Teach a Man to Fish

I was very fond of charities during my teen years, but I didn't have much money to give away. In the midst of all the liberal vs. conservative back-and-forths over the last few years, I started to embrace the characterization of direct charitable givings as "hand-outs" that solve the needies' problems superficially and in the short term. I haven't given up on straight-up donations; after all, some charities do wonderful work for the less privileged (the AF runs several charity donation campaigns, in which I've happily participated now that I have a paycheck), but I've decided that it's more mutually beneficial to follow another path: help those who help themselves. Someone down on his luck who's handed a sum of money with no strings attached has very little motivation to better his situation, but if he has to pay it back, well, he just *might* kick his own ass into gear. That's what I like to see in a "charity", and this is the premise behind microloans.

The application of microloans is no longer limited to third world locales, thanks to person-to-person (P2P) lending sites Zopa in Britain and Prosper in the US. P2P lending basically works like this: someone who can't or chooses not to get a small loan ($1k-25k) from a major lending institution posts a listing on the website, and then potential lenders bid for the right to lend the whole or a part of that loan. I won't go into more details--there is, as always, already plenty written on the web and posted at these websites--I only want to note my own experience investing in P2P lending. If you feel the itch to argue that loaning money is not being charitable at all since it's for my own benefit, I suggest that you follow closely the ongoing research regarding why we h. sapiens are charitable to others at all.

I joined Prosper late last October and so far I've partially funded 30+ loans, totally around $1.5k. My borrowers include a college student who needs tuition money, credit card debt consolidators, small business owners, a guy who want to buy a monkey for his gf and more. In the beginning, I saw this more as a charity to the poor, so I was more cavalier about whom (in terms of credit history and score) I lend money to, but after one guy defaulted on me, I realized that I'm not that rich yet and can't handle losing so much capital. So far, I'm still recovering from that one default, but each week I'm closing out two new loans to borrowers with better records, so the future looks pretty bright.

Some really smart but possibly very nerdy and bored folks created an awesome sister site called Lendingstats to help people analyze the Prosper phenomenon, complete with all listings, rankings and more stats than Thermo Analysis. If you want to stalk the performance of my portfolio or laugh at my plight, just search for afreedawg.

Not that I'm extremely successful yet, but I've learned a few tactics that I use everytime I bid for a new loan to minimize my risks:

• The most obvious is lend to people with high credit scores (B or better), no delinquencies and public records. Home owners and people with verified bank accounts and steady jobs are also things that I look for.
  
• Don't chase the high interest rates offered by the borrowers. Someone who has to shoulder a 20% interest rate is a lot more likely to be overwhelmed, no matter what their credit score. I usually go for 10-13%, taking into account the low historical default rate for good credit scores.
• If you commit to a bid, you money is locked until either you're outbid or the listing is cancelled after you win. So I choose from among listings that are closing soon and are 95%-100% funded already. Why waste time when high school math taught you how interest grows?
• Read the listings and try to get a sense of who's borrowing and why. Read endorsements (although I suppose those can probably be easily fabricated/staged) and questions posted by other potential lenders. They might have seen something's out of place which you missed.
  

There's some debate online on whether Prosper will succeed or fail. I don't know, but so far, every month I'm getting back around $10 of interest for having put in not much more than $1k, which totally beats even the best savings bank rate. Looks pretty good to me.