Our Own Private Sub-prime Meltdown
A lot of pundits lament the fact that people don't pay attention to the financial news. This a sometimes a problem because your personal finances are usually connected to big picture economic trends. In our case, we've had our own personal subprime meltdown.
Like many personal finance aficionados, we've been lending money on prosper.com. When we initially started lending, we targeted high risk borrowers. About a month ago, we started to see that many of these people were several months behind on their payments and we changed our lending policy. Well, now it turns out that we didn't shift course quickly enough. Five of our loans are currently delinquent and a couple more are two months late. All in all we've lost about $300.
Our situation is small microcosm of what's going on in the larger economy. For us, the $300 lesson that people with bad credit don't pay their bills was cheap, but the national mortgage industry has poured billions into the subprime market. Overall the consequences of the sub-prime meltdown have been far reaching. Mortgage lending is down, so are all the business that profited from the housing boom, like construction, advertising, retail, etc. For the nation, it has been an expensive lesson that when prudent finances become secondary to irrational decisions, the results can be messy.
In the case of us DINKs we still believe that prosper is a good way to build wealth, but it will be a long time before we lend to someone with high risk credit risk again.
Best,
James
Stumble It!
5 comments:
You're not the only one! According to Prosper's first monthly market survey, one year ago sub-prime loans made up 25% of funded loans. Now they make less than 9%. Lenders are starting to avoid the high risk borrowers.
Hi James,
From a past post, I dug out your total investment in Prosper at $3,450. So $300 represents less than 10%, right? After spreading out the risk across your entire investment, how are you guys doing? It sounds like you're still doing well. But are you going to sink more money into it, or just stick with your initial investment?
As for me, I just put in another bid, but I only have $200 invested.
I'm not entirely sure that this comment will be seen, or will get a response, but I'm curious as to your thoughts. Is there any difference to you, as a lender, between someone with horrific credit because of a one time string of incidents and someone with the same horrific credit, but a consistent pattern of late or non-payments?
I ask because I had some stupid spending habits when I first got out of college, but was paying them off until a health crisis led to losing my job, slipping into a coma, getting a terminal diagnosis, and deciding that I wasn't going to deal with anything like bills if I was going to die. I realized, of course, that terminal doesn't mean tomorrow, and am just starting down the road to recovery. You've mentioned several issues - renting, borrowing, etc., so while I'm not looking to take on any more debt at the moment, I do have to do things like find a place to live, get a job, etc. Are there things that people can do to make you more confident and willing to take the chance on them, even when they're classified as "high risk"?
In response to the last comment...
Yes, I do think there are certainly ways of getting around bad credit. Particularly if it is more seen as a one off deal than a perpetual cycle of bad behavior around finances.
I think in the case of finding a place to live and work you have the personal side of things working to your advantage. Being straight about things can often be to your advantage.
I think issues related to health can also be seen as more valid than other cases. Everyone has some thought that it could be them in your shoes.
When we were renting to folks I mostly wanted to feel that I had confidence in the person. We had two folks at about the same time with poor credit. The woman felt like you were being walked around in circles and the guy was straight up if he needed an extra day. I'd take the later route if I were you. Same goes with a job.
As for times when you are just a peg in the system, just try to do your best to get things back on track and you'll be fine. Seeing a red blip in the past is much different than a string of yellow.
Best wishes to you in getting back on your feet. Keep posted and perhaps you can get a few tips as well.
Cheers,
Miel
Depression is a commonplace event in modern times, taking on many different forms, including physical, sexual, emotional, and verbal abuse, occurring in many different contexts.
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TOM
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