Opportunity Cost (Part 2)
I've been thinking a bit more about my last post, and I think I should qualify some of what I was saying with regards to the interest rate I am willing to accept.
There are some people out there that are on Prosper with the primary goal of helping people achieve their financial goals. If they achieve a decent interest rate on their money in the process, then they consider that a bonus.
I share this goal, but I don't rank it with the same priority. For me, achieving a risk adjusted interest rate of greater than 11% is the higher priority. And the reason that I don't feel bad about this is because there are an unlimited number of loans to bid on.
Think about it. There are thousands of loan requests out there right now on Prosper. Hundreds more are added every day. From these multitudes, I use screening criteria that I have established to whittle down the pile of thousands to a mere two dozen or so. I am then able to read these requests, and pick from them the ones that I wish to bid on at an interest rate I consider "fair". If I am subsequently underbid by someone else then I move on to the next request. The person I was bidding on has achieved a lower interest rate that would not be considered unfair to those lending the money, and someone else who ALSO has a need gets the benefit of my funds to work with.
This does create more work for me. I have to spend more time reading requests and placing bids if/when I get underbid. The thing is...it's business. You can't "fall in love" with a particular requester. You have to do the math and make a judgement call. Much like doctors in combat, you have to perform triage, and separate those that need your help (funding), those that can survive on their own (funded but lower than my interest rate floor) and those that have no chance of survival (the multitudes that don't get bid on).
So you see, I don't feel bad for getting a high interest rate on my money. The borrower said that they were willing to accept a high interest rate, the market determined what that interest rate will be, and they either get funded or they don't. Either way, I still feel like I am helping people, because there are MANY more borrowers than there are lenders with funds to bid. My bidding helps the overall process.
Comments?
There are some people out there that are on Prosper with the primary goal of helping people achieve their financial goals. If they achieve a decent interest rate on their money in the process, then they consider that a bonus.
I share this goal, but I don't rank it with the same priority. For me, achieving a risk adjusted interest rate of greater than 11% is the higher priority. And the reason that I don't feel bad about this is because there are an unlimited number of loans to bid on.
Think about it. There are thousands of loan requests out there right now on Prosper. Hundreds more are added every day. From these multitudes, I use screening criteria that I have established to whittle down the pile of thousands to a mere two dozen or so. I am then able to read these requests, and pick from them the ones that I wish to bid on at an interest rate I consider "fair". If I am subsequently underbid by someone else then I move on to the next request. The person I was bidding on has achieved a lower interest rate that would not be considered unfair to those lending the money, and someone else who ALSO has a need gets the benefit of my funds to work with.
This does create more work for me. I have to spend more time reading requests and placing bids if/when I get underbid. The thing is...it's business. You can't "fall in love" with a particular requester. You have to do the math and make a judgement call. Much like doctors in combat, you have to perform triage, and separate those that need your help (funding), those that can survive on their own (funded but lower than my interest rate floor) and those that have no chance of survival (the multitudes that don't get bid on).
So you see, I don't feel bad for getting a high interest rate on my money. The borrower said that they were willing to accept a high interest rate, the market determined what that interest rate will be, and they either get funded or they don't. Either way, I still feel like I am helping people, because there are MANY more borrowers than there are lenders with funds to bid. My bidding helps the overall process.
Comments?
posted by ~Scott~ at 9:12 AM
2 Comments:
Thanks Scott for your comments on my blog. I like you approach to Prosper - indeed it is a business and needs to be approached like a business. In fact, social good is built-in in any competitive business. If a person is accepting say a 20% loan then the person is perhaps getting out of a 29% Credit card and hence saving - otherwise there is no reason for the person to take a 20% rate. So - I believe - one should get the interest rate that the market would bear and just the fact that market is bearing the rate means that there is value for society at that rate.
Sanjeev
My blog: Idle Ramblings
Even though we disagree about the fairness of a market-driven economy, I respect that your values are driving your financial decisions.
A very thoughtful post. Keep it up!
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