P2p loans are a relatively new investment that is gaining traction. Prosper and Lending Club are some of the major players in this market. So what are they and how do you make money?
According to Prosper : “Prosper is an online community for lending and borrowing money. Bidding on borrowers’ loans, lenders get great returns by offering great rates.”
The Interest rates on Prosper go from anywhere to 6% to 30%. Their current average rate is advertised at 9.49-12.81%
Alright theres gotta be a catch right?
Lenders have to pay an annual loan-servicing fee based on grade of loan, this fee ranges from .5% to 1%. Lenders are also responsible for collection agency recovery fees on any loans that are more than a month late. This collection fee can range from 7.35% to 20% of the amount recovered.
The major risk on Prosper is the chance a loan will default or payments are made late. Loans that default can be sold off for a discount (sometimes as low as pennies on the dollar). This depends on the credit grade of the loan and once late, loans are turned over to a collection agency. As default rates increase, credit grade decreases; however, as credit grade decreases, interest rates increase. That should be obvious, as more risk should entitle higher rewards.
Another problem with Prosper and other P2P lending markets is the liquidity of loans. The only way to take money out of Prosper is to wait for the borrower to make payments on loans, which are over a three-year period. Just as this isn’t enough just to remind you that Prosper is taxed as ordinary income, which means up to 35% in Federal income tax 
Posted in Money Resources | Comments (0)
