Recently I described how I overcame my fear of P2P lending. One factor that encouraged me to dive into peer to peer lending was Prosper’s new Portfolio Plans. With these plans, you can quickly and easily select the types of loans you want to make, and then leave all of the hard work up to Prosper. Today I’m going to walk through the Portfolio Plan I created, explain why I made the decisions I did, and provide step-by-step screenshots of the process. If you are interested in using Prosper’s Portfolio Plans, this guide will show you everything you need to know. So let’s get started.
Creating a lending account and logging into Prosper
If you are not already a member of Prosper, the first step is to join. Joining Prosper takes only a few minutes and the screens are very easy to follow. You will need your social security number and checking account information. Prosper links to your checking account so that you can transfer funds to and from your Prosper account. If you use this link to join as a lender, Prosper will give both you and me a $25 bonus. As you may know, I donate 50% of my bonus (and all other blog revenue for that matter) to charity. Anyway, it’s a great way to get started. Once you’ve joined and funded your account, when you sign back in the screen will look like this:
Prosper’s Portfolio Plans
Toward the bottom left of the screen is a red ellipse that I added to the screenshot to highlight my current balance: $225. The red rectangle toward the top highlights the link to begin using Prosper’s Portfolio Plans. Prosper has four plans: Conservative, Balanced, Moderate and Aggressive. Each plan consists of a number of what Prosper calls Standing Orders. A standing order allows you to bid automatically on loans based on criteria you establish. For example, you could create a standing order to bid on all loans from grade AA borrowers with a debt-to-income ratio of less than 20% who are seeking loans of no more than $10,000. Prosper’s Portfolio Plans are a series of standing orders created by Prosper with different risk profiles depending on the types of loans you want to make. Here is what the Portfolio Plan page looks like:
Under each portfolio name is a link that will give you details about the standing orders that make up that portfolio. The conservative portfolio, for example, is comprised of four standing orders. Here’s a view of the first two:
You first see a summary of the estimated returns, which is the average bid rate less estimated losses and expenses. For the conservative portfolio, the estimated return is currently 7.79%. Below that you’ll see two of the four standing orders that comprise the conservative portfolio. Similar information is available for each portfolio.
So how did I chose my portfolios
The question here is whether the risks associated with each portfolio are reflected in the interest you’ll earn. Frankly, it’s difficult to make that assessment with the data we have. Financial institutions have terabytes of data that allow them to analyze borrowers and default trends in unimaginable ways. We don’t have that, and simply noting the higher interest rate for the riskier portfolio really doesn’t tell you much. To me, the real test of these portfolios will come when the unemployment rate rises substantially. So my approach was twofold.
First, I see no reason to take significant risk with debt instruments. I invest in bonds and view my Prosper account as an extension of that. I invest in bonds for consistency and some level of security. Lending money to borrowers with really shaky credit and a high debt-to-income just doesn’t make sense for me. So I put $125 in the conservative portfolio. I do, however, like the opportunity to earn a little bit more without taking undue risk, so I put $50 in the balanced portfolio and $50 in the moderate portfolio. I also instructed Prosper not to give any one borrower more than $50. This further helps diversify my risk.
Now at this point you may be wondering why I spread $225 so thin. First, I hope this account grows substantially. I’ve invested the money in portfolios that I think would be appropriate if I had $5,000 to lend. Second, with Prosper’s Portfolio Plans, it’s easy to do.
There’s one final point to note. I’ve submitted my portfolio plans with exactly $225. That raises the question whether I need to go back and create new plans every time I add money to prosper. The answer is no. You can allocate more money to a portfolio plan than you have in your Prosper account. As new money comes in, Prosper will lend your money according to your portfolio plan. You can check out Prosper’s Help page for more information on Portfolio Plans.
Watching your bids
After you submit your portfolio plan, assuming you have funds in your Prosper account, the bidding is almost instantaneous. Literally from the time I submitted my bid, wrote the above paragraph, and then checked my account, I had four bids, one of which is completely funded. My average interest rate is 13.49%, although that could go down as more bids are received on the loans. Remember, just because a loan is fully funded doesn’t mean the bidding is over. New bids can come in that drive down the interest rate.