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More Real-Life Prosper Experience Print
Thursday, 22nd February 2007 (by J.D.)This article is about Investing, Real-Life
Earlier today, Frykitty shared her experiences with Prosper, the person-to-person lending site. Her post prompted an excellent discussion. Here’s some follow-up information from Justin McHenry of Zen Personal Finance, who last month posted this collection of comments and reviews from Prosper users. He’s kindly granted me permission to reprint it verbatim.
One of the most-read posts I’ve written at Zen Personal Finance was the one from last June titled “Why Prosper.com Will Fail”. To be fair, I also wrote a counterpoint to that very post, titled “Why Prosper.com Will Succeed”. The first gets much more traffic and gets mentioned in other blogs and discussion boards, perhaps because it’s the second listing if you Google “Prosper.com”.
I have nothing against Prosper and feel a little bad that my negative take on it shows up so high on Google while my thoughts on the potential positives do not (although I linked to the positive post on the negative post).
So, 7 or so months later, I thought I’d look to see how Prosper is doing.
According to this NPR interview with Prosper CEO Chris Larsen, Prosper has over 140,000 members and has funded over $27 million in loans. My thoughts obviously haven’t dampened others’ enthusiasm.
Here are some other articles and thoughts I drummed up when trying to get a feel for how Prosper is doing today and what its prospects for long-term success might be.
Despite the somewhat derogatory headline “Want to Loan Me Money? Here’s a Picture of My Dog.”, this past weekend’s Washington Post report on Prosper.com is actually fairly positive on the company. BusinessWeek’s “A Tale of Two Lenders”, compares and contrasts Prosper with microloan site Kiva.org, which serves poor communities in Africa and elsewhere.
But forget the media — what are lenders and borrowers saying? Some of what I found (in no particular order):
It’s now been almost a quarter since I began using Prosper.com. Overall the Prosper experience has been lucrative. My portfolio currently has a risk-adjusted return of over 10%. That certainly beats what you can get currently with both money market accounts and CDs both of which currently will return you around 5%.
…
As I and many others have previously argued Prosper needs to address the issue of money not participating in loans. For example, I mentioned above that my risk-adjusted return was over 10%. That’s only true of the money is actually deployed in loans. If you look back over the past quarter at the overall amount of money sitting in my Prosper account the actual risk-adjusted return is significantly lower because not all of my capital has been deployed into loans.
I know this is been raised over and over and over again. But Prosper needs to provide interest on funds that are not yet invested.
…
I do have to consider the amount of time and investment takes to achieve the return. Right now, that’s my biggest issue with Prosper.
Countercolumn (I don’t think this person has actually used Prosper and does not back up the claims made, but the opinion is still interesting):
It’s the coolest thing in the world. It’s addicting. It’s a great little microcosm of capitalism. The lenders are the stupidest people I’ve ever seen!!!
Why?
Default rates are already, like TWICE what Experian data leads them to believe. Most veteran lenders are underwater. New lenders who haven’t learned a thing, but are chasing the illusion of 29% returns are bidding interest rates way down. Lots of borrowers aren’t even making it through 3 months without paying late. Lenders are sinking hours into researching trying to beat the odds, but don’t seem to be paying themselves a salary to compensate for the time spent in research. There’s so many idiots bidding to lend that they’re bidding loans down to less than their default rates for a given class of borrowers. There is a shortage of good borrowers.
Blogging Away Debt interviewed the person with the most invested in Prosper loans, about $750,000. He’s been pretty happy so far:
Originally, I expected returns of 18% to 20%. I now think my returns will be more like 15%. I am happy with 15%. If my returns drop to 11% or 12%, I’ll start moving money back into stocks and mutual funds.
I invested a little bit to try it out. Unfortunately after the better part of a year I am currently only breaking even.
My lack of success is due to intentionally starting out funding risky loans with a higher interest rate. I wanted to start with the riskier loans to push the envelope and see how large a return I could get. I now have a better idea of how to distribute my money.
For the last 4 or 5 months, I’ve had a good chunk of change invested in Prosper, and it has been performing beautifully.
…
Prosper gives me the expected default rates for each credit rating so that I can adjust my requested rates accordingly. Therefore, if I am diversified over enough loans, it is almost no risk because it is entirely predictable, and I’m pretty much guaranteed my desired interest rate of 12%.
…
I have decided that this is probably the best investment opportunity available at this time, and I’m going (mostly) all in.
Roy:
The biggest problem with Prosper is it takes FOREVER to get anything done. It took 3 days for me to set-up an account and get it verified. It took me another 5 days to transfer funds from my bank account into my Prosper account. Then it took me about a week to get start bidding on listings and for those to close.
A couple of my thoughts based on what I’ve been reading:
First, I think it’s amazing that someone has put $750,000 into Prosper. That would scare me. On the other hand, this person must have a lot of money to play with to even consider such a thing.
Second, I think Moshe is crazy if he is using Prosper as his main mode of investing. It’s easy to look at the promising numbers, but just as MLM schemes will tell you what you could make, they don’t necessarily correlate with what you will make. Not trying to compare Prosper to MLM, just saying this concept is too new for anyone to making it their main investment vehicle based on potential. This thing’s less than a year old, and the numbers they use for predicted default rates are based on traditional loans, not on the actual payback of Prosper loans. Prosper just hasn’t been around long enough to reliably tell you what to expect.
Beyond that, though, I guess the reason I haven’t been enthusiastic to put any money up is that it all sounds like such a hassle, setting up these accounts and parameters for possible loans, then bidding against others to place your money. I don’t have the time for all that. It seems more attractive to someone who really likes to be active with their money, someone who gets as big a kick out of being a “winner” in the system as they do in the actual return. Because your time has a value, too, and unless you think Prosper is a lot of fun in addition to the potential of higher returns, then you have to factor in how much time you’re spending when looking at your overall return.
The goal of making lending more “democratic” is great and I hope Prosper can meet that goal. But I’m still not in.
February 22nd, 2007 at 3:11 pm
As I posted in the comments on the earlier Prosper post:
“I’ve been on Prosper since it opened just over a year ago (Prosper’s been open for about a year and a week, my one year anniversary was 3 days ago). I have $25,000+ invested, and over 1400 posts on the forum. As you can tell, I’m a big fan of Prosper.
If anyone is genuinely interested in this, check out the forums: http://forums.prosper.com/index.php
There’s a trove of knowledge there, and if you have any questions, send me a pm on there (same name, arebelspy), I’d be glad to help out.”
Everyone curious should also check out the rough Q&A Prosper Andrew did in the comments on that post for the answers to some basic questions you might have:
http://www.getrichslowly.org/blog/2007/02/22/prosper-investing-on-your-terms/
-arebelspy
February 23rd, 2007 at 5:43 am
I understand your hesitancy to endorse prosper. After all, it is radically different than the tradition options. But I think once people get used to the idea and system is refined and made simpler that social lending will really take off. It just gives people on both sides a better deal by cutting out the middle man.
February 23rd, 2007 at 5:44 am
I see a lot of potential for micro loans, but as I read testimonies, for and against, it occurs to me that Prosper.com has been in business for a year an the standard term of a loan is three years. At this point the only loans paid in full are ones where the lender has suffered the prepayment risk.
This in itself doesn’t make bearish but I would find it useful to contrast the opinions of bankers (maybe even loan sharks) with the opinions of people who have used it over the last year. The common mantra is that a professional lender has more overhead and therefore higher rates, but how much really does that cost, especially in light of the economy of scale from a bank. If a credit card company has a team of Phd Actuaries telling them to charge 17%, what makes Joe Sixpack think he can loan for less?
I hate to be a wet blanket, but my only explanation is that Joe Sixpack has less understanding of default risk or less profit motive. I welcome an alternative explanation, but I believe the balance may be tipping in the favor of the borrower more than the lender on Prosper.com.
February 23rd, 2007 at 6:32 am
Duane Gran,
On one hand, I totally agree with your reservations. However, there are a few indications that there is something fundamentally more efficient about Prosper than the current institutional lending system. In other words, Prosper may address a market demand that isn’t currently being addressed by corporate financial institutions, and may never be.
Here’s how your typical bank works. They take your money, in the form of savings deposits, and pay you a very low interest rate. (In Canada, this can be less than 1%.) Then, they use your money to lend it out in various ways in the hopes of making greater returns than what they’re paying you for your savings account. On the low-risk side of their business, there are mortgages and RRSP loans. On the high-risk side, there’s probably stuff like hedge funds and car loans.
Banks are very good at things like mortgages. That’s because you can put all the necessary information on a form, plug it into a computer, and have it spit out a very good guess at what the appropriate interest rate should be. The number of variables in a mortgage are fairly limited.
However, the typical situation for a Prosper loan is not so simple. There are a high number of variables in each situation. How do you quantify the fact that somebody is just coming out of debt six years after going through a divorce and needs a car to get to a new job? Add in the fact that this person has just finished an apprenticeship in HVAC. Maybe throw in the fact that they moved back in with their parents after their divorce. How do you put that information on a spreadsheet and feed that through a computer? It’s a very inefficient type of loan to process. So banks tend to shy away from making these types of loans. They take too long to process and figure out. The end result is they either slap a super-high interest rate on the loan, just to be safe, or they decline the loan.
Prosper, on the other hand, is proposing to have thousands of people with spare time that are willing to evaluate each of these cases individually. Basically, they will play the role of loan officer. That’s their job.
Perhaps one day the banks will have programmed their supercomputers to deal with 90% of these highly variable situations, and then maybe Prosper will no longer prosper. Until then, I think they are addressing a niche that isn’t being addressed by anybody else.
Here’s my prediction. The community of Prosper will become like that of eBay. There will be some specialists that will devote themselves to this and make quite a bit of money off of it. However, that will take lots of time and be just like another job. There will be some people that just dabble in it. There will be some horror stories of people that get scammed and these will make the rounds on all the major news sites, triggering another round of debates. Over time, the system will become more sophisticated and efficient, as eBay has over time.
I would be willing to drop $500 to $5000 in “low-risk” loans, but no dice for us Canucks.
squished
February 23rd, 2007 at 6:57 am
I’ve been trying to invest in Prosper for a few months now, but I keep getting outbid!
Prosper appeals greatly to me, and I think it has something to do with my interest in blackjack. I find near endless entertainment in the play-by-play of blackjack, the stock market, and now Prosper. So far blackjack and the stock market have worked for me, at least a little bit. Not as a primary source of income, but as a nice little supplement.
As I become more aggressive in my lending and begin winning loans, I hope that Prosper will become the same way for me - a fun hobby that makes some money.
You’ve posted several times about money making hobbies - I suggest adding Prosper to the list.
-James
February 23rd, 2007 at 7:23 am
Where are all the article about or by the borrowers? Everything I have read is about or by the lenders?
Who are the people borrowing your money? What is their experience?
February 23rd, 2007 at 8:20 am
squished18:
I have an unsupported suspicion that banks tend to ignore those special circumstances because they don’t want to be accused of discriminatory lending practices. Better to just blindly trust FICO’s “objective” criteria and avoid the potential lawsuits.
One point I’d like to highlight, though, is your mention of car loans and mortgages. I keep seeing examples like that in the comments.
Unlike a bank, Prosper’s loans are all unsecured. Because Prosper lenders cannot get a lien on a car or house or boat, they should logically always charge more than a bank for loans in which a bank demands collateral.
I’ve no evidence that this is happening, but if Prosper lenders are undercutting banks on car loans and such, it’s almost certain that they’re not properly considering the level of risk they’re taking on. Rather, it would just be an oversupply of lenders chasing too few borrowers.
I, too, would like to hear from a Prosper borrower.
February 23rd, 2007 at 8:57 am
I’ll see if I can dig up a Prosper borrower in the next few weeks. I’m not sure how to go about this, but I’ll bet it can be done!
February 23rd, 2007 at 11:10 am
squished18,
Thank you for the detailed response. As you point out, I overlooked the most obvious explanation — the loans themselves embody complex circumstances that traditional lenders don’t address. This is a believable hypothesis and I hope you are right about the potential for Prosper to work like eBay.
February 23rd, 2007 at 2:09 pm
I’m a lender on Prosper and it doesn’t necessarily have to take any time at all. Unlike Ebay (at least to my knowledge), you can place standing orders for any loans that match your parameters and it bids without your intervention. I would say that I spend about 15 minutes a week on it, not a very large time commitment. If you want to sell things on Ebay it seems like a much bigger headache (dealing with shipping and all that). In the end, I think the 80/20 rule applies. You put in 20% of the effort and get 80% of the value out of it.
March 1st, 2007 at 10:42 am
This thread/posting might be considered dead by now, but it’s the most relevant place to post this. I just had an idea for improving Prosper.com.
What if Prosper allowed a secondary party to co-sign for a loan? Banks do this all the time with people who get their mortgages for the first time, right? What if another Prosper member could vouch for a potential lender by “co-signing” the loan? Basically, if the original lender defaults on payments, Prosper can go after the co-signer for the balance. The credit risk would be spread over two parties.
I think this would add greatly to the confidence of potential lenders, and it would also likely significantly decrease default rates. Anybody who co-signs a loan would want to be very familiar with the situation of the potential borrower. The co-signer is putting their own credit rating and money on the line.
This address situations where someone knows the potential borrower is a good credit risk, but doesn’t have the cash up front to give them the loan. For example, let’s say I know my sister is a responsible person and she just needs a bit of cash because she’s going back to school. However, I’ve got a mortgage of my own so I don’t have much free cash that I could lend her for these purposes. So, we could both go on Prosper and I could co-sign the loan for her.
On the other hand, if a potential borrower finds it impossible to find anybody willing to co-sign their loan, perhaps they really shouldn’t be applying for that loan in the first place.
Prosper has gone part way with this idea by establishing the concept of groups. However, if a group member defaults, you can’t go after the group for the money. Co-signing the loan has a lot more substance than a loose social connection.
Thoughts?
March 23rd, 2007 at 11:22 am
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December 13th, 2007 at 1:30 am
[...] Get Rich Slowly has a useful summary of information. [...]
September 22nd, 2009 at 12:31 pm
Prosper is only there to funnel shitty borrowers that are destined to default on their loans to the few collection agencies that have joined forces with Prosper. When these borrowers don’t pay up, prosper isn’t out anything and those collection agencies get half of the lenders money, if they can recover any at all. If they can’t, they just sell the debt to someone else.