Beating Broke

Personal Finance from the Broke Perspective

  • Home
  • About
  • We Recommend
  • Contact
  • Privacy Policy

Powered by Genesis

Archives for January 2010

Yes, Peer-to-Peer Lending is Risky, But Not Cursed

January 19, 2010 By Shane Ede 3 Comments

After my last two posts, and then this one, you must be beginning to think that this is P2P lending week here at Beating Broke.  I hadn’t intended it to be this way, but it just seems like that  is what’s on the brain and it’s getting a bit of buzz lately too.

Jim, from Bargaineering, wrote an article today about how risky peer-to-peer lending can be.  I completely agree.   But, he also made it sound like he thought that they should be avoided altogether.   And that I disagree with.

P2P lending is risky.  It’s just as risky as bank lending is for banks.  And look at the mess they found themselves in not too long ago.  But, as P2P lenders, we can learn a lesson from that.  First, you shouldn’t be investing your nest egg in anything this risky.  Once again, diversification is the key.  On a scale of risk, P2P lending lands somewhere on the risky side of stocks.  So, if you properly diversify, P2P should probably only make up about 2-5% of your portfolio. Also, the banks lent out way too much of their portfolios to way too many people that they really shouldn’t have.  If you’re careful about who you lend to, you should be able to significantly reduce the risk.  What that means is that you probably won’t be lending to to many people who will be paying 20% on their loans, and will be lending to more people who are paying in the 4-7% range.  That’s OK.

Why any at all?  Because the returns can be pretty good.  Depending on the model you take, your return can be in the 5% range.  The riskier loans you lend to, the higher the potential return.  Some of them are in the 20% range.   Of course, the caveat there is that those are also the most risky loans and the most likely to default.  And, much like in the banking world, if a borrower defaults on a loan, you will lose money.  You might manage to recover some of the money through collections, but it will only be a percent of what you lent out.

My advice?  (not that it’s worth much) Be cautious.  Don’t lend more than you can stand to lose, and keep the ratio of P2P investing pretty low in your diversified portfolio.  Do your research.  Lending to some 24 year old who is using the money to finance a class on real estate investing is probably not the best idea.  Chances are, that loan is headed for default.  On the other hand, lending to a mother/father of 3 who is going to use the money as a down payment on a house could be a safer loan.  In the comments of Jim’s post, he mentions that he doesn’t invest in anything that he doesn’t understand.  He doesn’t invest in options or futures because he doesn’t understand them either.  That’s a very valid point, but I think it really boils down to how much information you want.

I think if Jim wanted to, he could find all the information he wanted to learn how to use option and futures investing.  (note: I don’t understand them either and don’t invest in them.)  P2P lending is a bit of a different cookie though.  The bones of it are simple.  One person is lending money to another person.  In essence, as a lender, you are the bank.  Using the available data, you review the loan applications and decide on which ones have the least risk of default.  If you feel like taking on some riskier loans, you decide how risky and modify your acceptance practices to reflect.  Is there more to it than that?  Of course.  But, if you keep your wits and only dabble a little while you’re learning the ropes, you can learn all of the intricacies from trial and error while not losing your shirt.

As with anything, there is risk involved.  P2P lending has much more than most investing models.  If you are adverse to risk, you really should probably avoid it.  If not, get your feet wet.  And per the usual disclaimer, seek the advice of a professional before making any major decisions.

Update: It seems the original story that spawned all of this (here at The Big Money) caused a bit of a stir at Prosper.com headquarters.  They’re asking for a retraction and refuted the article with some of their own facts.

Shane Ede

I started this blog to share what I know and what I was learning about personal finance. Along the way I’ve met and found many blogging friends. Please feel free to connect with me on the Beating Broke accounts: Twitter and Facebook.

You can also connect with me personally at Novelnaut, Thatedeguy, Shane Ede, and my personal Twitter.

www.beatingbroke.com

Filed Under: Investing, ShareMe Tagged With: Investing, investments, lending, p2p lending, peer to peer lending, peer-to-peer, risk

SwapMamas.com: Mother’s Little Helper

January 6, 2010 By Shane Ede 1 Comment

One of the side effects of my wife’s entrepreneurial adventures has been that we have a very unstable income on her side of the balance sheet.  And part of how we’ve dealt with that is to try and save money in as many ways as we can.  Frugality has become the modus operandi in our household.

Anyone with kids will tell you that there are certain things that you cannot go without.  For example, kids need clothes, and lots of them.  They’ll go through several outfits a day depending on the messiness of their meals and the level of dirt outside.  Kids like to have toys too!  And being frugal and buying your kids toys don’t always go together.

But, we found a site that helps us a little with both.  It’s called swapmamas.com and it is pretty darn cool.  In a nutshell, it is a social networking site for moms where they gather together and swap/barter for items.  Say we have  some formula left over after our youngest moves up to real food.  We can list the sealed cans on swapmamas.  Another mama comes along and uses that formula, and has some clothes that will fit one of our kids.  Or some DVD movies that her kids no longer watch.  She offers the trade to us, we accept and all that’s left is the shipping.  We pay for the shipping for  the formula, and the other mama pays for the shipping for whatever it is that she traded us for.  She gets a can of formula that she can use and that would have done absolutely nothing for us except sit on a shelf and we get a new movie or some new(ish) clothes.  Win Win.

Swapmamas.com is worth a look if you’ve got kids and want to try and be frugal as well.  It might even be worthwhile if you don’t have kids.  I can’t attest to that since I would have never known the site existed if it weren’t for having kids. 😉

Shane Ede

I started this blog to share what I know and what I was learning about personal finance. Along the way I’ve met and found many blogging friends. Please feel free to connect with me on the Beating Broke accounts: Twitter and Facebook.

You can also connect with me personally at Novelnaut, Thatedeguy, Shane Ede, and my personal Twitter.

www.beatingbroke.com

Filed Under: Coupons and Discounts, Frugality, Saving, ShareMe Tagged With: barter, frugal, Frugality, save, save money, swap, swapping

  • Facebook
  • Pinterest
  • RSS
  • Twitter

Improve Your Credit Score

Money Blogs

  • Celebrating Financial Freedom
  • Christian PF
  • Dual Income No Kids
  • Financial Panther
  • Gajizmo.com
  • Lazy Man and Money
  • Make Money Your Way
  • Money Talks News
  • My Personal Finance Journey
  • Personal Profitability
  • PF Blogs
  • Reach Financial Independence
  • So Over Debt
  • The Savvy Scot
  • Yes, I am Cheap

Categories

Disclaimer

Please note that Beating Broke has financial relationships with some of the merchants mentioned here. Beating Broke may be compensated if consumers choose to utilize the links located throughout the content on this site and generate sales for the said merchant.

Visit Our Advertisers

Need to change careers? Consider an Accounting Certificate Program from WTI.