Crazy Idea: Investors - Get 5.5% return; Students - Get loans @ 5.8%

Twitch · Apr 7, 2008

So here is a crazy idea I've been toying around with:

As investors you get 5.5% return on your investment. Sure beats the current CD rates you can find in the market currently. You'll invest in student loans for medical students. The default rate should be pretty low. I've not done any calc on this, but let's say admin costs included, the spread is 0.3%.

So medical students get loans at 5.8%. A full percentage point less than the lowest federal stafford rates they can get.

I realize there are a bunch of reasons why this won't work. But hey it was a nice dream.

PreMD86 · Apr 7, 2008

Prosper.com pretty much beat you to it.

xanthines · Apr 8, 2008

Yeah, except anyone lending out money on Prosper for 5.5% is crazy. Might as well sock it in a ING Orange account. Safer, too.

See: http://www.mightybargainhunter.com/2006/06/21/a-surprise-calculation-prospercom-vs-ing/

It's the concept of APR vs APY. (And yes, I know that you can make Prosper more profitable than a savings account by reinvesting.)

-X

PreMD86 said:
Prosper.com pretty much beat you to it.

Doctor · Apr 21, 2008

xanthines said:
Yeah, except anyone lending out money on Prosper for 5.5% is crazy. Might as well sock it in a ING Orange account. Safer, too.

See: http://www.mightybargainhunter.com/2006/06/21/a-surprise-calculation-prospercom-vs-ing/

It's the concept of APR vs APY. (And yes, I know that you can make Prosper more profitable than a savings account by reinvesting.)

-X

Hmmm. That link is pretty dumb. Why would anyone assume that if you put money in an ING account you would always reinvest with no withdrawals but with Prosper you would always keep the withdrawal and never reinvest? Because those are the default setups? Utterly worthless comparison IMO. And it really has nothing to do at all with APR vs APY.

elderjack21 · Apr 21, 2008

PreMD86 said:
Prosper.com pretty much beat you to it.

I can't believe anyone gives money to some of the people on that website.

But I think it would be worth looking into establishing documented loans with family members who may be interested in making good interest rates on their money. I know some schools will provide you with the paperwork necessary to make this happen. I would rather give my dad 6% than a bank 8.5%, for that matter, I would rather give my dad 8.5% than a bank that much.

xanthines · Apr 21, 2008

Well, since it's a savings account you shouldn't be making too many withdrawals. As for Prosper, the minimum bid (ie, investment) is $50. So unless you're investing a relatively large amount (I'd guesstimate $2-3k), you won't be getting back enough money to re-invest.

That, and like elderjack21 said, you'd have to be crazy to loan out money to some of those people, especially the amounts and rates they're asking for.

-X

Doctor said:
Hmmm. That link is pretty dumb. Why would anyone assume that if you put money in an ING account you would always reinvest with no withdrawals but with Prosper you would always keep the withdrawal and never reinvest? Because those are the default setups? Utterly worthless comparison IMO. And it really has nothing to do at all with APR vs APY.

Doctor · Apr 21, 2008

xanthines said:
Well, since it's a savings account you shouldn't be making too many withdrawals. As for Prosper, the minimum bid (ie, investment) is $50. So unless you're investing a relatively large amount (I'd guesstimate $2-3k), you won't be getting back enough money to re-invest.

That, and like elderjack21 said, you'd have to be crazy to loan out money to some of those people, especially the amounts and rates they're asking for.

-X

So what you're saying is:

1) Savings accounts inherently give higher returns than checking accounts, even if the APR is higher on the checking account (presumably because you don't make withdrawals from the savings and therefore get a higher return no matter if the rate is lower).

2) Even if you invest only $50 and have the Prosper payments go directly into your ING savings account, we shouldn't consider the interest on the ING account in this case. We should only consider savings account interest if the money has been there from beginning to end!? Ugh.

And yes, I got my undergrad degree in Econ. 😉

BTW, I tried Prosper out with just $50 myself and lent some money for an inner-city single mother trying to pay off her payday loans. So far she's paid every month and the interest I charged is 33%. That makes it worth it. 🙂

xanthines · Apr 22, 2008

Well, not to be pedantic but I don't believe I ever mentioned checking accounts. Also, you're coming up with more complicated schemes than the "I have $1000 to play with. Should I dump it all in Prosper or a savings account?" But you're right, if you know what you're doing you can make a lot more money in Prosper than leaving it in a savings account. Not everyone got a degree in econ or common sense! 🙂 As an aside, if you know any interest-bearing checking accounts with rates higher than or comparable to an online savings account let us know! But don't bother if the minimum balance is $10000000000000000000000! :laugh:

Oh, and congrats on becoming a loan shark. If you need anyone to go around breaking kneecaps, I know a lot of anatomy and I'm a pretty big guy! :laugh:

-X

Doctor said:
:And yes, I got my undergrad degree in Econ. 😉

BTW, I tried Prosper out with just $50 myself and lent some money for an inner-city single mother trying to pay off her payday loans. So far she's paid every month and the interest I charged is 33%. That makes it worth it. 🙂

Doctor · Apr 22, 2008

Two things:

1) I actually helped save that lady FROM loan sharks. She was paying something like 90% interest and was able to reduce her rate to 33%. It was a huge difference in her monthly payments, something like $800 a month becoming $250 a month. And of course, 33% is hella more than I could get in a bank account, but like I said I've only tested it with the $50. I'm not sure I'd be comfortable handing my whole bank account over to random people I don't know in real life. 😉

2) I think, but am not sure, that the default setup for Prosper is to deposit your incoming monthly payments into a savings account. So you really have to add the ING interest in to both sides of the equation (after it gets paid back to you each month) before comparing the two investment choices. In other words, it's impossible to make more money with an ING savings account since you're going to get that return either way when each payment comes back to you. (Well not impossible, they could always decide to take a ding on their credit report and stop paying you back... then you'd end up with a negative return.)

xanthines · Apr 22, 2008

That's cool and a more of a humanitarian gesture than anything else. 👍 However, it still boggles my mind how people with BAD credit records can still get $25k loans funded at fairly reasonable rates. I mean, low scores, public records, bankruptcies, high credit card utilization, etc etc. While I feel for some these people, I still think it's a risky venture for lenders.

Like I said, Prosper definitely has the potential to be a lot more profitable than an ING Orange account, but you need to know how this process works and that you are assuming risk for returns. I think some lenders get caught up in the gimmicky-ness of Prosper. The OP was talking about lending at SINGLE digit rates. Considering the risks involved and actual returns (as opposed to rates), I still stand by statement that you're better off socking that money into a high (relatively) interest savings account. If you're OK with lending out money to the needy or shady at +20%, then coolio. 😎

I guess it comes down to how risk-averse you are.

-X

Doctor said:
Two things:

1) I actually helped save that lady FROM loan sharks. She was paying something like 90% interest and was able to reduce her rate to 33%. It was a huge difference in her monthly payments, something like $800 a month becoming $250 a month. And of course, 33% is hella more than I could get in a bank account, but like I said I've only tested it with the $50. I'm not sure I'd be comfortable handing my whole bank account over to random people I don't know in real life. 😉

2) I think, but am not sure, that the default setup for Prosper is to deposit your incoming monthly payments into a savings account. So you really have to add the ING interest in to both sides of the equation (after it gets paid back to you each month) before comparing the two investment choices. In other words, it's impossible to make more money with an ING savings account since you're going to get that return either way when each payment comes back to you. (Well not impossible, they could always decide to take a ding on their credit report and stop paying you back... then you'd end up with a negative return.)

notlikethat · May 21, 2008

Does filing taxes differ between normal savings account interest and profit derived from prosper?

nu2004 · May 22, 2008

Twitch said:
So medical students get loans at 5.8%. A full percentage point less than the lowest federal stafford rates they can get.

But don't the Stafford loans have all sorts of rate reductions for paying on time, setting up EFT, etc.? In total I thought those incentives bring the rate down close to 5.0% ...

anoncurious · Apr 13, 2009

nu2004 said:
But don't the Stafford loans have all sorts of rate reductions for paying on time, setting up EFT, etc.? In total I thought those incentives bring the rate down close to 5.0% ...

sorry old thread..but can anyone comment on what kind of rate reductions would bring the rate that low? Any notable 'bests' in terms of which lender to go with?

TMP-SMX · Apr 13, 2009

Lender incentives are long gone. All you can hope for is finding a lender without any up front fees. Discover is the only one right now doing that.

dragonfly99 · Apr 14, 2009

agree with TMP-SMX...for whatever reason, all those incentives like cutting down the interest rates for paying on time, etc. seem to be gone. I had a "bonus" of a few hundred dollars Q3 months for paying on time that was taken away last year, when the economy just started to go south.

Crazy Idea: Investors - Get 5.5% return; Students - Get loans @ 5.8%

Twitch

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