Failure is always coupled with an opportunity for learning. Thankfully, in this case we can learn from someone else’s failure to hopefully avoid it ourselves. The Prosper.com lender we’ll look at goes by the nickname warew, who according to LendStats ranks as the top lender by rate of loss by posting a return on investment of -14.71%, losing over $2,000 in the process. Ouch!
Warew lent $15,831 on 89 loans, making his average investment per loan a whopping $178. This immediately sends up red flags, clearly this lender did not diversify properly. There is very little reason for someone with this amount of money invested to put any more than the minimum amount of $25 into a specific loan.
The story actually gets worse when digging through the transaction details. Just two loans make up 76% of this lender’s entire portfolio, totaling $12,008, one of which is currently in default. Both are business loans, which carry a higher risk of default. Here are the loan details for these two:
- Loan 512039
- IR: 31%
- Bid: $6953
- Origination Date: 06.28.11
- Description: Nurse & Police Officer Need You!!
- Status: Current
- Loan 494950
- IR: 23%
- Bid: $5055
- Origination Date: 05.27.11
- Description: Police Officer Needing 911 Help
- Status: Default
I find it interesting that both of the descriptions include police officers asking for help from their fellow citizens. My assumption is that these descriptions were a motivating factor in driving our lender to action.
There are three lessons I see from this quick overview:
- Beware of loans that are being requested for business reasons
- Diversify your p2p loan investments, only putting down the minimum $25 on any one loan
- Do not get caught up in emotional calls to action in the loan description
I actually found sifting through this lender’s data a bit depressing. You can really tell this is someone who cares about other people and is trying to help borrowers out with these loans. But, it is clear loan investing should not be based on emotions if your goal is to make a positive return on your investment. I wish warew the best.
Wow and to think that is a Prosper 2.0 investor. When I see a negative return like that is usually a lack of diversification. This investor could have easily invested in more than 400 loans which would have pretty much ruled out the possibility of a negative return.
I am guessing this investor must have known these borrowers or at least had a connection with them somehow. Why else would you lend $12,000 out of your $16,000 portfolio to two people. Makes no sense unless there is an offline connection. I hope he/she has learned their lesson.
Excellent reminder and warning.
It really is too bad, when one excludes that one loan warew actually would be doing pretty well.
Here’s another related example. I just noticed that the lender who has been at the top of the LendStats ROI list for much of the last couple months, 113121, just had a big drop of 1% or more down to 17.5%. For a seasoned lender with a large sum invested that is a big drop. I thought the reason for this would be worth finding out and I see there is a $13500 loan that just went late. Wow, that’s a big one. Hopefully it recovers, if not, this lender’s ROI will drop another 1% in 2 weeks.
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