Reader Questions on Prosper

Reader Kevin asks:

Hey there, I just signed up for Prosper yesterday. I’ve been skeptical since the whole registration process asked for access to my bank account, and now I’m reconsidering after reading your post.

Is it worth the hassle? Or is this really just a gimmick to net a few pennies extra?

Dear Kevin,

Let me address the second question, is it just a gimmick? No, it’s not a gimmick. it’s the real deal and real money. Is it worth the hassle? Well, that’s a horse of an entirely different color. You seem to have reservations about linking to your bank account, however, to do all your transactions, Prosper wants to transfer money to/from a legitimate bank account.

That’s your first hassle and it seems a pretty low barrier to entry to me, that’s why I signed up. It’s no different than signing up with PayPal or an online bank like ING Direct. (If you want an ING referral I still have some. Please leave a comment and I will privately email you.)

As far as the rest of it being a hassle, well, I am making about 5.8%APR right now. (You can see me on LendingStats.com) Before one of my loans went into late status, I was actually making something closer to 15%. I just had a loan payoff as well, so that’s probably also depressing the rate of return at the moment. But either way, 5.8% is way better than my online savings bank. Or the stock market this year. I’m willing to assume some risk here for a better return than I can get anywhere else at the moment. (Heck, even my condo is upside soon with all the condo foreclosures/short sales in my area. I checked what’s for sale in my building and I’m definitely upside down by those list prices.)

Though I’m feeling cold about the one borrower who is and has been late, I am willing to take on that risk. It’s up to you to decide your risk aversion. I’m not risk-averse when it comes to investing. I hold zero bonds. But I am extremely risk-averse about other things in life, like motorcycle riding. I wear full gear head to toe. If it’s too hot to wear it, it’s too hot to ride. Period.

So, only you can really answer the question of if it’s worth the hassle. Ask yourself what rate of return you want and if you think you can realistically get it from Propser lending.

Reader Mary asks:

I was considering putting some money into Prosper but was a little leery. I also feel like I should use whatever I can to pay off my credit cards - but I noticed you still have cc debt too, so I was wondering how you figure out how much you get to play around with investing?

Dear Mary,

If you read about investing, you’ll find that most places recommend utilizing no more than 10% of your investments for doing something like Prosper or buying and selling stocks. The other 90% of your portfolio should be in index funds, bonds and professionally managed stuff. I’m inclined to agree with that advice. Ask yourself what you have to invest or what your total investments are. If you have $10,000.00 sitting in a bank account, use only $1000.00 for investing.

I’ve written about this before, but let me reiterate, I have about $300 in Prosper. I have more money saved up in my emergency fund than that. Heck, my monthly dining bill is more than that. This money was never going to go to my credit cards. If so, I would have sent it in by now. If you have credit cards, you should probably pay that off first. That’s what conventional personal financial wisdom would tell you. (At 15%APR though, I was better off with Prosper. My highest credit card rate is 11%. You’d have to figure out what rate of return you needed to beat your credit card interest rate, figure in taxes, etc. Do your math.)

The investment in Prosper represents about 1% of my total savings/investments. It’s not a lot. I’m not sure where you are at, but if you’ve only got $1000 saved, you might not want to put it in Prosper. If you only have $50, again probably not a good idea because Prosper’s minimum lending amount is $50, and that would is a poor risk management strategy. (It’s called ‘putting all your eggs in one basket.’)

None of these questions are easy. That’s why this blog is marked as a Fiscal Challenge. I’m not that great at it either. If you’re looking for real professional advice, try writing in to a CNN/Money or Kiplinger’s, or go see a financial advisor who has a CFP or some sort of professional license. (Series 6 for stocks, Series 7 for insurance.)