This isn’t going to be some post about why I think payday loans are a great investment. I’ve never gotten a payday loan myself, so I’m not talking about my personal user experience either. I’m not even going to discuss whether payday loans are good or bad.
What I’m talking about is how payday loans are helping me get a good return on my money! No, I’m haven’t started a check advance loan business that lends money out to people at 200% per year. I’m just helping out people who are already stuck in the vicious cycle of payday loans and who can’t seem to get out of it.
Payday loans come with fees that usually range between $15 and $50. Assuming you’ve taken out a $100 loan for 2 weeks until your next pay period. You’re charged $15 which is 15% of your total. This works out to 390% annualized, so if you can’t pay off the $100 and it rolls over a few times, pretty soon you’ve paid 50% interest. Some people get into a situation where they can’t pay off the first loan and they take out a second one. Eventually they’re paying a few hundred percent interest and they can never get out of this cycle.
That’s when they hear about Prosper and use it to try and break the vicious cycle. I’m currently lending money on about 50 loans on Prosper. About 10 of them are payday loans. While I’ll have several defaults in the past 18 months, none of my borrowers who borrowed to pay off their payday loans have ever defaulted. I’m not sure if such borrowers are statistically less likely to default than other borrowers, but from my experience (which could be biased due to my personal lending criteria) it certainly seems that way.
I think if a borrower is paying 200%+ in interest to payday loan business, he’s ecstatic at paying me 27% a year. At least he knows he can pay me off in 3 years, unlike the other place where it seemed like a slow death-spiral. I’m overjoyed at getting an buffett-matching rate of return on my principle too. It’s the perfect win-win (except for the check advance loan guys!).
That’s why I love payday loans. They make me look good! And of course I love Prosper for making this possible.
Payday loans can be helpful, if you use them responsibly. Never get a cash advance that you can’t afford to pay back on time. Make sure you know what you’re getting yourself into before taking out one of these loans.
Micro-lending is one of my 20 passive income streams. I currently have 45 loans on Prosper.com, lent out at an average rate of 19.55%. Even though I’ve had a few delinquencies, my capital has grown 14.5% in the 15 months I’ve been a lender. I’ve learnt a few things about lending and how to protect your principle. While I won’t explain how to lend money on prosper, I will explain how not to lend money!!
Here are the Top Ten Worst reasons to lend money to borrowers:
- You think they’re hot!
- You feel sorry for them.
- They have a picture of a cute kitten or puppy (or supermodel) in their profile.
- They’re 95 and need money for medical bills.
- They’re a Californian real estate investor and are willing to pay 20% interest for a remodel.
- They need $25,000 for college and are willing to 25% interest for it.
- They’re terminally ill and need a new fridge.
- They look like they’re 65 and are smoking in their photograph.
- They make $200,000 a year and need to borrow $5,000.
- They’re buying a business and want borrow the 20% down-payment.
So far I’ve had a really good experience with micro-lending on Prosper. Prosper also has a new tool that automatically calculates the estimated chance of loss based on several criteria like the the borrowers credit and number of delinquencies. That gives you a good idea of what minimum interest to charge to overcome your losses.
If you’re interested in signing up, Prosper is offering a $25 incentive to new lenders.
I’ve been lending money on Prosper.com for nearly a year now. I’ve been getting a pretty decent rate of return, despite having had a couple of borrowers default.
I’ve also made over $200 from referrals fees! Whenever anyone signs up using the referral link and funds atleast $50, we both get $25. If a borrower signs up, I get $125.
And to add to that, Prosper is now a paid advertiser on my blog. Not only are they offering referrals rewards, but they’re also paying me to put their link up!
I guess they’ve had such success with the program that they can afford to be extremely generous. If you have a blog you can start making extra money by doing just 3 very simple things:
- Sign up using this referral link.
- Fund your account with $50 and lend it out. (ok, you don’t need to do this, but considering you get $25 almost immediately, where else are you going to get a 50% return on your money?)
- Email me at livingoffdividends$$gmail.com (replace the $$ with @) with “prosper referral advertiser” in the subject field, and I’ll put you touch with the rep at Prosper.com
Not only will you get a check from Prosper for advertising, but you’ll still get the referral rewards too!
If you don’t have a blog, you can do steps 1 and 2 and get a referral link or an image button from Prosper.com which you can put in your email signature to generate some extra money.
I started lending money on Prosper.com about 10 months ago. I started out with a total of $1900 in my account. I’ve been mainly targeting people with D and E credit who seem have steady jobs but got into the payday loan trap and can’t get out. My average interest rate is about 19.4% right now and I usually lend out the minimum $50.
I’ve been reinvesting all the interest payments I’ve received. So far I’ve made loans to 40 people and I’ve had 2 defaults and 1 currently late loan – two of which were from Prosper’s auto-pay, which I don’t really recommend using. One of the defaults had a B rating!
Currently my account is worth about $2106, which gives me an annualized return of about 13%. Not bad at all.
If I don’t have any more defaults, this might increase slightly. Even if I get 1 more default, I should still get an annualized rate of 9%, which is about twice what I get in a savings account.
Why should Visa and Mastercard make all the money!
Lending money to friends and family can be a strain on the relationship (not to mention your finances). Seeing that you’re doing well, everyone wants to hit you up for a small loan. If its a short-term thing its fine, but if you’re worried about the borrowers ability to repay your loan either due to poor financial responsiblity or income limitations it sometimes becomes difficult to say no.
One way is to steer them towards micro-finance sites like Prosper.com. Tell them that if they sign up on Prosper, you’ll contribute as much as you can towards their request and also give you a recommendation.
This helps you in several ways:
1. It doesn’t sound like you’re saying no. You’re trying to help them and will even
contribute towards their loan.
2. You get paid interest. This is based on their credit history. The better they’re
credit history, the lower the rate.
3. You don’t have to keep on asking them when they’ll repay you and they don’t have to avoid you because they feel like stiffing you. (Isn’t it amazing how people who don’t have enough money to repay you still seem to have enough money to spend on movies and fine dining?)
4. Their credit is on the hook if they don’t repay you. Even if you lose money, atleast they didn’t get away without incurring some loss. You don’t even have to bug them. Prosper will pass on the info to collections after a few months of non-payment.
Prosper is also currently running a promotion. If they sign up using the referral link, both you get $125. If they join your group, you get group rewards which can be a % of the loan and an ongoing % of the monthly payments! If you refer a lender, then you both get $25.
You can even borrow money from friends and family this way. If you need a small loan just sign up on Prosper and forward your request to your friends. The smallest amount they can lend you is $50. If your friends can’t lend you $50, you need to find richer friends or (more likely) to work on your image!
Prosper.com has now started giving out $25 referral fees if you sign up through an affiliate link!
It doesn’t matter whether you’re a lender or a borrower, you still get the $25. Don’t know when it started but it ends on August 31st 2007.
Great time to join if you already haven’t. I’ve been lending out money at around 18%.
1. Don’t lend money to people to get cars.
Anyone with a pulse can get a loan on car. If they sell the car, wreck it or it otherwise gets repossesed, their motivation to pay off the loan will drop to nil.
2. Don’t lend to people who are terminally ill or very old.
That sounds cruel but unless you’re in it for charity(and I admit, I’ve made one loan like that which surprizing hasn’t defaulted!) I suggest skipping this class of people.
3. Avoid people with a large number of delinquencies.
People who’ve had a dozen in the past 12 months are not good candidates for lending money!
The Saturday edition of the Wall Street Journal had a good report on how Prosper.com is working out.
Based on the borrowes credit score, lenders can get between 8 and 24%. A lot of borrowers aren’t getting enough responses for their requests because the rate they are offering is too low for their credit rating [which is set by Prosper]. People with bad credit [termed as High Risk borrowers] are offering 10% when they should be offering over 20% and these requests usually generate no interest. People trying to borrow money for weddings are also having a tough time. However borrowers with stellar credit can get money for almost anything.[like trips to europe and flying lessons!]
If the loans go bad, Prosper has hooked up with 3 collection agencies who’ll then try to collect. Prosper makes a 1% cut from the borrowers and a 1/2% servicing fee from the lenders.
The author of the report had made 300 small loans with an average return of 21%. [I’m thinking that might be a typo, coz otherwise he’s funded 30% of loans through Prosper till date]. No one has defaulted although 8 people are late on the payments.
I’m not sure Prosper checks the borrowers debt-to-income ratio but I think they should.
I think I’ll try to borrow money from Prosper. Maybe run an experiment and see if I can raise $250k to invest in real estate. With 2nd mortgages on investment properties running over 10% right now, it would be sweet if I can get money for those at under 9%.
Check out this related post about investing in notes.