Friday, November 15, 2013

A Potentially High Interest Investment that Can be done with Christian and Socially Conscious Principles — Peer-to-Peer Lending

Prosper, a peer-to-peer lending firm, offers opportunities for a high-interest investment—it advertises an average return of around 9%.  What is peer-to-peer lending?  The adequate summary below is from an article in Wikipedia:

Peer-to-peer lending (also known as person-to-person lending, peer-to-peer investing, and social lending; abbreviated frequently as P2P lending) is the practice of lending money to unrelated individuals, or “peers” without going through a traditional financial intermediary such as a bank or other traditional financial institution. This lending takes place online on peer-to-peer lending companies’ websites using various different lending platforms and credit checking tools. . . .
Most peer-to-peer loans are unsecured personal loans, i.e. they are made to an individual rather than a company and borrowers do not provide collateral as a protection to the lender against default. Business loans, including secured loans, are offered by some companies.
The interest rates are . . . fixed by the intermediary company on the basis of their analysis of the borrower’s credit. Borrowers assessed as having a higher risk of default are assigned higher rates. Lenders mitigate the risk that borrowers will not pay back the money they received by choosing which borrowers to lend to and by diversifying their investments among different borrowers. Lenders’ investment in the loan is not protected by any government guarantee. Bankruptcy of the peer-to-peer lending company that facilitated the loan may also put the lenders’ investment at risk.
The lending intermediaries are for-profit businesses; they generate revenue by collecting a one-time fee on funded loans from borrowers and assessing a loan servicing fee to investors, either a fixed amount annually or a percentage of the loan amount.
Because many of the services are automated, the intermediary companies can operate with lower overhead and provide the service cheaper than traditional financial institutions, so that borrowers may be able to borrow money at lower interest rates and lenders earn higher returns. Compared to stock markets, peer-to-peer lending tends to have both less volatility and less liquidity. . . .
The modern peer-to-peer lending industry in US started in February 2006 with the launch of Prosper, followed by Lending Club and other lending platforms soon thereafter. Both Prosper and Lending Club are located in San Francisco, California. Early peer-to-peer platforms had few restrictions on borrower eligibility, which resulted in adverse selection problems and high borrower default rates. In addition, some investors viewed the lack of liquidity for these loans, most of which have a minimum three-year term, as undesirable.
In 2008, the Securities and Exchange Commission (SEC) required that peer-to-peer companies register their offerings as securities, pursuant to the Securities Act of 1933. The registration process was an arduous one; Prosper and Lending Club had to temporarily suspend offering new loans, while others, such as the U.K.-based Zopa Ltd., exited the U.S. market entirely. Both Lending Club and Prosper gained approval from the SEC to offer investors notes backed by payments received on the loans. Prosper amended its filing to allow banks to sell previously funded loans on the Prosper platform. Both Lending Club and Prosper formed partnerships with FOLIO Investing to create a secondary market for their notes, providing liquidity to investors. Lending Club had a voluntary registration at this time, whereas Prosper had mandatory registration for all members.
This addressed the liquidity problem and, in contrast to traditional securitization markets, resulted in making the loan requests of peer-to-peer companies more transparent for the lenders and secondary buyers who can access the detailed information concerning each individual loan (without knowing the actual identities of borrowers) before deciding which loans to fund. The peer-to-peer companies are also required to detail their offerings in a regularly updated prospectus. The SEC makes the reports available to the public via their EDGAR (Electronic Data-Gathering, Analysis, and Retrieval) system. . . .
As of June 2012, Lending Club is the largest peer-to-peer lender in US based upon issued loan volume and revenue, followed by Prosper. Lending Club is currently also the world’s largest peer-to-peer lending platform. . . . With greater than 100% year over year growth, peer-to-peer lending is one of the fastest growing investments. The interest rates range from 5.6%-35.8%, depending on the loan term and borrower rating. The default rates vary from about 1.5% to 10% for the more risky borrowers.[15] Executives from traditional financial institutions are joining the peer-to-peer companies as board members, lenders and investors, indicating that the new financing model is establishing itself in the mainstream.
You can find out more about investing with Prosper by clicking on this button:



What I find particularly attractive about peer-to-peer lending is the possibility of its being a Christ-honoring investment. Borrowers state their income and can disclose their occupations (the large majority do so–I do not fund those who choose not to), and you can choose what occupations you wish to fund.  You can fund the architects, the dentists, the police officers, and so on, but refrain from funding abortionists, bartenders, and others who make their livings from vice.  There are two ways to do this.  You can either look at each individual’s loan and see where he works, and whether or not that is an occupation that fits Biblical principles, or you can use Prosper’s automatic investment tool to automatically pick loans that fit the criteria you select.  I only invest in borrowers with (among a few other criteria) a credit score above 660, no current delinquencies, no public records (that is, defaults) in the last ten years, a debt-to-income ratio of 35% or less, and at least two open lines of credit.  They must also have opened their first credit line at least ten years in the past, have been employed for five years or more, and have no other credit inquiries in the last six months (that is, they aren’t applying for a Prosper loan because they are desperate).  Most importantly, I only fund loans for those whose field of work is Biblically acceptable.  All of the above requirements are built into my automatic investment criteria.  I like Prosper better than Lending Club, Prosper’s main rival, because Lending Club does not have the auto investment tool that Prosper does—the only thing similar requires a $25,000 investment minimum and charges you 0.8% on your investment, while Prosper’s tool is free.  Furthermore, Lending Club does not have an auto invest feature that allows one to select occupations the way Prosper does, requiring that someone who wishes to invest Biblically must, in a time-consuming way, investigate each individual borrower’s workplace.

While it is possible to auto invest in only Biblically acceptable occupations with Prosper, unfortunately the occupations listed do not have enough specifics to keep only ungodly occupations out—some legitimate people are removed also.  For example, to get rid of abortionists you, unfortunately, cannot auto invest in doctors at all, so the family doctors and the surgeons go out with the abortionists;  to safely remove those who serve alcohol, you have to not auto invest in waiters and in food service.  I have asked Prosper about this, and they have expressed some interest in making socially conscious auto investment easier, although nothing has happened along these lines at this time.  When I spoke to Lending Club, they did not seem to have any interest in what I was saying.  That is another reason I prefer Prosper to their main competitor, Lending Club.  If either company made it easier to explicitly invest in a socially conscious way, I would immediately recommend that one over the other—as the situation stands, it is significantly easier to invest in a Biblically principled way with Prosper, so I recommend their company over the competition.

The reason auto invest is important and it is time-consuming to look at individual loans is because diversification among many loans is important to reduce the risk of default.  One can invest as little as $25 in an individual loan, and investing small amounts in a lot of loans is a wise strategy.  If one invests in a lot of loans, and a few go bad while the others return a great rate of interest, everything will be fine—but if one invests, say, $5,000 in a single loan and that loan goes bad, everything is certainly not fine.  Diversification is important.

If you are considering an investment in Prosper, I very highly recommend that you read their prospectus first.  It tells you everything that can possibly go wrong with your investment–which you ought to know.  Peer-to-peer lending, while it offers the potential of high rates of return, is by no means without risk.  You should diversify your investments, not put all your life savings in peer-to-peer lending.  Look at other options for Biblically responsible investing, such as the Timothy Plan family of funds, in addition to looking at Prosper.  However, I think that Prosper loans are worthy of being in a diversified investment portfolio–they are part of mine. If you want to get started, click here:



Furthermore, if you are in debt, you may be able to get a lower interest rate with Prosper than what you are paying on your credit card.  You should get out of debt as soon as possible, and then stay out (Deuteronomy 15:628:11-12Proverbs 22:7Romans 13:8).  Taking out a Prosper unsecured loan for any other purpose than to pay off higher interest debt is going to be extremely difficult to justify Biblically, and if you are not taking out a loan with the intention of paying down and getting out of debt–and then staying out–I do not recommend that you borrow money with Prosper.  However, if you want a lower interest loan to get out of debt faster, you can find out more about borrowing with Prosper here:



You can also search the Internet to find reviews of both Prosper and Lending Club, and various strategies people employ to increase the likelihood of their receiving a higher rate of return.  However, be aware that many people who discuss the subject have a financial interest in the companies–if one opens an account through the banner ads they display, very often they get some money themselves.  (Full disclosure:  I will be financially compensated by Prosper if you open an account with them using the banner ads above.  However, I believe that I would write this same material even if that were not the case.  If you are bothered by this fact, just go to Prosper.com and open an account there directly, and I will not make anything.)


May God give you wisdom to be a good steward of all the financial resources He has given you, and may you glorify Him with them all.

-TDR

6 comments:

Bobby Mitchell said...

Brother Ross,

I appreciate you posting this information. It is something that I plan to look into.

Alex Rodgers said...

I have been working with the http://www.mutualfundstore.com and it seems that they have some very good financial advice to give. Your advice has me wondering if I should have another Advisor on the side. Not that the MutualFundStore isn’t good, but having more than one advisor can’t be all that bad either. Should I do this?

Jim Peet said...

I invested in Prosper for 4 years. The site (service) has changed for the positive since then.

My observations here

KJB1611 said...

Dear Bro. Mitchell,

You're welcome.

Dear Alex,

I don't know anything about that mutual fund firm. However, if you have investments with them, I would encourage you to use the complementary moral audit feature for stock mutual funds here:

http://faithsaves.net/miscellaneous/

to make sure that your funds are clean.

Dear Jim,

Thanks for the observations. I believe that there is no question that Prosper has changed for the positive since that time. I think that getting a 9% rate of return is quite feasible, and that even a higher rate of return is possible. I have both an IRA and a normal account with them.

David said...

The Prospect and Lending Club require those who invest to meet the following "State and Financial Suitability":

"Investors who are residents of states other than California must have:


(a) an annual gross income of at least $70,000 AND a net worth (exclusive of home, home furnishings, and automobile) of at least $70,000 OR

(b) have a net worth of at least $250,000 (determined with the same exclusions)."

Residents of California have even higher numbers than above.

This makes the majority of people in America ineligible to use Peer2Peer investments. I think this is important to mention in your article. I was about to try it out until I saw I would have to agree to the above, which I cannot in honesty. Are there other Peer2Peer companies other than Prosper and LendingClub that would not require meeting the above conditions? Were you aware of the above conditions?

KJB1611 said...


Dear David,

Thank you for pointing this out. I am guessing that you got that information from reading the prospectus, which I did highly recommend people read. As the laws governing peer-to-peer lending can change at just about any time, and I may not be able to keep updating this blog post or my website article, I think it is justifable that I did not mention that information in the post. However, I appreciate your putting it in the comment section--thank you. Nobody should violate his conscience or do something contrary to the required rules in order to make money.

Thanks again.