Posted By Paul
How, I found this very old posting about personal lending just sitting in my drafts folder.
I'm posting it now even though I wrote this about 18 months ago.
So stay tuned for the epilogue on how it went.
I recently learned a little about personal lending sites. They had me intrigued to the point where I decided to dip my toe in the world of personal lending.
I decided to open an account at Prosper.com and see what it was like lending money to random people.
First of all, it seemed very strange to be browsing listings of total strangers. There was a voyeuristic quality of perusing the loan listings of these people. It was fascinating to see how much money they needed and why (not to mention the interest rate they were willing to pay).
Since I was very new to this whole concept I decided to choose three different loans and loan each $25. The way these pages work is that a person who wants a loan asks for a certain amount, for a certain payback term with a certain interest rate. If the loan looks good you can contribute to the loan.
I chose two loans that were considered lower risk by prosper (with a correspondingly lower interest rate) and one high risk loan (with an interest rate of 31%). All three loans have a 3 year term.
It is kind of cool that you can just contribute $25 to a loan, so the total you need to play around is actually very small. The idea is that if someone wants to borrow $1000 they need to have enough lenders willing to contribute to their loan so that they reach their goal.
There are many strange aspects of this process. Some of the obvious ones:
-I don't honestly know if these people are using the money for what they say they are using it for (the listing says 'to payoff a credit card' but for all I know it could be going to a gambling habit)
-There is the risk that one (or more) of your borrowers will stop paying/declare bankruptcy/move off the grid, or who knows what.
My overall impression of personal lending? When I loaned out the money and every month when I get my payments (so far all three loans are being paid off on schedule) I feel like I'm playing some sort of game. I know that any form of investment can be viewed as gambling, but lending money to strangers using their internet posts to judge the likelihood of being paid back REALLY feels like gambling.
So for me, I think personal lending will just be a fun little hobby. Picking loans and watching the payments come in IS fun, but I don't think I will ever put anything more than "fun money" into one of these sites.
For some of the loans I contributed to I saw people that had made contributions in excess of $1500! I really don't see myself ever doing that. There seems to be so much uncertainty in the process that I would feel uncomfortable committing any significant amount of money to it.
This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.