Keeping your Prosper.com money working
June 27th, 2006 | by mbhunter |Several people responded to my post on a Prosper.com vs ING return, in which I pitted a 4.25% online savings account return against lending the same amount at 8% on Prosper.com. The 4.25% online savings account outperformed the 8% loan over three years, because the interest in the savings account is a compounded return of the entire deposit, whereas the interest part of the amortized payments on the loan declines as the loan progresses.
The commenters said that it would have been better to have my money work for me as it gets paid back, either by reinvesting it or by transferring the payments back to the ING account. This is absolutely true, especially since it earns nothing sitting unlent in my Prosper account.
For the amount of money I invested initially in Prosper.com ($100) I would need to transfer the payments out to take advantage of this, because the payments total only a little over $3/month, and there’s a $50 minimum bid. This takes some of the fun out of getting the money back into ING, since the transfers are not instantaneous.
The better option, though a higher-risk option, is to re-invest in Prosper.com. To do this from the start, though, you need to put in some relatively serious cash so that the payments total more than $50 after the first month. Otherwise, you have to wait until they do to bid on another loan.
So as an example, let’s say you win a bid to lend $1,600 at 10% (after fees). The payment back is $51.63, which can be lent out again. If this is lent out at 10% again, the payment on this loan is $1.67. Both payments then sum $53.30, which can be lent out again to produce a payment of $1.72 at the same interest rate, and so on.
It’s much easier to keep the reinvestments happening once you have at least $2,000 lent. Less than that and you need either a very high rate of return or good borrowers who pay on time. Once you have a critical mass of loans in your portfolio, you can pretty much have money in your account most of the time to lend out, and you can play with some higher-risk loans without derailing reinvestment for AA-rated bread and butter loans.
(Then again, if this is still too risky and you don’t have an ING Orange Savings account, I can hook you up with $25 for getting one! Just let me know!)
9 Responses to “Keeping your Prosper.com money working”
By ~Dawn on Jun 29, 2006 | Reply
Also, what if the borrowing pays off the loan early as well, I would thing that cuts into things as well.
By mbhunter on Jun 30, 2006 | Reply
Hi Dawn, thanks for the comment. Actually if it’s reinvested quickly enough the return is actually better than if it had gone to maturity. The interest on an amortized payment is front-loaded.
By ~Dawn on Jun 30, 2006 | Reply
I have no idea what you just said. “interest on an amortized payment is front-loaded” ???
By mbhunter on Jun 30, 2006 | Reply
Hehe … probably meant to say “interest on an amortized payment SCHEDULE is front-loaded.” Meaning that a larger portion of the total you interest you pay on the loan is paid at the beginning of the loan than at the end — it’s front-loaded. This is good for the lender because the largest interest payments are at the beginning.
By ByteMark on Oct 28, 2006 | Reply
I am a Prosper.com member now and I am doing almost exactly what you say, except for half the cost. Basically what I do is fund the difference between the payments (Prin. and Int.) and the next loan value at $50 on an approx. bi-weekly basis. I am now down to $40 and will be about $35 in another 2-3 loans. And one more way to hedge the bet is that now for my 11th loan, I bid and won $51, while the next will be $52 and so on. This may seem small now, but the secret is in the stacking of the loans and later that extra few cents per month payment will snowball.
By Scott on Sep 22, 2007 | Reply
Columbia Savings and Loan was known as the best managed S&L when they followed a similar idea. They invested in high yield junk bonds. They got a high rate of return using cheap money that more than covered some losses from defaults. I am doing the same thing on prosper. Columbia got into trouble when they lost money in the stock market in the 1987 crash.
By locogumby on Dec 30, 2008 | Reply
Does anyone know where I can find a calculator which calculates the scenerio mentioned? If I loan $1,000 at 10% interest for a 3 year term and reinvest the monthly payments (principle + interest) at the same 10% interest and 3 year term loans, how much will my money grow? Lets pretend there are no defaults.