I was reading an article on bankrate.com about Using a CD Ladder as Parking Locations for Your Emergency Fund. One of the big problems with a CD Ladder is the finite number of times you can withdraw money without a fee. Another big problem is length of time it takes to build a fully extended ladder. These problems are mitigated with Prosper.com so I thought I would review their $50,000 dollar example within the framework of my standing order strategy and see the results.
First let’s quickly examine how Prosper.com differs from the standard CD ladder. Prosper.com is a series of micro loans made directly to other individuals. These loans are fully amortized 3 year loans. Each loan has it’s own origination date, payment date, interest rate, and expected ROI. While the loans are not individually as secure as the FDIC guaranteed CD, collectively the risk is very small if proper care is taken when selecting loans.
One other thing to note, Prosper.com loans are 3 year terms and I will be comparing them to the Bank Rate 5 year CD ladder. This will cause a 2 things… The first, the Prosper.com 3 year ladder will have more money available (for withdraw or reinvestment per year than the 5 year ladder). The second, interest rates available for 5 year CDs are slightly higher than 3 year CDs, but since the Prosper.com loans have such a much higher interest rate than CDs the affect will not be noticed.
Ok…
At today’s rates Bankrate estimates that a $50,000 CD Ladder would have an a value $64,677 with access to $2500 plus earnings every 3 months with interest rates between 5.25%-5.46%. So in 5 years you have increased $14,677 or 29%.
My current average interest rate is 15.85% and currently I have no defaults. I fully expect some defaults, but with an average credit weighting of B+ and an expected ROI of 14.12% I think using a conservative 13% for this example is appropriate.
| Account Value | Monthly Cash Available | |
|---|---|---|
| Start Year 1 | $50,000 | $1,605 |
| Start Year 2 | $56,941 | $1,827 |
| Start Year 3 | $64,845 | $2,081 |
| Start Year 4 | $73,846 | $2,370 |
| Start Year 5 | $84,096 | $2,699 |
| Start Year 6 | $95,770 | $3,073 |
Even though Propser.com is continually making cash available let’s compare the 3 month available cash from Year 1 of Prosper ($4,815) to the CD Ladder ($2500). Prosper has $2,315 more or 93%.
At the start of year 6 the prosper account value is $95,770 for an increase of $45,770 or 92%. Compared with the $14,677 increase of the CD Ladder the Prosper account generate $31,093 or 312% more!!!
There are some caveats, but the numbers alone are startling. One, you cannot get access to your money early, with a CD you could choose to pay an early withdrawal penalty, not so with prosper. Two, the ROI that I used was not guaranteed, my actual rate may be higher or lower. Three, you cannot get money into loans on demand as you can with CDs, it takes time to get money into loans.
I continue to be enamored with my prosper.com experience. I love the interest rates and the lack of a middle man. Banks make too much money. I fully expect to have my own emergency fund in prosper eventually. Why am I waiting? See my next post.
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[...] Kevin presents Use Prosper and get a 312% Increase over a CD Ladder for Your Emergency Fund posted at RateLadder.com. A coach’s plan doesn’t always go as expected. Having a failed play with no backup plan in the 4th quarter of the Super Bowl could spell disaster. As an investor, having an emergency plan is key. [...]
Prosper is a whole new type of investment that is neither comparable to CDs or the stock market. I accept more default risk by targeting D thru E credit rating loans (and a couple of high-risk), but mitigate risk by not considering lending to those with previous lates or defaults. Average about 20% rate, with $2500 spread out over 40 loans, all less then 2 months old – no lates yet on the 15 due. Anticipating 2-3 defaults and a ROI of 14-15% after fees and defaults, before taxes.
Everything is comparable. The ROI for one is directly comparable to other investment types.
I personally think that a CD ladder is comparable to a Prosper portfolio, at least superficially.
Only time will tell if our expected Prosper returns hold up. IF THEY DO, then why would you ever have money in a CD Ladder?
[...] (8) Money Musings vs. (9) Rate Ladder [...]
The thing that’s missing here is that, in practice, funds in CD funds are available if you’re willing to pay some penalties and forfeit some interest. There isn’t a secondary market (yet) for Prosper loans, so the cash-out option isn’t available.
Mike
[...] [...]
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