Prosper-ish
August 22, 2006
I’ve been watching various bloggers talking about Prosper and wondering if I could or should try my hand at it. The fact that there’s no real guarantee is unsettling, though why it’s more unsettling when it’s a loan to a real person rather than money I invest in mutual funds doesn’t make much sense.
I’ve not made any further moves towards Prosper because I have two “loans” outstanding already through family connections that are a traditional sort of Prosper. To be honest, I think that this informal but monitored set-up we have is very similar to what Prosper is based upon.
One is an outright loan with a family friend who needed cash capital. He offered 3% interest monthly and since it’s an anonymous loan he uses PaDucky to facilitate the interest payments, and he subtracts that amount from the total that PaDucky owes him. Essentially, his paying on my loan to him is forgiving a business loan he extended to PaDucky at a much higher percentage than I could earn anywhere else. Previously, when he was able, PaDucky did pay that cash to me, but since it just got paid into the household bills anyway I didn’t worry about it when he wasn’t able to any longer. Not only do I not have to help pay back that debt in cash, it’s still slowly being “paid down.” And no, he’s never asked me to help, I just feel obligated when we still do business with this person. I’m rather proud of that one.
The second is the pre-Prosper family loan community that I’ve just started with this year. PadresDuckies have apparently used this system to raise large amounts of cash on short notice for business capital for years.
Basically, a large group of people (approximately 40+) decide they’re in. The same person is always the banker in this very odd game of banking. She holds the cash and guarantees that no one is going to cut and run with the money. Everyone makes a first payment of say, 200, which she uses to begin funding the whole process. The first payment is collected from everyone and that sum goes to the first winner of the bidding process. Basically, it means that (40 times 200 equals 8000) $8000+27% is the pot every month, and traditionally, whoever wanted the pot typically bid the amount of interest they were willing to pay. This interest rate has varied greatly in the past, but this particular banker has set the interest rate at 27%: she won’t allow it to go so high as to financially cripple the eventual winner but it’s definitely lucrative if you wait it out. [I think my numbers are right.]
Because this is a family/community sort of thing, everyone can have different rules, but I’ve been told never to do this outside of this particular group because she’s very trustworthy and it’s nearly impossible to verify anyone else’s trustworthiness. Each “play” goes for as many months as there are people. In this case, there are 40 people, so 40 months. Every month someone takes the pot, and then they’re only in the game to pay their 200 plus 27%. You either pay your 200 until the end and then take your pot, gaining the whole 27%, or at some point in the game you decide to bid for it and take the pot and pay your remaining portion at 27% interest. You can still profit if you wait it out longer than half of the total time involved. There’s a slight variation of putting up a pot of your own to buy someone’s stake, and then they pay you the interest money directly, and you still get a pot in the end. Obviously, you have to decide that you’re willing to invest your money in this investment model rather than another.
It’s basically risk-free because you’re going to get your money back when you want it, depending on how long you can afford to pay and if you decide you want an infusion of cash for any reason. I found it very intriguing that there’s always someone who wants the pot so you’re never forced to cash out early as I’d feared, or so PadresDuckies reassured me. I decided to give it a whirl, and managed to buy someone’s stake but it’s definitely a long wait for the payoff.
Trading the lump sum is worth it to me because I will be able to bank the monthly interest for MaDucky without taking it out of my own paycheck, and when I get the total pot, I’ll keep the interest and reinvest the principal.
This is a rather unique investing opportunity that sort of musses up my net worth assessments. I don’t include those two loan amounts in my net worth because I really don’t know how they’d fit in. I don’t consider them touchable assets, I generally just track them monthly and forget about it. It’s like the ultimate game of hiding money from yourself, but just because it involves absolutely no effort on my part and I’ll just unnecessarily fuss over it. I guess they’ll just have to sit out for now!
That’s a neat concept – I had heard of the same idea going on in rural communities for families to buy big purchases like machinery but still keeping the interest money in the community. What kind of business things are people starting up with the money in the pot?
MapGirl I think described something similar in the Korean community. I still don’t understand it at all though š
Kira: Many of the people who use it for business are entrepreneurs, so it’s capital for buying equipment, start-up costs, etc. Some use it as a line of credit for paying down debts. Others, like me, use it purely to make money. Sounds a little mercenary but it’s a good mix, I think.
Moom: I missed that post, I think. Honestly, I understood the basic concept pretty well but because I haven’t actually DONE it until now, I’m still learning about the numbers part of it. Like I said, I consider this a fairly unique opportunity because I don’t know how much longer the banker will be in good health and willing to handle these transactions. After all, she doesn’t just handle this ONE. She does do loans as well, so I’m considering looking into that for a more short term investment.