I had an interesting conversation with a friend, who's very conservative and uncomfortable with prosper's model.
I tried to interest him with my high average interest rate of almost 14%. He's earning 13% on a synthetic bond product linked to the price of a tech company's stock - it trades as a close end fund and pays a 13% dividend. If the price of the underlying stock drops by more than 30% from the point of contract initiation all he gets is the principal value at the time of maturity - he gets an equity, but a smaller amount. So far his investment is in the black and it looks like he'll get his 13% interest.
It's an interesting idea, but certainly has risk depending upon the fortunes of the underlying tech stock. At least it's liquid.
We discussed what's the most we really could expect prosper to do for someone. Somehow, I couldn't imagine putting more than $80k into prosper. At least at my financial level. Even then I wouldn't want to drain my cash supplies by that much. It's conceivable I could borrow it and arbitrage the interest rate spreads. If I were to do so, I think the maximum interest I could obtain would be an 8% spread.
Here's the model:
$80k in loans of $400 each would be 200 loans. I would have to reinvest 1/36 of that amount after making the initial investment over 2-4 months. 1/36 of the loans would be returned to me each month, which would require me to make 5.6 new loans each month. About $533 in interest would require about 1.6 additional loans to be made. Not bad, less than 2 a week. The problem is that I'd be taking on quite a bit of risk to earn 8% on $80k, which is only $6,400. After taxes it would be $4,000 in interest. That's a net of $333.00 per month or a gross of $533.00, not bad, but not enough to live on. Is it enough to justify taking on $70,000 in debt (assume I'd put $10,000 of my own cash in)?
Would I be able to take out a mortgage with $70,000 in outstanding installment debt applied against my income - I assume it would go against my income, not my assets.
One experiment is to look at it over a longer period of time. After 20 years I would be NETing $1,250 per month (after taxes) with $92,000 in NET principal. In your opinion is it worth the risk and time?