Last month I described how I’d experimented with giving money to strangers on the Internet. It was an interesting experience for me and I feel like it was educational, both socially and economically. Some people had questions after learning about what I’d been doing and I’ve done my best to answer their questions here.
Q: Is this a passive income for you (if yes how many other passive incomes do you have and what are they)? Or is this more of a side hustle?
A: I guess you could say this is a form of passive income, or side hustle. It’s not really “passive” since there is a lot of communicating, tracking loans, verifying information, sending out reminders, etc. This would probably qualify more as a hobby or, for someone doing it seriously, a part-time job.
It’s not really an income stream either since most people don’t make money from it. Most loans pay back about 20% interest and about 80% of people pay their loans. As a result most lenders don’t make money from this. The few that do are rare and probably see it as a side hustle. For me this is an experiment – seeing if it can be a hobby that pays for itself.
Q: What would you describe as your personal tolerance to risk in words and on a 1-10 scale, 1 being the most risk averse?
A: My risk tolerance is typically low, probably about a 3/10.
Q: What are your biggest red flags in a borrower’s requests?
A: Big red flags? There are a lot. The biggest is probably someone with existing unpaid/unfinished loans. People who ask for new loans before others are paid off are either poor at managing their money or unlucky. Either way it’s a concern.
I’m also wary of people with elaborate hard-luck stories. If someone’s uncle has cancer and their dog is sick and their car broke down chances are they are playing your emotions, not actually planning a legitimate business transaction.
A third big, red flag are people who request the same loans month after month. If they’re copy/pasting the same request every week/month, saying they are short on a bill or need car repairs, then something is wrong there. Again, they’re either scamming or super unlucky and not a good investment.
Q: How often do you continue working with the same borrowers and do you every develop like on-line relationships with them?
A: About a quarter of my loans are repeat borrowers. We generally don’t get to know each other much outside of the business transaction, but we sometimes become more friendly over time if our transactions go well. I’ve only been doing this six months and some people have borrowed two or three times.
Q: How do you react to a loan going unpaid? Do you try to do anything after?
A: When a loan goes unpaid I’ll usually wait a few days, then send a reminder. Then send a request for a new schedule. Then report the deal as broken to the payment processor to try to get it reversed. Then mark it as late on the forum. Then mark it unpaid. The whole process is about a month long.
Typically, either the person will pay back the loan or the payment processor will reverse the transaction. Once a loan has been flagged as unpaid that person isn’t allowed to post future requests; the community tries to weed out people who aren’t able to pay back their loans.
Q: At what point do you feel comfortable with a borrower?
A: I’m not sure if I ever feel “comfortable” with a borrower. I don’t know these people, they’re just strangers on the Internet. Some I’ve successfully completed loans with multiple times and I appreciate them. Others have taken out multiple loans and not paid me back on the last one. It’s important to keep in mind that these are not people I know, people I’ve met, or even talked to on the phone. Hopefully some of them become successful deal partners, but some won’t.
Q: Are you a member of any other similar platforms?
A: Yes, I also use goPeer It’s the Canadian version of Prosper. I’ll be talking about these in an upcoming post. For now I’ll just say these are more regulated, convenient platforms for peer-to-peer lending.
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