebody for 20%, 25%, or more, just because they have been forced by circumstances to ruin their credit and rack up huge debts. I'm sure many, even most, of the borrowers on Prosper got where they are today through bad money management, overspending, being irresponsible, etc. But I think there are many borrowers who got where they are today because, unlike me, then didn't have somebody to pay for their education, or help them pay for medical care, or any number of other things.
When I bid on loans, even if I'm bidding on HR borrowers, I never bid more than about 12-15%. Other lenders always bid higher amounts on HR loans, so I do have some loans out that are earning more than 20%. But I feel really uncomfortable with it.
But what should I do? Do I just never ever bid on high risk folks, and only lend money to the people who are more like me and don't need the help as much? That doesn't seem fair either.
I know some borrowers are paying horrific rates on payday loans, etc, and they're happy to pay as LITTLE as 20 or 25% percent on a Prosper loan. So it's arguable that with your usurious rates you are still helping people get out of debt. And you're probably smarter than me in that you have tougher criteria and expect to get more in exchange for the risk you're taking.
Also, I really don't know anything about you. I don't know what your motivations are for your Prosper loans, so I don't presume to judge you. I just know that we have pretty different attitudes about lending, and so I'm not sure that my commenting on your Prosper posts is useful for you, or for your readers.
I don't have a solution. I just feel sort of conflicted about being a lender at all, especially a lender who gets such high rates.
I have a loan in default right now, and you know what? I'm actually sort of glad, because it makes me feel a little bit absolved for being such a parasite.
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