A Guy With An Idea

I’ll get the obvious point out of the way immediately: while both SoLo Funds and Prosper are P2P lending services, they shouldn’t be considered direct competitors. From my experience they cater to different audiences and have different purposes – both for lenders and borrowers. But I use them both. And I view them each as occupying the same space in my investment portfolio. Which means the total percentage of portfolio I’m allocating to P2P loans has to be allocated across these two services. How I distribute funds between them is a combination of rate of return and ease of use.

While I started off highly engaged with SoLo, and still believe the best returns are to be found with SoLo, I’ve found myself migrating more and more of my investment in this category to Prosper. Here is why:

Prosper

Prosper allows for partial investment in debt instruments. These loans – or notes, in Prosper language – range between $5,000 and $50,000 in value, and 2-5 years in duration. Borrowers come to Prosper to get money for their business, home improvement project, or other need, at competitive rates.

As a lender, when I put my money in it is being mixed with several other lenders’ funds until the debt funding requirement of the note is met. Then the money is deployed. The borrower receives the money and they start making loan payments back to Prosper. Prosper keeps a portion of the loan payment as their processing fee; part of the payment is applied to reducing the principal on the note; and the remainder of the payment – which represents interest paid – is distributed back to loan investors. Each month I receive a bunch of loan payments, all of which Prosper processes for me. The interest payments I receive can be held in cash or can be redeployed to invest in future loans. I have the system set up to reinvest.

The thing that I really love about Prosper is that I don’t have to think too much about the loans I want to fund. I can hand pick the loans I’m willing to fund, if I want to. But I don’t have to.

What I do is take advantage of Prosper’s auto-invest feature. I give the system some direction – like what percentage of my money I want to invest across each of their risk bands and how how much money I want to invest in each loan opportunity that comes up – and Prosper does the rest.

This auto-invest feature allows me to put my investment on auto-pilot. I contribute additional funds each month on a regular basis, and this money (plus the interest I’m earning on current loans) is deployed without me having to do much of anything. If I see that returns are dropping for a segment I simply adjust my risk band allocations for future investments.

At the end of each month Prosper generates a statement that shows all of the interest I’ve been paid for the month and my stake in the current loan balance for each note I’ve helped fund. Updating my records for tax reporting is pretty easy.

SoLo Funds

SoLo Funds operates more like a payday lending service. The loans are short term, almost always less than 2 weeks, and seem to be requested mostly for personal reasons: rent, car repair, emergency need, etc.

The terminology on the SoLo site was a bit confusing for me in the beginning. Borrowers request an amount of money, aptly called “Principal”. But SoLo’s processing fee is called a “Donation” and is editable by the borrower. They can choose to keep the default setting of around 7% of loan amount, or they can edit it – all the way down to $0. Most loans I see are within the 3.5% – 7% range. The amount of interest I as the lender will earn on the loan is called the “Lender Tip”. SoLo suggests to the borrower a rate based on their creditworthiness – as represented by the term “SoLo Score” – and these rates range from 3% up to 15%. If I accept the proposed Lender Tip I can fund the loan immediately just by clicking on the loan in the mobile app. I have the ability to request a higher Lender Tip if I think the risk warrants it, but have found that nearly every time I’ve done this the loan has failed to fund.

15% is an astronomical rate of return for a 2 week investment. But I have found that there is a correlation between high Lender Tips and low SoLo Scores (representing worst risk), which result in a fairly high default rate.

When I first started funding loans on SoLo I was optimizing for rates of return higher than 10% and found the average repayment term to be around 45 days (despite the 2 week repayment promise) and the default rate was slightly higher than 25%. Now my approach is to keep my funding to loans where:

• the SoLo Score is at least 65 or higher and the borrower has never had a late payment, or
• if any of the borrower’s last 3 loans were repaid late, the SoLo Score must be greater than 75, and
• the Lender Tip must be at least 5%

Even with these adjustments I still have a default rate around 12%, but it’s coming down. And the average repayment time has dropped to 17 days. Which means I can turn around and lend this money out at nearly twice the speed as before, which results in a higher annual rate of return than when I was only seeking high Lender Tips.

There is a lot to love about SoLo as a lender. But there is just as much to not like, in my experience.

To begin with, it was only recently they introduced a web app. Most of my experience with the platform has been through their mobile app. While the mobile app makes funding loans super simple, it also makes it really difficult to track the performance of these loans. Everything I’ve calculated about default rate, annual rate of return, and average days outstanding I had to do through a spreadsheet I created for tracking the investments. Each time I fund a loan I have to manually enter all of the details into my tracker. SoLo does not provide any monthly or annual statements. The only ability I have to reconcile my records with theirs is to click through each individually funded loan and copy down numbers from their system into mine.

There is currently no way to “auto-invest” in loans meeting my criteria (see above) and it’s entirely up to me to login daily, weekly, or monthly to hunt and peck through the loans currently in the market place to find the ones that meet my criteria. Like I said before, I used to invest heavily in SoLo but have backed off considerably in recent months simply because doing so is such a time-suck.

I’ve written to the team at SoLo and while they thanked me for my suggestions, they have a different vision for their app. I get it. I would likely make similar choices if I was in their shoes and looking at the product requests they’re sorting through. I don’t believe they have a strong vision (yet) for their lender community and as such are not working on features that make it easier to fund loans on their platform. I really hope when they decide to focus on lender tools they let me know. I think they meet a unique need in the market place and could be huge player if they can get the experience on both sides of the transaction nailed.