Thursday, December 14, 2006
Want to get into banking?
Want to get into banking?
We’ve all, at one time, as investors, been perplexed by the inner workings of the bank down the corner. How to perfectly judge risk and reward ratios and the basics of buying and selling loan assets. Even on the corners as we see Payday loan companies we see establishments that make 30-40% a year on high risk loans. If only we could tap these fountains of wealth, we could micro-loan anywhere from $1 to $25000 and get paid a high interest rate for our assumption of risk.
Payday loan companies offer ridiculously high interest rates to those who simply cant afford them. These companies thrive on the idea that the borrowers take out a loan against their future paychecks, then the payday office receives the paycheck as payment. That is, of course, after high interest rates and other fees are tacked on the price. These companies have to cover high default rates, but are rewarded when a client pays off the loan at a rate higher than the default. These businesses can legally charge hundreds of percent in interest each year and still operate legally in the United States. I’m sure we would all like to earn 30% on our money, even in a forex account I only earn 5.25% per year, 30% would be awesome.
Now there is a way to do it. Much like eBay revolutionized online auctions and selling useless crap, Prosper is hoping to privatize the lending industry. Prosper.com offers high returns for ordinary people like you and me who want to finance loans for people who would otherwise not receive them due to poor credit or high debt to earnings ratios. At Prosper, you can take any loan you would like to, and earn some hefty returns on your money.
Think of it this way. Bob, your co-worker has $10,000 of credit card debt which charges him 20% in interest each year. Lets say you decide that to make some money, and help out your poor friend Bob, you pay off his credit cards and he will pay you 15% a year in the form of a monthly payment. You’re getting 3 times the best bank rates in the country and helping someone out. You will also receive monthly checks, producing cash flow which can be reinvested in other loans or some more traditional investments.
Prosper.com allows anyone to invest in the lives of others. The borrowers post their ads like you would see on eBay, complete with profile of how much the borrower earns along with an expense schedule. The wanna be borrowers basically have one page to spill their guts, whatever story they happen to have for money trouble. About 50% of the stories posted seem to be involving credit cards or other high interest loan schemes such as the payday loans I discussed earlier.
Lenders can choose how much they would like to loan to each borrower, a minimum of $50 is imposed by Prosper. The lenders bid by interest rate, the lowest interest rates will always win. Some lenders offer $500-1,000 to the borrower and some are consistent $50 loaners. Prosper allows investors to spread risk amongst however many loans the site has to offer and the lenders have to lend. Someone with $10k could loan all of it to one person, or make 200 separate $50 loans.
Prosper shows all the information necessary about an individual. Their earnings to debt ratio, credit rating, and a suggested interest rate provided by the person seeking capital. The borrower can offer additional information which can only assist him or her in their search for money. The site has a groups section, basically when someone joins a group, the group offers its name basically as a consignor. The group incurs no monetary loss if a member fails to make a payment or makes one late, but members of the group are expected to be responsible and possible lenders can check on the stats of a group to see its history on payments. The group gains by collectively getting lower interest rates if all the members are responsible members of Prosper.
Prosper recognizes the risk of members skimping on payments because this really isn’t a true financial institution. However, Prosper reports all payments to the three major credit bureaus in order to keep its borrowers in line and as an insensitive to pay on time.
How it works exactly:
1 The borrower posts an ad, basically an option in order to get the cheapest interest rate possible. They have to sell themselves, listing all of their credentials and information. Borrowers are allowed to ask from $1,000 to $25000 for whatever reason.
2 Lenders offer their best interest rates and the amount of money they are willing to lend to the person seeking capital. They must conform to the interest rates set by the borrowers. If the borrower sets the rates too low, the borrowers will not take the loan because of the amount of risk involved. The minimum lenders are able to lend is $50 with a maximum of $25,000, the max people are allowed to borrow on the site.
3 Borrowers accept the bids and receive a bank transfer from Prosper in the amount that was accepted. Each month, the amount of the loan payment is debited from the borrower and divided amongst the investors by the amount each investor loaned. If a borrower is late on a payment, Prosper acts also as a collection agency, working to collect the money on the investors behalf. If the borrower ceases to make payments, it is reported to the big three credit agencies.
Lenders can make some serious returns on their money on prosper. I have seen high risk loans go for as high as 29% while low risk loans to AA+ credit members go for 7-8%. The low risk loans on Prosper offer 40-60% higher returns than that of your low risk money market accounts so for the low risk investing I would say it is worth it.
Prosper sends you monthly checks for the interest you collect on your loans. This allows for heavy compounding because each investment carries a minimum of just $50. With just a few thousand invested, you would be able to make new investments each month for greater monthly income. Check it out, its worth a shot. Help others and yourself from this high-yield, low and high risk, investment vehicle. http://www.prosper.com