I had mentioned previously that for a number of reasons, it's very difficult to earn 10% interest on your money. However, I think I found a way to do it. Of course there's some risk involved. For those who get squeamish about the possibility of losing money, you might want to look away - this could get ugly.
If you are a regular reader of Lazy Man and Money, you'll know that I'm a bit of a proponent of Prosper.com. I think it cuts out the middle man in the banking business. Borrowers get better rates by getting a large mass of people bidding for their loan. Lenders make out by making more than they could in some other investments. I've chosen to be a lender in an attempt to get a return on my money.
Looking at my account, I have nearly 70 loans, mostly consisting of $50 loans to different borrowers at a rate approximately at 24%. At first glance it feels like I'm a loan shark or credit card company with that rate. It's true that I typically loan to those who are greater risk of default, but I'm at least diversified amongst them. I also have nearly 50% of my money in lower risk credit grades of C and higher. Eric's Credit Community is a site that analyzes the Prosper community. One of it's more useful stats is an estimated risk adjusted return on investment (ERAROI). According to the site, my ERAROI is over 17.5% when taking in account for risk, amazingly (at least to me) in the top 50 of all lenders with at least 25 loans.
So how does this look from the top to the bottom:
- 24% - Start
- 23.5% - After Prosper's cut for doing business (.5%)
- 17.25% - After adjusting for risk
- 13.5% - After adjusting for Inflation of 3.75% (just a rough average)
- 10.125% - After a 25% tax
This is far from a guaranteed gain, but I think it has a place as part of a well-balanced portfolio.
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