When looking to invest or generate income with peer-to-peer lending, it is important to consider what your goals are and what part this money plays in your overall financial situation. Understanding what you have in mind for this money can help you then determine how much money you should have in the peer-to-peer marketplace.

Prosper Lending as an Asset Class

In order to fully understand the role that this type of money plays, you first have to understand how it works as an asset class. The most common types of assets are:

• Stocks
• Bonds
• Cash
• Real Estate

Sure, there are other derivatives of asset types, but these are the four most common types of assets that make up a typical person’s portfolio. So, where does peer-to-peer lending fit in?

When you lend money to someone on Prosper, it is essentially the same as buying a bond. A bond is defined as: “A certificate of ownership of a specified portion of a debt due to be paid by a government, individual, or corporation to an individual holder, usually bearing a fixed rate of interest.”

For example, when you buy a U.S. Savings Bond, you are lending money to the government, and in return they agree to repay you over a specified amount of time plus a specific amount of interest. The same transaction happens in peer-to-peer lending-only the agreement is between two individuals.

Comparing Prosper Loans and Bond Risk

All bonds are not created equal, and depending on the issuer, a bond may carry more or less risk than another bond. Take government bonds for example. These are considered the safest of all bonds because repayment is backed by the full faith and credit of the government. This security comes at a price-lower interest rates.

Then consider corporate bonds. These are companies seeking loans from investors. Since the repayment generally isn’t guaranteed, they typically command a higher interest rate to attract lenders. Very large and stable corporations will typically have lower interest rates, whereas very small or financially insecure companies may offer very high interest rates because the possibility of defaulting on the bond is much higher.

Prosper loans are no different. The higher the risk of default, typically the higher the interest rate you can receive. If you are interested in funding a Prosper loan to someone with a poor credit rating, relatively high debt-to-income ratio and a 21% interest rate, you have to realize that this is no different than buying a bond from a small start-up internet company that has a chance of failing. With the higher rate comes added risk.

Where This Fits Into Your Portfolio

Now that we’ve determined that peer-to-peer loans are nothing more than personal bonds, where do they fit into your portfolio? To answer that, it comes down to what your goal for this money is. Do you want to generate regular income that you can use today? Do you want to simply generate income so that you can place the money into more Prosper loans? Or is this all part of the bigger picture where you’re looking to simply accumulate more money for long-term goals such as retirement?

Short-Term Goals

For short-term income you can focus more on diversifying across different Prosper loans and cash you may have elsewhere compared to how it fits within your overall portfolio. Short-term goals can put this money at risk, but you are doing so knowing that it is money you can afford to possibly lose or earn less since it isn’t being used to fund something like retirement.

Here you want to focus developing a good mix of loans and cash that produces the highest reward with least amount of risk. As far as how much money you should be putting into this practice, you really just want to make sure that you are comfortable with the amount of funds you have committed and that tying this money up isn’t sacrificing your other long-term goal funding.

Long-Term Goals

When P2P lending with a long-term focus, things are a little bit different. Since this money makes up part of your portfolio that shares a similar goal, you want to make sure they work together and you keep your risk/reward balance in-check.

You may have heard about typical asset allocations before that are based on age and risk-tolerance-90/10 mix of stocks and bonds, 70/30, 30/70, and so on. Conventional wisdom suggests that the younger you are, the more aggressive you can be with stocks because you have more time to recover from losses and see higher long-term average returns. As you age and approach retirement, you generally move to a more conservative approach that protects principal since you likely are or will be living off of that money.

Comparing Prosper loans to bonds is only a start, because you first need to know what type of bonds you’re dealing with. Remember, most of the asset allocation models consider the bond portion as a very conservative bond position that consists of primarily government bonds for guaranteed principal. When lending money on Prosper, you aren’t getting a guarantee that the government will pay you back, so these loans are much more like corporate bonds where there is a varying degree of risk.

That being said, does this mean if you consider yourself someone who should be in a 90% stock and 10% bond portfolio that you should allocate 10% of your assets to Prosper? Not exactly. Remember, in a typical asset allocation strategy, the bond holdings are used to safeguard your stock declines with protection of principal and interest payments. Thinking about corporate bonds and Prosper loans is closer to comparing them to stocks in this regard.

So, if you have a $100,000 long-term portfolio that is appropriately invested in 75% stocks and 25% bonds, what would be reasonable as a peer-to-peer lending allocation? If you’re seeking low-quality loans and trying to obtain the highest interest rates, your peer-to-peer lending holdings should be treated more like stock. This means that of your $75,000 in stocks, you should either sell some of the stock position to put in Prosper, or if adding new money, treat it as purchasing new stock and adjust your bond holdings appropriately.

If you are being much more conservative with your Prosper lending and seeking only the highest grade loans, you have a bit more flexibility. While even the highest rated borrowers aren’t guaranteed to repay the loan, the likelihood is much higher. For the most part, you can probably be fairly comfortable in considering this money as part of the bond portion of your portfolio.

Final Thoughts

Ultimately, your financial portfolio is more of an art than science. There are no rules that are set in stone, and it is up to you to determine how much risk you’re willing to take. Lending money on Prosper is a great way to add diversification to your portfolio, but you do need to understand how this money fits into your financial picture. Different goals will determine how much money you should allocate towards peer-to-peer lending and the amount of risk you should take.

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Jeremy is the author of the personal finance blog Generation X Finance, which aims to help a unique generation achieve financial independence. Jeremy also writes for the Financial Planning topic over at About.com. He currently works as a retirement plan specialist with a focus on employer-sponsored plans.

Unless you live in the heart of a large city with accessible mass-transit, you probably need a vehicle. Unfortunately, vehicles can be an expensive component of your finances. When it is time for a new vehicle, do you buy a new or used car? Or, do you skip buying altogether and lease?

Buying a New Car

Unlike buying a house, when you buy a vehicle, it has no chance to increase in value. Vehicles are depreciating assets, which mean they are not investments, but an expense. Buying a car can still be a good decision, but the type of vehicle, along with whether you buy new or used will have a significant impact on the financial outcome.

If you choose to buy a new car, keep in mind that the average car loses around 50% of its value over the first three years you own it. This is extremely important if you are someone who likes to buy a brand new car every few years. You will be wasting a lot of money to depreciation just to have the latest model.

Buying a Used Car

This is where buying used can create more value. If you buy a car that is already two or three years old, you’re letting someone else lose money on the initial depreciation. This also means that by buying a vehicle that is a couple years old, you’re getting a relatively new vehicle at 25-50% off what you would have paid just a few years ago.

Buying used is becoming even more attractive in recent years due to warranties. In the past, buying a used car usually meant giving up the manufacturer’s warranty. Now, as automotive companies fiercely compete for business, you can often obtain a used car while still retaining the warranty, or even have the ability to purchase an extended warranty.

Leasing

Finally, if you choose to lease instead of buy, there are a few important considerations. On the surface, a lease always sounds like an affordable way to get into a brand new car. While it’s true that you may be able to keep monthly payments down with a lease, it does have drawbacks.

First you have the down payment. When you put money down on a new car purchase, that money will go right into the value of the car and reduce the amount of money you have to borrow. With a lease, there is almost always some sort of money due up front, which can be $2,000 or more. This is lost money, and you will still need to make the same required monthly payments.

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Jeremy is the author of the personal finance blog Generation X Finance, which aims to help a unique generation achieve financial independence. Jeremy also writes for the Financial Planning topic over at About.com. He currently works as a retirement plan specialist with a focus on employer-sponsored plans.

Debt is a fact of life for many people, and while debt isn’t necessarily a bad thing, bad credit card and debt habits are. When you are burdened with substantial debt, you probably wonder how you can effectively reduce that debt. Here are a few things that can help you get things under control.

Stop Borrowing

You need to stop borrowing. Does that sound obvious? It is, but unfortunately that can be easier said than done. The fact of the matter is that you will never climb out of debt if you continue to borrow money. Resist the temptation to use your credit cards and remove them from your wallet or purse. Put them in a lock box at the bank, or freeze them in a block of ice. Do whatever it takes to make them harder to get to.

Consolidate Your Debt

Many credit cards have very high interest rates, and these high rates make your monthly payment larger. Not only does it increase the monthly payment, but you will spend hundreds or thousands of dollars in interest while repaying the debt. If you can, you want to negotiate a lower interest rate or consolidate the higher interest debts into a more favorable rate. Editor’s Note: Using Prosper to get a loan is an excellent way to consolidate debt – use the Loan Calculator to view a summary of your loan’s overall cost.

Break the Minimum Payment Habit

Once you have stopped borrowing more money and have obtained reasonable interest rates on your debt, you need to break the minimum payment habit. Did you know that on a typical credit card, if you only make the minimum payment, it can take over ten years to pay it off? In addition, over that time period you will likely pay more in interest than the original balance was.

The minimum payment may be affordable, but you are on the long road to financial freedom if that is all you pay each month. Minimum payments are typically just a few percentage points of the outstanding balance, which usually just barely covers the interest payment.

Get into the habit of paying more than the minimum. It doesn’t matter if it is an extra $10 or $100 a month, but by paying more than the minimum, you will be applying that directly to the principal and can shave months or years off the debt. Not only do you pay the debt off quicker, but you’ll save a great deal of money as well.

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Jeremy is the author of the personal finance blog Generation X Finance, which aims to help a unique generation achieve financial independence. Jeremy also writes for the Financial Planning topic over at About.com. He currently works as a retirement plan specialist with a focus on employer-sponsored plans.