OK so first of all… Everyone has heard of a a CD Ladder, right? This is where you buy your CDs so that expire at intervals. This ensures an average interest rate and continually available funds. Typical CD Ladders are 1,2, or 5 years long. Don’t ask me why but 3 and 4 year CD Terms are hard to find. CDs are very safe. and the interest rate is 2-6% depending on many factors, but generally on the current interest rate climate.
Prosper.com loans are always 3 years in term. With a minimum lender loan portion of 50$. That means you can have a portion of many loans with even a modest ladder amount. (I have 44 loans with 2800 invested.) By taking a large number of small loans you average your risk and avoid single defaults throwing off your expected return on investment (ROI).
As loans are paid and the money is recycled into new loans, not only are you further diversifying but also extending you 3 year rate ladder. The problem with most ladders is that you have to wait at least a month and as much as a years to create/invest in a full ladder. With Prosper.com the process is continuous. All loans will have payments on possibly any day, so predicting when you will have money is a little difficult in the absolute, but that is the beauty of it. As your loan portfolio grows your monetary throw off (or reinvestment) also grows.
To illustrate my example please see see the following grid. year (1 for current), middle yearly account value, and right is monthly throw off. This graph assume a 12% ROI. After 10 years my 2800 will be throwing off $339 assuming I pay taxes elsewhere and that I don’t add any additional money into the pool. That’s 12% of the current value in monthly throw off. Sweet!
| Year | Account Value | Taxable Income | Monthly Throw Off |
|---|---|---|---|
| 1 | $2,800.00 | $95.38 | |
| 2 | $3,223.61 | $423.61 | $109.81 |
| 3 | $3,711.30 | $487.69 | $126.42 |
| 4 | $4,272.77 | $561.47 | $145.55 |
| 5 | $4,919.19 | $646.42 | $167.57 |
| 6 | $5,663.41 | $744.21 | $192.92 |
| 7 | $6,520.21 | $856.80 | $222.11 |
| 8 | $7,506.64 | $986.43 | $255.71 |
| 9 | $8,642.30 | $1,135.66 | $294.40 |
| 10 | $9,949.78 | $1,307.48 | $338.94 |
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