Two months ago I funded my Prosper account with a few hundred dollars. Prosper connects those seeking a loan with lenders. Risk of default from rickety borrowers can be spread out by investing only $50 per loan. The interest rate is determined by lenders bidding the rate at which they are willing to loan.
When I am searching for loans to bid on I check off the homeowner box and select a B or higher Prosper credit rating. I allow any debt-to-income (DTI) ratio in the search. I then sort on hours left for bidding and select prospects with interest rates 10% or higher. I find the better the credit rating the lower the risk. The correlation is amazing. I look for lower requested dollar amounts to be borrowed and those that need the money for credit card debt consolidation or for their business. Currently my lending is earning 17% but I am allowing for 7% of this to be defaults which will give be a net return of 10%. I shall not grieve though even if my net drops to 3%.
One can join a Prosper group and pick up tips on possible candidates for loans. I have loaned to a business borrower, based on a group tip, who had an E Prosper credit rating. I am rewarded with a return of 30% which bumps up my average return. I recommend you don’t have too many of these in your portfolio because of the risk of default.
Lending on Prosper ties your money up for three years but it is a different situation than with a Certificate of Deposit. With Prosper lending you get interest and a portion of the principal back each month. With say, $1,500 invested at 17% you would get $50 a month back to re-lend. I would be cautious though because your money is not insured and some people have not fared well. Prospers.org is a website that has a lot of useful information about Prosper, some of which you will not find on Prosper itself.
What I like about Prosper
I like the bidding process and checking through all the details of the borrower. It is interesting to see what the borrower wants the loan for. I really get a feel of how onerous credit card debt can be if the borrowers think they are getting a good deal with a Prosper loan at 25%. Debt is indeed worse than the plague. The automated bidding you can set up is cool. It is also great to be able to sort on a number of parameters to reduce the amount of loans I have to look through. When a loan is obtained through a false identity Prosper refunds your money. Loading the Facebook application allows money to instantly be transfered to Prosper instead of waiting five days. Accounts are easy to set up. And of course I love the higher returns, even with the risk.
What I dislike about Prosper
The loans are three year terms. It would be handy to have one and two year terms. My money can sit around not earning interest. Five days for a transfer, up to six days to wait for the bidding to close. Another seven days for the loan to be reviewed. Then, if the borrower does not qualify for the loan, your money is refunded and you go through the bidding process again. You can however optimize the process to reduce this dead time. I would like there to be more competition for Prosper. There are other lending sites but many of them have a social lending component.
What say you about Prosper?
Updates
1 May 2009: Prosper, for six months closed, has reopened. They have a website redesign and one item I don’t like is that the interest earned for the month and in total has been removed from the summary. I had to go through the statements to keep a running total. A total is useful in balancing against charge-offs so that you can decide whether to invest more. In contrast, Lending Club changed their summary page and more prominently display the interest earned so far in the statement cycle and the total interest since the account was opened.
I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.
Tim Ramsey
Those sites are good but as far as I can tell they all have some sort of social lending component whereas for me Prosper is strictly business. I do get into lending for humanitarian purposes but I do that through Kiva.
I put $500 into prosper almost a year ago now. Of my 10 loans, I’m at 3 defaults..and unscientific 30%. All of my defaults are ‘D’ rated, and I have a few more D’s with 2 years left. Of course I can’t withdraw my money because it’s locked. So…be careful and choose high quality borrowers. And if you really want safety, don’t go through prosper, because the best way to hedge your loan bets is via collateral – something prosper won’t let you do.
Thanks for your comments, I’m glad you wrote. I am a little more fortunate in that I have no defaults but of course I am only 3 months into the loans. I agree it is normally very wise to have collateral. The money I have in Prosper is my risk money, I have the majority of my investments in much more conservative instruments. I empathize with you, even one default would be distressing. Here is a breakout of my loans by Prosper credit rating:
AA – 26.67%
A – 23.14%
B – 43.48%
C – 0%
D – 3.35%
E – 3.36%
HR – 0%
NC – 0%
The borrower also had to be a homeowner though I don’t know if that makes any difference.
That looks like a good spread. The B’s and up have been paying regularly and on time. Luckily my investment was my ‘high risk’ funds as well, but 30% is certainly more than they allude to on their site. I think the real problem is what kind of incentive do people with really bad credit have have to pay back a huge loan. Just searching through the site, there are many low credit rated borrowers asking for a large sum. It’s legalized theft really if they never intend to pay it back. So, good luck with your investments, and don’t expect too much from the < B’s.
Thanks for your comments, I appreciate hearing from you. You are right, I don’t seem to be having much difficulty with the AA, A, and B’s. I agree also that if one doesn’t intend to pay back the loan you are really a thief. I have known people that have declared bankruptcy and for the longest time afterwards if they could get a loan it would always be at a higher rate. To buy anything online that required a credit card they had to have a relative do it for them and reimburse them with cash. I wonder if that over time they end up paying more than the money they defaulted on.
I have a “Prosper” account that is three years old… history:
20 loans funded.
3 paid back as agreed ~ 2 still open, and 15 defaulted / BK.
Horrible program and experience!
I ended up not doing particularly well. I didn’t have as many defaults as you but enough to wipe out any profit. My first four defaults were all AA rated.