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  • How One Investor Earns 16% Investing In Peer To Peer Loans 0 comments
    Aug 21, 2012 2:53 PM

    Ken is the name of the investor that runs the website, which tracks the performance of loans made through the peer to peer lending companies Prosper& Lending Club. These companies allow you to lend your money to individuals for paying down credit card debt and other types of loans instead of loaning your money to companies.

    According to the site, Ken has $189,000 of outstanding loans made through Prosper. He is not only an evangelist for peer to peer investing, he has backed up his talk with a serious financial commitment. According to the LendStats site, Ken is currently averaging a return of $16.4% on his peer to peer loan portfolio.

    Can you replicate Ken's success?

    Ken does far better than the average investor who buys loans through Prosper. The average return on the category of loans which Ken buys ("D" rated which are moderate to high risk) is 9% for loans issued between 2010-2012. The return represents the interest rate on the loans (in the mid 20% range) minus losses on unpaid loans. How is Ken outperforming the averages?

    I haven't spoken to Ken, but my guess is that he does his own analysis on which loans are likely to miss payments and default. Both Prosper and Lending Club provide lots of information about the characteristics of the borrower and the default rate on their loans. In theory, all this should be factored into the borrower rating. However, ratings criteria tend to be backward looking rather than forward, providing opportunities for astute investors.

    Here are some interesting findings when looking at the data:
    • Loans made for the purpose of buying a car or paying down credit card debt have low default rates (sub 3%)
    • Loans related to a business enterprise have a very high default rate (around 10%)
    • Borrowers with monthly incomes above $10,000 have half the default rate of borrowers that make less than $10,000 a month. While this should be accounted for in the rating of the loan, the return to investors on these high income borrowers appears to be about 3%.
    • Surprisingly, employment history (how many years the person has been at their current job) seems to make no difference in terms of loan losses. However, the age of the person (the number of years the person has had a credit history) does. You're better off loaning money to a person that has over 5 years of credit history.

    With these factors in mind, you might be able to find loans that have lower losses than the average.

    For more visit the peer to peer lending section at Learn Bonds.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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