Greetings,
I've been lending through Prosper for a couple months now and thought I'd share my experience and solicit the thoughts of some others that are either considering it or already lending. If you don't know what Prosper.com is, it's essentially an EBay of lending, which lets the free market (us) determine the adequate rates for borrowers, generally at rates much lower than the institutions are willing to offer, especially if they're carrying 20+% credit card debt. Risk of default isn't much higher than through banks and the like since defaults are reported to a reporting agency.

Anyway, I started off slow with just a couple loans and now I've just added a couple thousand more dollars to my account since I have several loans actively paying and no defaults. My average interest rate is over 14% as of today. The key is to spread your loans across several credit grades and loans at about $50 each to minimize adversely impacting your overall portfolio if any one loan defaults. So, it's been a great experience for me. On top of providing a return that exceeds the major market index returns and providing for excellent diversification, it's actually fun and rewarding to do the research and help out some folks who either made a bad choice or caught a bad break and are now beholden to credit card companies charging obscene rates of 30% or more in some cases.

I'd love to hear your thoughts. If interested in lending strategies, referral bonus for signing up (only a couple weeks left) or borrowing as well (anyone with an interest rate over 12% should join since Prosper's rates can generally beat any market rate), feel free to visit at after posting here.

Prosper is fascinating. It was love at first site for me. I've never been a lender, but am currently a borrower and I gotta tell you, this site is fantastic. I posted a loan request of $15,000 @ 25% interest and put my trust into the lenders. By the time my loan auction ended, my rate was 9.25% for 36 months with a $150 loan origination fee. Unbelievable. Seems like I read somewhere that eBay is not sitting on it's hands with this style of auction. Exciting stuff.

Prosper's execution is a bit off but the idea is probably here to stay. Ebay just bought Microplace and Virgin just bought CircleLending. Zopa seemed to have done a pretty good job in the UK and will be here soon. So it looks like Prosper will soon have 3 different competitors.

I have $1K "invested" in Prosper. Of my 16 loan portfolio, I have 1 late (and probably headed for default) so that means my 16% lending rate is probably headed for an 8%-10% ROI. Still not bad but really not worth the effort of picking loans. I'd have to go bigger -- $500 per loan in order to make it worth my time.

I've considered putting a little bit of money into prosper, but have been too leery of default rates to go for it.

I added a couple grand this week on top of my initial investment. I started off very slow and only do a couple loans a week, but after a month or two, bamm, ready for more. With the market taking off the way it has, I'm relying on it for some great diversification. Even the internationals and real estate are all now inexorably linked, as evidenced by the Feb 27 Asian meltdown and the mayhem that ensued in all markets. Anyone have a favorite group? I've been using groups that already have a pretty solid history, 5 stars of course. I'm sure when I get my first late/default, it will be a wakeup call, but now over 30/30, so might as well keep doing what I'm doing.

Dan at www.everydayfinance.blogspot.com

I have a small (couple hundred) amount invested there. I don't think the ROI is worth my effort. I've had one loan to go default, one get paid off in 3 months and the others are chugging along.

If the system truly is controlled by the market, then I would expect your rate of return to be equal to other investment vehicles once risk is adjusted for. Since I'm not part of a crime family and don't have any goons on the payroll, I'm not that interested in becoming a loan shark. I don't see a place for this kind of thing in my portfolio.

Asset class correlation is just as important as risk/return. 2 high risk returns non-correlated together can combine together to produce lower risks. For example, commodities and REIT both have returns similar to stock but since they are on different cycles, having a portfolio of stock+commodities+REIT gives you the same return at a lower volatility.

Now, I don't know what the correlation of P2P lending is yet. We'll need some history to look at which is why I have only a puny % in Prosper.

I've been following prosper too for a while. I would suggest that expectations of 14% long term returns are pretty unrealistic. That type of return is only if you get really lucky. Consider any money you lend out on prosper to be 'fun' gambling money that you won't mind losing.

If you decide to play, stay away from HR & E credit ratings. You could just as well save yourself some time by burning it.

Keep in mind that your earnings are taxed at your ordinary income rate (vs. only 15% for long holds on the stock market).

Loans go bad with age, as evidenced by this chart (their real results)


Also check out their late loans by age: http://ericscc.com/index.php?page=lates_by_age

Spend time in their forums, you will learn A LOT! Otherwise you will be walking in blind & have to learn your lessons the hard way. http://forums.prosper.com/index.php?showforum=3

Money in a prosper account not currently in a loan gets no interest. This will slightly reduce your actually ROI.

This is how all the other lenders on prosper are doing:

The mean expected ROI over all these portfolios is 4.29%.

As far as borrowers go, it appears that the bidding in quite competitive and they do get a good rate for an unsecured loan. Some borrowers may have better options like access to a home equity loan.

Sorry. I am not trying to rain on any body's parade. But if you are going to dive in, it's best to do it with your eyes wide open.

These are good points. To share my thoughts on a few, regarding the loan sharking and goons, I'd argue that the real loan sharks are the payday lenders lending at 100%+ for short periods and credit card companies charging 30%+ to people who missed a couple payments. If you look at the profiles and the incomes (which are vetted by group leaders), some of these folks are 6 figure earners or recent college grads that ran up some debt as a student and now have full time jobs. Not all the borrowers in the community are deadbeats. A lot of them can simply get a much lower rate than 30%, and I'm glad to oblige.

GusGus raises some great reality check points. I've done some research at Eric's credit as well, I did some posts on his work and have some ideas of my own that I'd like to see more granularity on, but for now, he has mainly aggregate data, which can be a bit misleading. For instance, his loan late/default data is inclusive of all borrowers. But several of the borrowers don't belong to groups, and hence, their performance is much worse than the group data set. Additionally, he postulated an "estimated return" which is the chart that was included in this chain, but this is just that: an estimate with several assumptions attached. If you look at certain groups, say "Lend2" and check out their performance, which is tracked by Prosper, the default rates are actually better than the Experian results for said credit grade. Some of these groups have over a hundred loans with like 1-2 defaults total on lousy E and HR loans; perfect records for A-C over several months (not all brand new).

I agree that for most lenders, 14% long term is a tough achievement. If it were that easy, of course, more investors would pile in. I think there may already be some loan rate depression occurring as supply of lenders outstrips demand for borrowed funds. However, there are a lot of people making 12%+ long term inclusive of defaults. These folks have been profiled in legit sources like businessweek, forbes, money magazine, etc. On top of that, at Eric's you can see total amounts invested by lots of folks. Some of these people have 6 figures invested in loans. Obviously, throwing around that kind of money, they know what they're doing and must be exceeding the long run 8-10% returns of the S&P. I guess a last point is the interest bearing issue isn't that big a deal if you just stay fully invested. As I have payments coming in, I continue to lend out, so I don't really need to be earning a couple percent. It's not much different than idle cash in say, an Ameritrade account. They pay like .25%, it's ridiculous. Staying fully invested or moving to CDs/goog money market is the best way to manage idle cash.

Anyway, I think all these points were great, and new investors should certainly research more thoroughly before just taking anyone's word for it. The takeaway for me at the moment is that if you go with good groups who actually invest in their lenders, vet their W-2, stick with professionals with decent past credit, but that perhaps got in a jam due to medical issue or poor habits as a college student, you can both help them with lower rates and help yourself with above market returns. I'm actually counting on my first default, which will bring me closer to 11% total from my current 14 since I have over 30 loans out.

Would love to hear additional thoughts/experiences.

Dan at everydayfinance

As I stated before, I am a borrower and there ain't no way my lenders will ever get even a one day late payment. That being said, I've also browsed the listings and found a very high percentage of stupid loan requests for people who have no business borrowing money for anything. Mainly folks who are simply trying to rob Peter to pay Paul because Paul ain't been paid in a while. While many of the requests go unfunded, some do actually get funded with pie-in-the-sky interest rates and empty promises. I found it to be too much browsing to make it worth my time, but if one does take the time and carefully select borrowers, I think you can put together a solid portfolio. Sadly, many would-be borrowers don't have a problem stiffing someone, but that's the real world not limited to Prosper.

Group membership is no where near a magic bullet. In the below dataset group membership did improve the default rates over the total prosper dataset (Group members & Non group members) for A's & B's, but Hurt AA, C, D, E & HR.

Dataset:
* Origination Date: 11/1/05-1/17/07
* Observation Date: 1/17/07
TOTAL, Just Group Members

DEFAULT RATES:


True. The chart is based on several assumptions. There is no way to perfectly calculate ROI until after the fact.

Let's look at the TOTAL Prosper Basket:
Dataset:
* Origination Date: 11/1/05-3/17/07
* Observation Date: 1/17/07

* PLEASE NOTE THAT THE NEWER LOANS IN THE ABOVE DATA SET HAVE NOT SUFFICIENTLY AGED. Since loans go bad with age, the end result will be a lower ROI

If you are willing to look at only loans that are over a year old we get the following dataset:
[url=http://www.prosper.com/lend/performance.aspx?af=0&esba=63&gc=&gm=0&gr=0%2c1%2c2%2c3%2c4%2c5&hw=0&iba=255&ibid=0&iwatch=0&lq=&maxAmt=25000&maxDTI=1000000&maxFund=1&maxGrpTLC=1000000&minA=0&minAA=0&minAmt=0&minB=0&minC=0&minD=0&minDTI=0&minE=0&minFund=0&minGrpTLC=0&minHR=0&minNC=0&occ=&od=06%2f17%2f2007&oer=06%2f17%2f2006&osr=11%2f01%2f2005&sf=1&sh=0&sn=&tg=0&vb=0]Dataset:
* Origination Date: 11/1/05-1/17/06
* Observation Date: 1/17/07
[/url]
GRADE AVERAGE_ANNUAL_RETURN
AA 7.89%
A 7.68%
B 7.27%
C 6.25%
D 4.11%
E -9.09%
HR -15.66%

It looks like the average investor, who is smart enough to stay away from E's & HR's will have a Average Annual Return somewhere between 4.11% & 7.89%.

I have nothing against Lend2, but I have to note that the average age of Lend2's loans are only 66 days. Since loans go bad with age, I do expect his/her group's rating to drop. It's too early to make a real call on that group. I also have to note that "Lend2" has stopped accepting new group members & has stated he/she is getting out of the group leader game.

Let's see. There are 111 groups that have a 4-5 star rating (meaning better than experian default rates). Of that set, only 8 groups have more than 40 loans. All of these are young groups. The average loan age for all of those groups is less than 83 days. This is not enough maturity time to be reasonably confident that these groups can out perform the experian default rates. Expect time catch up with most of them.

Also note that one of those 8 has 5 community payments under it's beltwhich skews it's star rating higher than what it should be. The problem with community payments to artificially inflate the start rating is that it is not economically sustainable. Look up the whole two millionaires/First Choice group. They were making community payments up the wazoo to keep a 5 star rating. Then they stopped. Now they are at a 1 star rating. All of the bidders who had unrealistic expectations of above experian default rates, now have sub par loans that are defaulting.

You mean people like pensioner? Time caught up with him. Lending Stats now has his estimated ROI at 5.87%. I now you don't trust that number. But it might help to point out that stopped bidding on loans back in March.

Greg Bequette went from doing great in the Forbes 3/2007 article to having stopped investing fresh money in the Wired 5/2007 article:


What a difference 2 months make!

55 people have invested over 6 figures. Of those 55 people, 30 have stopped investing. I agree, they must know what they are doing... or at least are capable from learning from past mistakes.

With only 32 loans and the oldest one being 56 days old, I think you might still be suffering from a bit of irrational exuberance. If you were to stick with the portfolio you have now, I would expect you to end up with a 7-8% ROI.

I wish you the best of luck. Keep in mind the value of 0 current delinquencies. Understand that people who have filed for bankrupcy before most likely won't have any issues with filing again. Keep an eye on the number of current inquiries (higher than 6 is a bad sign).

EveryDayFinance - I know this was a big post. And I really do hope you don't take this as a picking on you. It's just a big topic and sooo many people walk into prosper with stars in their eyes, memorized by the prospect of 10-15-20-25% ROI. The realities are far different than that. Default rates at prosper are consistently higher than than the historical experian default rates reported. Most people don't realize that until they have learned the hard way. Many people also tend to ignore the effect defaults have on their ROI & instead focus on the high interest rates of what hasn't defaulted. It keeps then lending for a while.

Competition is too high. You have people who are happy to just get higher than the 2.25% interest rate their local bank's savings account offers them. Nevermind the fact that you can easily get 5.00%+ savings accounts at a reliable internet bank.

Wow GusGus, you really did your homework. These are all great points, thank you for researching and providing these counterpoints. Good info on the top past lenders who were cited in recent press accounts. Another top lender I've noticed out there is Shark - big $750 loans on some of the same one I bid on - any info on him/her? I have a few extra thoughts and questions below.

Regarding Russ's comments, I agree, there are a lot of crappy people out there that don't mind stuffing others. In fact, the other night, we had dinner with some other couples which included a guy on the board for a credit union and another guy who was a landlord. They were each incredulous about the people they have dealt with and were convinced that our type of people (that pay their bills) were like 3% of the US popultion and everyone else stinks and pulls this stuff routinely. They cited lawyers, professionals to section 8 renters that destroyed their apartment units all stuffing them. So, yes, unfortunately, it's not all roses out there. The ability of group leaders to vet some of these past behaviors and have a vested interest in continued performance should (in theory) drive better performance than the overall market.

GusGus, thanks for the info on Lend2 - I just read their statement from Jun 13 -it's because prosper just ceased all group leader rewards. Now groupleaders would be expected to do this for free?! I guess I'd quit too if it was consuming this much time, I'm sure it was a full time job. Will be interested to see where this goes now that they made the change.

That being said, I was curious what your thoughts were on No-Bull-Investors; that's the other group I did a lot of lending through. And finally, are you a lender yourself? Or just checked it out and decided it's not for you?

On the chart - looks to be bimodal, with the higher mode close to 10%. Any thoughts on that? Perhaps populations that either did or didn't stay away from the E and HR loans? Another thing the chart leaves out, I know we touched on this a little with the overall percentages...a lot of first time lenders were enamored by the high rates of the low credit score population and if they did their homework even on Prosper, they'd see that there's actually a negative ROI in aggregate and should have stayed away from them. Do you think for investors doing the research, investing with groups with strong past performance, etc. 10% is unreasonable, hitting that 2nd mode? Although the mean was low at less than 5%, the median appears to be somewhat higher (which is inclusive of uneducated lenders and lousy credit risks [not necessarily mutually exclusive]).

So for now, still optimistic, but somewhat wiser as a result of these insightful and well researched rebuttals from GusGus. Perhaps I'll slow down on the investment front and make sure my loans aren't going south over time before I get too enthusiastic.

Great points all, would love to hear other experiences, thoughts, opinions, and especially anything of interest related to these recent happenings at Prosper and how that may impact future lending.

Dan at Everydayfinance blog

I just can't imagine Propser being worth the trouble, esp given all the unknowns. People who really get into it apparently have way more time on their hands than I do.

It's real work trying to beat the market. Most professional money managers can't do it, let alone individual investors. It's that holy grail of investment, I guess. Otherwise, we should all put 100% of our holdings in an S&P SPDR and call it a day. Some great back and forth on the topic in this post to be sure. I had been researching and investing so much time to determine whether I should go full bore and be one of those guys with a ton of money in it. From the sounds of it per GusGus, even the top guys involved are now disillusioned. Perhaps I've been overly optimistic; time will tell over the next few months if I start to see lates showing up in my account.

Will continue on my search; right now, a lot invested in international - Russia, Australia, China, India, etc. in addition to high yield investments. For more on those, feel free to stop in at

www.everydayfinance.blogspot.com