Prosper: Investing on YOUR Terms
Last December I discovered Prosper, a site that connects private lenders and borrowers, and manages the resulting loans. Because I’m not a fan of the stock market, this looked like a perfect opportunity to invest on my terms, to help individuals with faces and stories, rather than contribute to the bottom-line culture. I decided to start the new year by testing Prosper with a set amount of funds to see how it performed.
Borrowers sign up on Prosper, then post a request for a loan and the maximum amount they’re willing to pay in interest. Lenders then bid to fund all or part of that loan, at an interest rate of their choosing. You win a bid by coming in at a lower interest rate than your competitors.
Tip #1: Patience is a virtue
I signed up with Prosper on January 1, 2007. Because there was no space for a mailing address in addition to a home address, there was a small verification problem that required some faxing, and that took me a few days. On January 3, I was approved as a lender. To bid on an account, you must have funds in Prosper. I immediately added an account and initiated a transfer of $500 to begin my experiment. On 1/5, I saw the money leave my bank account. On 1/9, the transfer was finally complete, and I was able to bid. Yes, that’s almost 10 days between signing up and being able to bid. That’s a long time in Web years. Prosper has recently made some changes to their customer support and approval processes, so this wait may be shorter in the future.
At last I was able to bid. I decided to fund 10 $50 loans, two each in five credit ranges. At the time, Prosper credit ratings went from AA to NC (no credit history), with the lowest rating being HR, or High Risk. Prosper recently changed their ratings, raising the credit scores for E (560-599) and HR (520-559), and they no longer allow listings from those with a lower score than 520, or no credit history. While I liked to help out those NC folks, apparently other lenders showed little interest. I did bid in time to fund two NC loans, and also two each of A, B, C, and D. I passed on E and HR.
Tip #2: Bid on loans that are already 100% funded
Lenders can bid on loans for a specific amount of time, kind of like an eBay auction. If there is a lot of interest in the loan, many lenders will bid, covering the entire amount of the loan. Unless the bidding is set to be automatically ended when the loan is funded (rare), you can still bid, as the idea is to get funding at the lowest interest rate possible for the borrower. Lowball a little — put in an interest rate you still like, but that is a point or two lower than others are bidding. Chances are, you will get to fund part of that loan.
When you bid on a brand new listing, or one where little interest has been shown by other lenders, the listing will often go away when the amount is not funded, leaving you to start the process over.
Once the bidding has ended, Prosper verifies everything, then funds the loan. This can take as long as a week. One loan on which I won the bid was cancelled before funding, as Prosper was unable to verify all information regarding the borrower. Prosper is very, very careful about fraud, and they err on the side of caution, an attitude I appreciate enough to put up with the extra time it takes to get through the process.
Tip #3: Remember, you’re the bank
Once my loans were all funded, it was time to watch the payments roll in. It’s something like watching a garden grow. All Prosper loans are on 3-year terms, with the borrower making monthly payments due beginning one month from origination. The borrower may pay extra principle, and can repay the entire loan at any time with no penalty. This is where it’s important to remember that you are playing bank, and it’s different from other investments and from savings; while the loan carries a specific interest rate, that is not your ultimate return. As with a bank loan, taking the full term to repay works in the bank’s favor. Cribbing from Prosper’s excellent FAQ:
Interest and annual servicing fees are accrued daily, and are based on the current outstanding loan principal.
To calculate the daily accrual amounts, take the principal balance on any given day and multiply it times the daily rate (based on a 365-day year):
Equation:
Daily accrual = (Annual rate / 365) * Principal balance
For example, if you own $50 of a loan with an annual interest rate of 10%, you will accrue $0.0136 in interest on a daily basis, and $0.00068 in lender servicing fees (which have an annual rate of 0.5%). Keep in mind that as the principal balance drops (because the borrower makes payments each month), the rate of accrual will also slow over the life of the loan.Assuming a full three-year loan, your $50 loan at 10% interest would earn you $8.12 in total interest, and you would pay a total of $0.41 in servicing fees.
To get historical numbers, study Prosper’s Marketplace Performance charts. This gives a very useful picture of the default rate as well. Default is your primary risk with Prosper, and you can manage that risk by researching the different credit grades, examining the income-to-debt ratio of the borrower, and any other factors which may affect repayment.
So far, I have only a few dollars in my Prosper account, as most of my loans originated less than a month ago. Once I have another $50 in my account, I’ll bid on another loan, continuing to reinvest. I won’t have a good handle on the ultimate performance of Prosper until my initial loans are repayed, and I can see how the investment has performed over those three years. At the moment, I have 10 active loans with an average interest rate of 13.99%, and all are current, with several of them processing payments. These first payments are like watching those first crocuses bloom. I hope I’ve planted some sunflowers.
More Real-Life Prosper Experience
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.
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):
Scott on Money:
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.
Arctic Orangutan Weblog:
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.
What’s It Like to BORROW Money with Prosper?
“But where are the reviews from borrowers?” some of you may be asking. Tricia at Blogging Away Debt has borrowed money from Prosper. Here’s her story.
When I first heard about people-to-people lending through Prosper.com last year, a light bulb went off in my head. Would everyday people be willing to lend me money so I could lower the interest rate on my credit card debt?
After some consideration, I signed up. It was a fairly simple to provide personal information via the Prosper website, 
and I did not have to give any proof of my income at this time. (Please note I signed up in May of 2006, so things may have changed since then). I was given a credit grade, and potential lenders were able to see a snapshot of my credit history, including any
delinquencies or non-current credit items. My credit grade was an A, and I didn’t have any negatives within my credit history. Unfortunately, I had a high debt-to-income ratio (24%), which I knew would deter some lenders.
The next step was to decide whether to join a group. Groups at Prosper are, in theory, there to help build trust within the Prosper community. Every group has a group leader, and sometimes they assist you with writing your loan request. They can also provide something called vetting. Vetting occurs when the group leader takes a look at records from the borrower to determine that the borrower is truthful. As payment for their “work”, group leaders sometimes get group rewards that are really an extra interest rate percentage that the borrower pays on their loan. Not all groups are not created equal; some group leaders “work” harder for the borrower. Because my goal was to obtain the lowest interest rate possible, I decided to not join a group.
Next I created a listing. I was paying 13% to my credit card company on a balance of $3,500. Because I didn’t want a larger loan than I needed, I asked for $3,500. I began by asking for an interest rate of 12%. My rationale was that if even I received the loan at 12%, it was a debt that had a set amount per month to pay and a fixed payback period of three years (although I can pay it back earlier at any time with no pre-payment penalty).
As you may have noticed, I started by asking for a 12% interest rate. This is the beauty of Prosper. Lenders can bid your interest rate down lower and lower by outbidding other lenders. They are competing against each other lenders to fund your loan. However, if a borrower needs the funds quickly and they are not interested in a lower interest rate, they can have their loan automatically funded. Their loan listing will end immediately after the loan is funded. Again, I wanted the lowest interest rate possible so I waited the full 7 days for my listing to end.
It was fascinating to watch bidders with my loan. I actually received two bids for the full amount of my loan request. The first one was outbid. The second one ended up funding a large portion of my loan. When it all over, I had an interest rate of 9.9%, and 13 lenders in total funding my loan. I now have 13 people that want me to succeed because they have a stake in my debt reduction progress. In fact, one of my lenders is familiar with the area where I live and he suggested a restaurant that I should visit once our debt is paid off (to celebrate). That interaction is something that you cannot get with dealing with a credit card company.
My Prosper loan was what I needed to get my credit card debt under a 9.9% interest rate. It was the last piece to my debt consolidation puzzle. I have no regrets about my experience, although in hindsight I could do a few things differently to try to obtain a lower rate.
But as they say: you live, you learn, and you blog about it!
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There are 83 comments to "Prosper: Investing on YOUR Terms".
I had looked into Prosper a while back, too, but wasn’t sure about the risk. My major concern was even if you spread your loans out, what happens when one of them doesn’t repay? Does the money you make on the others cover that cost AND still give a nice return? I wasn’t convinced.
I would feel differently if I had all of the lender’s personal information and could verify it myself. When I last checked you couldn’t do that. Has it changed?
Have you seen anything like this for higher loan amounts? It seems that their maximum is $25,000.
Holy crap, what a horrible idea. I’d bet anything that this site will be gone before your 3 years are up.
Think about it – you are lending to people that can’t scrape together 50 freaking bucks. You aren’t doing these people a favor, you are enabling their poor financial habits.
A few of these people will default on you and your time, effort and money will have been wasted.
I remember hearing about this site back when it first launched over a year ago. It was a very interesting idea and it’s great to hear that it is still going strong. I held out on investing money at first but the system certainly has been refined from launch.
Are you involved in the Prosper community very much? One of the neat things I remember is that there are forums where lenders discuss the viability of different applications.
Kevin: There is a certain amount of trusting Prosper to check things for you. There is a lot of credit detail included. It would be difficult at best for an individual to check the details.
Jon: I don’t think so, but I haven’t looked around as much as I’d like.
Jag: You misunderstand. $50 is just the portion of the loan I funded. I chose that amount to keep my risk relatively low. The loans themselves are usually for a few thousand dollars, funded by several lenders.
jf: No, I haven’t really become involved the the community, but that’s a good idea.
Jag wrote: Holy crap, what a horrible idea. I’d bet anything that this site will be gone before your 3 years are up.
My initial reaction was skepticism, too, when I first heard about Prosper last spring. I’ll admit to being a bit of a skeptic still. But since then, I’ve read a little more about microcredit, and now believe it has an important role to play in the future economy. I’m not the only one who thinks so.
Last year Muhammad Yunus was awarded the Nobel Peace Prize for his work with microcredit and the poor. This is a real, viable concept, and many people view it as a way to do some good with their cash. It’s a sort of a cross between an investment and a charitable contribution. Does that make sense?
If I were doing this, I would make the investment with the realization that it was high risk and that I might lose the money, but accepting this because even if I did lose the cash, it would be going to help somebody in need. I know that’s probably a little strange to some people, but it’s a lot like loaning money to family or friends: you don’t do that with the expectation that you’ll ever see the money again. You make those sort of loans to help somebody out, and if you do get the money back, so much the better.
Still, I think most people who use it view Prosper as an investment vehicle, and aren’t taking an altruistic outlook. One man has invested $750,000 through Prosper. That shows some faith.
I should also mention that Kiva offers a similar concept, but for third-world entrepreneurs. Cat, you may want to take a look at Kiva.
For more on microcredit, check out this overview in Kevin Kelly’s Cool Tools blog.
I really like this concept and had never heard of Prosper before. Too often we overlook opportunities to reduce poverty in our own backyards…this is a very promising way to give others a hand up. And it’s interesting to view it as an investment opportunity; I hadn’t considered that before.
@Cat
Thanks for the clarification. That makes more sense.
Still – I think the risks of this type of investment are extremely high. You mentioned that you aren’t a fan of the the stock market? The stock market has been around for a very long time and has a track record that can be examined thoroughly before deciding to invest. Prosper.com has no track record. It’s completely unproven and its very existence depends on borrowers that have proven their inability to save $ (why else would they need to borrow?).
If you want to help “individuals with actual faces and stories” then volunteer in your community. You can find people in need in every town in America. Don’t put your personal finances at risk to help random strangers that refuse to live on less than they make.
@JD
Microcredit seems more plausible than prosper.com, but it’s still not something I would ever take part in. If I want to help somebody in need, then I GIVE the money, I don’t look for a silver lining of possible profits.
The best advice I can give when it comes to lending money to friends or family is this – don’t do it – EVER. If they need money and you want to help them, then GIVE them the money as a gift and don’t accept repayment. When you loan a family member money, you have fundamentally altered your relationship. It’s a bad, bad idea. I once gave my sister money when she was in need. She tried to repay me later on. I told her if she really felt the need to repay the money, then she should pay it forward and help somebody else in need.
In principle (no pun intended) I like the idea of nontraditional/altruistic micro-lending, but I’m most uncomfortable with the 3-year term. Presumably the site has a means for selling your loan to someone else if you wanted to cash-out?
Overall, this is a high-beta investment and I’m not yet convinced it has any place in my portfolio. I’d prefer to discuss why frykitty is “not a fan of the stock market.”
So, I just signed up for Kiva and made some micro-loans. The funny thing is, I can’t seem to find anything that mentions the interest rate on the loan or the expected return. Does Kiva not charge interest for their microloans or does Kiva keep all the interest or what?
Kiva keeps the interest to pay for the running costs of organising the microcredit. The details are on the website somewhere.
One of the benefits of microcredit for the borrower is that its not charity. You are encouraging a move into independence, albeit with a loan rather than furthering dependence on charity. Charities don’t, for example, give people money to buy a mobile phone so that they can sell calls to other people in their village.
Matthew: this is from Kiva’s FAQ on their website:
“26 Do I get interest on my loan?
No. Kiva.org’s loans do not provide a financial return on investment.
27 Does Kiva.org charge interest?
Currently Kiva.org does not charge interest to our Field Partners, however we will begin charging a small (approximately 2%) fee to our Field Partners in 2007. This fee will contribute towards Kiva.org’s operating costs while still allowing our Field Partners significant savings to their cost of debt capital.
28 Do Kiva.org’s Field Partners charge interest to the entrepreneurs?
Yes. Self-sustainability is critical to creating long-term solutions to poverty and charging interest to entrepreneurs is necessary for microfinance institutions to achieve this. Our Field Partners are free to charge interest, but Kiva.org will not partner with an organization that charges exorbitant interest rates. Kiva.org also requires Field Partners to fully disclose their interest rates.
Microfinance is an expensive business, which is essentially the reason small loans are not provided by large banks. While Kiva.org’s Field Partners do not bear the cost of capital or the cost of default, they do bear transaction costs and currency risk. Charging interest to entrepreneurs enables our Field Partners to bear these costs and achieve self-sustainability.”
Do you have bond funds? You’ve lent money to a bunch of companies, governments, agencies, etc — some of them will fail and never pay you back.
Prosper works pretty much the same way. You treat it as a numbers game. Accept that some of your loans will default, price your credit grade/interest according and diversify.
Excellent, useful writeup–thank you.
As to why frykitty is not a fan of the stock market, the bit about not contributing to “bottom-line culture” plus a quick scan of her review of Your Money or Your Life give some pretty good clues 🙂
I hadn’t heard of Prosper.com, thanks for the review and I’d be really interested in hearing more as things develop.
I had considered this last summer, and was going to put in $1-200 and do a test run, very similar to Cat’s. The problem I encountered was that the company did not support people outside of the US (IE, us Canadians). Is anyone aware if this has changed?
Also, Cat, will you be writing a follow up in a quarter or two, to let us know the true experience on there? I would like to see a truly subjective review of the service.
Meaghan, thanks for the info. I must not have seen that on Kiva’s FAQ. I promise, I did look. 😉
While I understand the point of Kiva, I have to admit that I can’t see it becoming very popular simply because the only real reason to fund these non-interest-earning microloans is to get some warm fuzzies. There really aren’t any monetary advantages to Kiva. All it gives you is a place to tie up your funds from which others make a profit while your money comes back to you at the end of the loan terms at the exact same amount you put in. In other words, thanks to inflation, I’m worse off at the end of the loan. On my side of the equation, I’d be just as well off to go stuff the cash under a mattress. Kiva microloan funding doesn’t even get you a tax break for charitable giving.
Perhaps if there were a tax write off for the money lost to inflation, it would at least be a net-even system, but as it stands Kiva will only appeal to those philanthropists with a strong belief in capitalism in developing countries.
I think they could get a lot more funding if they could extend some profit to their members. I mean, the optimum 1 year CD APY right now is nearly 5.5%. If Kiva could give me 6.5% on a one year loan (and Kiva had say, a 90% loan repayment rate), I’d still end up ahead of a same term CD. Maybe that just isn’t possible with all the middle men and field agents and such, I don’t know. I definitely wouldn’t want them charging exorbitant interest rates to the poor people of these developing countries. That would seem like exploitation.
Matthew wrote:
There are thousands (if not millions) of them. Microcredit is become very popular among philanthropists; it’s seen as a much more effective way to help people out of poverty than by giving them handouts.
The “no tax writeoff” thing is indeed a drawback, but most serious philanthropists (by which philanthropists who are serious about the causes and people they want to support) wouldn’t let that stop them. Speaking as a (very small scale) philanthropist who regularly makes non-deductible donations.
Mossy- I personally don’t have bonds/bond funds, but the analogy is apppropriate except for the liquidity of investments (unless, as I asked earlier, it is possible to sell one’s loan to someone else). A sizeable bond market exists for exiting such an investment.
Communicatrix- Sorry, didn’t mean it to be a personal attack on Cat, but I still don’t see what’s so wrong with the stock market and I didn’t read anything like that in the YMOYL review. All I meant to suggest was that we might discuss it. You’re correct that it’s an excellent review of Prosper.com.
This has definitely got my interest piqued. However, there remains a fundamental question that I would like to have answered. What value does Prosper.com provide that traditional financial institutions do not?
For example, if I am a borrower that qualifies for a B credit rating (according to Prosper.com) and I want to borrow $2000, Prosper’s current interest rate is about 10%. Is this substantially better than I would get at a bank? Both Prosper and the bank are using the same information to qualify my loan, right? So why wouldn’t they give me approximately the same rate?
I did a quick scan of Prosper’s FAQ, so maybe I missed it, but I have a couple of concerns.
The first is getting my money out of Prosper. Okay: I’ve loaned some people some money, and they’ve paid me back, or whatever. How much of a pain is it to transfer that cash back into a checking or savings account? Does a full withdrawal of funds close my account? More importantly: are they going to charge me a fee to withdraw funds?
Next: taxes. Is Prosper going to send me a 1099-INT? Is that even the right form for this?
Third (and this one is personal): choosing a rate. I don’t want to gouge the borrowers, but at the same time, I do want to be adequately compensated for the level of risk I’m taking. I’m not very good at evaluating credit risk, and I’m especially ignorant of how to judge default risk for an individual.
It seems like a really cool idea, but right now I don’t feel especially comfortable with it. To anyone who tries it long-term, though, I’d be interested in hearing their stories. (Once Prosper has a long term, that is.)
In the UK we have a similar service at http://www.zopa.com. It is pretty popular and the good thing about it is that you earn interest on money in your account whilst it’s waiting to be lent out.
I wrote a post about it on my blog investjournal.blogspot.com
majeest,
This page here should answer your question about transferring funds out of your Prosper account.
https://www.prosper.com/public/help/topics/account-transfer_funds.aspx
squished
I love these reviews of new tech spins on the social networking idea. Prosper seems like a good idea, and the review was well thought-through (as I’ve come to expect from this site). Great stuff!
What a great discussion!
I think all but a few of the questions posed have been answered.
On liquidity: once you commit to funding a loan, you are in for three years.
On the beta nature of Prosper: yep, it’s risky right now. Because it’s a concept I’m excited about, I’m willing to march point. I am definitely planning regular follow-ups, to let everyone know how Prosper performs.
On the stock market: I know I’m a vegan at a barbecue on this one, and that’s cool. The world is not a perfect place. Many of the things wrong with it come down to one cause: greed. Sweatshop working conditions, environmental degradation, and a thousand other problems have bottom-line culture at their root. Bottom-line culture is public companies who must continually pay investors; they must grow or die. A company is not allowed to reach a place of comfortable profit, where everyone is earning a decent salary and whatever they do, they are doing their best. Instead, a company is expected to either expand their business, or cut costs to make the bottom line. This has tremendous consequences in the world.
I know that not investing in the stock market is a tiny thing, and hardly hurts this system at all, but it’s important to me. It’s hardly possible to step completely out of the money cycle, but staying out of the stock market is one small thing I can do.
A company is not allowed to reach a place of comfortable profit, where everyone is earning a decent salary and whatever they do, they are doing their best. Instead, a company is expected to either expand their business, or cut costs to make the bottom line. This has tremendous consequences in the world.
Shh. Don’t tell anyone, but we try to run our box factory like this. Edward Abbey said, “Growth for the sake of growth is the ideology of the cancer cell.” We’ve tried to find a place of stasis where we are providing a good product and good service at a fair price while providing a work environment that fosters our employees’ well-being. We don’t pay big bucks, not even to ourselves, but we pay above average. Plus we understand that our employees have lives. We’re accommodating. Of course it helps that we’re just ten people, but still – people find this shocking.
Will we remain this was forever? Who can say? But for now, it’s what we feel is right.
The box company is not publicly traded, I assume? 😉
How you run the box company is no surprise, since you’re perfectly familiar with the concept of “enough”.
Cat,
Many public companies are driven by greed and they probably make the world a worse place, but why attempt to punish *every* company by not investing? If you invest in socially responsible companies only, you’d be sending a stronger message than if you don’t invest at all.
I don’t think you’ve eliminated this problem by lending to people at prosper.com. Every borrower is going to come up with a legitimate sounding reason to borrow money. In reality, most of the money that people borrow will be used to help them buy material items (from socially irresponsible companies no doubt).
If you are loaning money to an American, you are most likely loaning money to somebody that is living paycheck to paycheck and has to borrow money because they have a lot of credit card debt and a leased SUV, etc, etc that is draining their wallet.
Why not invest in socially responsible companies and then donate some of the profits to one of the many worthy charities in your area?
You have no idea who you are lending to or what your money is being used for with prosper.com.
-Jag
Hi all – I’m the product manager over at Prosper, and the owner of this blog asked us to answer some of the questions. Most questions can be answered on our help pages, but here are some direct answers to questions posed here…
(number indicates comment # above)
1. When a borrower misses a payment, we send them to a collection agency and ding their credit report. If the agency can’t collect after 4 months of delinquency, we sell the loan to a debt buyer. Our first debt sale returned an average of 11 cents on the dollar to participating lenders.
And no, we don’t give out the borrower’s personal information for lenders to check it. We do it ourselves for 1) convenience, and 2) to protect lenders from any kind of legal credit reporting issues.
2. Yes, our maximum loan amount is $25k.
3. No comment, although I’m quite positive that we’ll be around for at least 3 years.
6. We agree that microcredit is an amazingly powerful force for good, and also love Kiva.org. Definitely check it out if you haven’t already.
7. Actually, most of our lenders look at Prosper primarily as a means to earn higher returns than they would through other investments. Many also enjoy the social elements of the site, but our research shows that good returns is the most important factor.
8. Jagg Nog said that “the risks of this type of investment are extremely high”. Well, yes, if you lend to high-risk borrowers, then the risks are very high. However, our AA-D credit grades (the lower-risk borrowers) are returning a risk-adjusted 8-12%. Check out our marketplace performance page, and scroll down to see the “Estimated ROIs” at the bottom.
10. No, we do not currently have a method for lenders to sell their loans if they want to get out before the borrower has paid the loan back. We hope to do this in the future.
11. No, loans on Kiva do not yield a return. They are interest-free for lenders (which I think is actually appropriate for what they are doing). The borrowers do actually pay interest to the MFIs (Micro Finance Institutions), but all of the interest is eaten up in servicing fees, so Kiva doesn’t pay interest to lenders.
17. Yes, right now we are for US residents only (SSN is required). We may expand in the future, but for now we are US-only.
21. Prosper’s rates are generally lower than those available for banks. Here’s an example of a woman who has a credit card rate at 17%, and it looks like her Prosper loan will fund around 11.45%. She has great credit, but the same kinds of benefits apply across the credit spectrum. In fact, lots of high-risk borrowers get loans on Prosper who can’t get loans through banks or credit cards at all.
22. You can transfer your earnings out of Prosper at any time. It’s super-easy, and free – we’ve basically built a Paypal-like system into our site, so that you can transfer funds electronically back and forth between your bank and your Prosper account.
Yes, we send you tax forms based on your lending activity. Learn more here.
You can see what rates are being loaned on this page. It’s up to you to choose the rate that’s right for you, but these are the averages across the last 30 days.
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I think those were all of the big questions – let me know if there are more. Or, again, check out our help section. We also have tutorials and forums.
Best regards,
Andrew
If you invest in socially responsible companies only, you’d be sending a stronger message than if you don’t invest at all.
The companies I would choose to invest in are unlikely to be publicly traded, and if they are, they would have a high failure rate, because they would not continue to grow. Which kind of precludes the need for my investment anyway. It would be necessary for me to investigate individual companies and buy stocks on my own without depending upon a mutual or index fund, as these always include companies I do not want to support. Perhaps there is a good way for me to do this, and I haven’t investigated thoroughly enough. I don’t see how the risk would be less than what I’m currently doing. So I choose not to support the system.
Because I can look at individual loans and adjust my risk accordingly at Prosper, I’m comfortable. There is a certain amount of trust involved–I’m trusting folks not to lie, and trusting Prosper to do verification. I’m more inclined to do that with individuals than corporations. I choose to fund loans for people who are doing things that align with my own values; things like digging out of debt, or buying a first home. That cute couple who wanted to pay for a big wedding? Someone else can fund them.
Cat,
I disagree with the assertion that it is a “rule” that companies must grow or die to survive on the stock market. I believe it is true that the nature of the stock market encourages these types of companies. I also think that many companies have expectations set on them (via their stock price) to grow. However, I do not agree that the only type of company that survives on the stock market is one that grows year on year.
Perhaps ironically, one example of a company that does not set growth as an objective is Berkshire Hathaway. Warren Buffett is on record as stating that for their insurance business (which is their biggest business), they write policies for which there is demand. They don’t set a target of how much revenue they wish to generate for the next year. By the nature of running a good business that creates value both for the customer and the business, they have grown.
I believe this is related to the proverb that the love of money is the root of evil. Companies that set growth targets often end up sacrificing moral principles for the sake of the almighty dollar. I believe companies that focus on what value they are bringing to the world and charging a fair price for it, earn a decent living in the long run and usually end up growing. Sometimes living up to their moral principles mean not earning as much in a given year.
I would agree that over 90% of the participants in the stock market are in it just for the money. They are not interested in building businesses or generating real value, for the customer or anybody else. I too am not immune to these tendencies of greed. However, I continue to believe that the system is a good one and can be one of real value, if used with good purpose. I would encourage you to look for those companies that are “right-sized”.
squished
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.
-arebelspy
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:
https://www.getrichslowly.org/prosper-investing-on-your-terms/
-arebelspy
Regarding Kiva (in response to Matthew’s post further up the thread):
I don’t regard my loans through Kiva the same way I would regard loans through Prosper (which I have not participated in). Before I started loaning through Kiva, I was donating a certain amount to charity every month. Now, I split that money in half- half goes to the charity I used to donate to, half goes to loans through Kiva. It’s not an investment, no. But it’s not supposed to be.
To me, it’s a way of making a difference that is highly personal- instead of sending it off to some charity and not knowing exactly what it’s being spent on, you choose a person- choose a business model- and help to give them the tools so that they can succeed.
I invest through the stock market. I give through Kiva.
And no, it’s not tax deductible, but if you take the standard deduction (like I do), who cares?
This is VERY interesting. I had actually been idly wondering if a site like this could be viable and for some reason didn’t actively go looking for it. I am just starting to look at small-scale investing this year (I’m newly out of debt). Since I’ve sadly seen firsthand that startups fail no matter their leaders’ level of “confidence,” my decision to sign up and invest would depend on getting more information from Prosper and/or from a third party about exactly what happens if they stop operating. (They say on their site that the existing loans wold be overtaken by a third-party servicer, but I don’t know enough about financial laws to know whether that is truly mandatory and guaranteed to happen.)
p.s. In case I wasn’t clear, my intent was to say that startups fail independently of “confidence” levels, not (of course) that all startups are doomed to failure.
I got a chance to look more at the site and I’m having a mostly positive but still mixed reaction. I would really like to be able to look at overall default/failure rates (it would be okay if they weighted them by their current standards, for example eliminating or otherwise compensating for the original standards for borrowers which were more relaxed). Or rates by category (their “A,” “B,” etc. ratings matched with default rates for all people who were rated with that letter when their loans were funded).
It’s disconcerting that all I’ve found so far is individual users speculating (and of course giving contradictory info) about default rates in the forums. If I’m missing someplace I should be looking, I’d be happy to hear about it…
Cat,
From my perspective, you aren’t helping anyone by lending them money at a rate of 14%. It’s more likely that you are enabling their already poor money management. Who the heck digs themselves out of debt by borrowing money at 14%???
Squished made a great point about companies and growth. Not all company growth is evil. Sometimes companies grow because they offer a great product at a fair price. Sometimes it is a life saving product. Do some research and find these companies.
By the way, proper.com wants to grow aggressively and become an enormous success with insane profits, so you better pull your money out now…
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.
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.
Well, I think prosper is a very good idea. I don’t know, if it will work out for them, but still it is a great venture, which can kick the big banks out of the income chain and divert their profit to the normal people.
What I really hate though, is that you only learn AFTER registration that you cannot do anything on the website, if you don’t live in the U.S. Maybe I missed it, but I read those small print legal agreements in advance and I could not find anything in there. Of course I understand that a registered user has a lot of worth for an internet startup, but this is still rude.
Kay,
You may want to check the original posting by Cat. Within the posting, there is a link to a page on Prosper that shows exactly what you are looking for. The link is labelled “Marketplace Performance”. It shows the total amounts invested and total defaults over the life of Prosper (or any other time frame). It’s a great page and gives me great confidence in what they are doing. The biggest difficulty I have right now is I’m a Canadian. Gotta find a way to get my money south of the border.
squished
The supposition that public companies must grow to survive is largely based on historical fact. All too often a company’s stock will fall after posting a large gain because the market knows the likelihood of repeating such a large gain is small. In general (there are always exceptions) the purpose of the market is a positive return on investment. I don’t think that growth is necessarily bad or exploitative of workers, but there are examples where it is. I’m going to remain non-judgemental about this. I work for a company that people love to hate, believing that it is pure evil for doing the work that it does, associated with the people that it is. From the inside I can see for myself that this isn’t true.
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
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
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?
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.
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!
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.
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.
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?
Thanks for the pointer, squished! Interesting to see on that chart that over the last two years, the “B” and “C” rated borrower groups seem to have performed almost the same. (As expected, A and AA were substantially better, and D or lower were substantially worse.)
So it looks like in the end, lenders earned more by funding C people than funding B people.
But it’s hard to predict anything for the future from that, especially since Prosper is still refining the standards of what the ratings are and who can borrow.
I’m really fascinated by this concept. Do you think it will ever evolve into larger loans? For example, lots of real estate investors borrow hard money at 15-18%, plus a 3% origination fee, to repair a house. It’s expensive but worth it.
Somebody like Prosper could move in and completely change the industry. The only reason I can think of that they haven’t done it is these types of loans are secured by real estate, which might be a little harder for Prosper to facilitate. You would have to show people how to record a lien against a property.
Hmmm… this got me curious enough to finally check out Prosper.com. Though I’m worried my credit score won’t qualify me as a borrower.
That is pretty dang amazing.
It’s very communal, very us against them (the big lenders, credit cards, etc)
Utterly fascinating.
I would love to hear more from other borrowers.
I am both a lender AND Borrower at Prosper. I think I have been a member at least a year now.
I took out a loan for my state Minimum ( $6,000) and it was filled rather fast. I offered a fairly generous ( but fair) rate for my B credit rating. The payment is debited monthly.
I am also a Group Leader.
I have only invested in 5 loans so far- all high risk- high rate. I do not invest any money I would actually miss. It might as well be lotto ticket or slot machine money ( or coffee or coca-cola or whatever your minor vice might be). Then I just revinvest all proceeds. No missed payments so far and I am at 25.99% overall.
Prosper is cool concept BUT lets wait to see how it and others play out over a economic cycle. Few folks miss their initial loan payments, its when conditions change that things get…um interesting…..
I am a Prosper lender and group leader. In some ways I have lost some of initial excitement.
What I have observed is the process is time consuming when you want to actively bid. You can use standing orders but I suspect that borrowers need to sharpen their deals before standing orders will hit the sweet spot in the curve (balance between risk and reward).
Many borrowers are naive. They come to Prosper after they have been turned down other places. They do not understand that lenders what to see a change in behavior before believing that they will do better than the credit score implies about their past.
I still am a member and still have money on loan (about 20 loans). I think it will take a bit longer to really take off.
John Corey
http://johncorey.wordpress.com – Real estate investing advice based on over 20 years of experience (multiple states and countries).
Hey, getting a Prosper account seems like a good way to get an estimation of you credit rating without having to pony up for your “credit score” number. I’ll have to try that.
Some of the rates cited above are very impressive, and I can certainly see why it would make sense to borrow on Prosper, however, as a lender, given the amount of control and security that is described (no proof of income level) it seems bizarre that people would lend any money.
It seems like the level of uncertainty involved is very high, and as such interest rates should be correspondingly very high. That being the case, my personal guess is that a lot of people are lending money without due consideration of the level of risk involved. It would be interesting to look at the default rates / delinquency rates and payment rates for Prosper.
Clearly there is something there, but from what I hear there are some bugs that still need to be ironed out.
I recently borrowed $4,000 via prosper to max out my 2006 Roth IRA contributions, and I found it incredibly helpful. I got a 8.4% loan rate with my credit grade of A. Being as this is my last year of graduate studies, I will be able to pay off the loan quickly after I get a “real job” and I will win out in the long run with the Roth IRA contribution.
I can’t tell you how exciting it was to watch the rate being bid down from my initial asking rate of 9.5%.
@RonenV
I agree that many people who lend don’t completely realize the risk. In addition Prosper allows you to diversify by lending as little as $50 which makes you believe you reduce your risk while in fact you simply level it out.
Wow, this is an amazing article! I had read about prosper and micro-loans before, but they are almost always from the lender’s perspective. Seeing it from a borrower’s perspective is really neat! I can imagine how good it must feel to see the rate being bid down!
“I have no regrets about my experience, although in hindsight I could do a few things differently to try to obtain a lower rate.”
You failed to explain what you would have done differently. This is a very unhelpful conclusion to an entry. I want to know what I can do differently!
Thanks.
I am a Prosper borrow. I wanted to “stick my toe in the water” and requested a loan of $1,000 exactly one year ago. My rate is 6.95%. There is only one term : three years.
Later I discovered that you can only have one loan at a time, so I’ll have to sit down and do an estimate of when it’s feasible to pay off early and consolidate my outstanding credit card debt, which ranges from Zero to 17 percent.
What I like about Prosper is that it gives me a choice to manage my debt load : credit card companies or individual investors. I’d rather not have the debt, but given the choice, I’d rather give it to you.
This crap kills me.
Tricia was only borrowing $3500 that she was planning to pay back over 3 years. Her goal was to lower her interest rate 1%. Instead, she lowered it 3%. So instead of paying $745.40 in interest over the three years she’ll be paying $559.78.
She can’t pay off $3500 in one year? Six months? If she paid it off in one year at 13%, her interest paid would be $251.32. Six months would cost $133.90.
A more aggressive debt payment budgeting is in order here, not monkeying with interest rates over long periods of time for paltry balances.
@TPSReports:
Get your head out of the sand. Some people are already stretched too thin and simply can’t pay their debt off any more aggressively. Lowering their interest rates will allow them to pay their debt off more quickly at the same monthly payment. Besides, they don’t HAVE to take the entire three years to pay it off. Why not obtain a lower interest rate and THEN pay your loan off in only one year? You save even more money.
RonenV #9,
While I think there is considerable risk, I don’t think any lenders really go in without taking this into consideration.
All borrowers are vetted, credit scoring, DTI used,etc. I can see how many inquiries, deliquencies, public records,income,etc. I cna contat borrowers and ask questions. Many have to provide W2s and verify bank account, home ownership,etc. If anything I think Prosper is TOO conservative finalyzing loans. My friend had his loan funded and retracted because they would only go by the income on his 2005 taxes, when he was making more money in 2006. They can be pretty strict on documentation. They have started verifying addresses via postcard with codes,etc.
Also, the # 1 way to manage the risk, is of course, the Interest rate. I know an E or HR is going to have a higher rate of default. Therefore I either avoid them completely or charge an appropriate rate,etc. Even so, As I said above, I don’t invest any money there I can’t live without.
There is also the SOCIAL or even family-lending aspect. Maybe you want to make a loan to a friend or family member but you want it set up so there are real structured payments and consequences. Or you just want to help people out ( and hope they pay you back). Prosper seems a decent facilitator, IMHO.
Certainly I don’t expect to continue to earn 25% or to manage that on a large scale, long term. But so far I have managed to do it small-time, mostly for acquaintances or people I wanted to help. I DO think it is entirely reasonable to achieve results competitive with mutual funds and easily surpassing money market/savings,etc.
There are actually a few websites out there where people track Prosper and have made models to predict the defaults and actual returns. There is one that lists all Lenders with their loan amounts, returns, predicted risk adjusted %,etc.
As I said, I joined Prosper a year ago ( still not “long term” I know) and there have been many members and many websites following this stuff at least as long.
@ Toby – I apologize that I didn’t include what I could have done better. J.D. asked for an article, and I put together a very basic snapshot of my experience. I do go into greater detail on my blog and I probably should of had J.D. link directly to my Prosper category (I give tips in there).
@TPSReports – $3,500 may seem like a drop in the bucket to some, but not when you have over $37,000 in total credit card debt. I’ve paid off over $15,000 of our credit card debt in a year and our income was $48,000 last year. I am being very agressive, yet also being resourceful in attempting to lower all of our interest rates so more of our payments are going towards principal and not interest. Like I mentioned, the Prosper loan was a part of my debt reduction puzzle.
Snarla suggested using Prosper to check one’s credit score.
Two things.
Prosper does not return a credit score using the same or normal scale. Part of their agreement with Experian. They provide a letter grade the corresponds to a numerical range.
They are also only showing what one bureau out of three has to say about you.
Second, you can obtain your credit score from all the bureaus each year for no charge. There is a website but I do not have the link. Part of the regulations for individuals to be able to verify the accuracy without having to pay to get access.
John Corey
– Real estate investor, 20+ years – multiple states and countries. Check my blog –
http://johncorey.wordpress.com/ – advice for real estate investors.
At first blush, I too was interested in the Prosper concept. However, after spending some time in their forums and reading about others experiences, I have gotten the impression that Prosper is basically a place to gamble.
Generally, my perceptions are:
Prosper is the gigantic winner:
* “middle man” – all profit, no risk
The borrowers undoubtedly make out great:
* lower interest rates
* pool of lenders to turn to when traditional institutions have balked
* no pre-payment penalty
The lenders play craps:
* Pool of borrowers is likely skewed versus general marketplace (ie – historical default rates may not apply)
* Fees and taxes bite into effective rate
* Not likely able to truly diversify portfolio to spread risk
I still like the concept, but will let someone else go through the “growing pains” of being a lender.
Anyway, the money isn’t being made in being the lender, it’s being the BROKER (Prosper). Now if someone wants to talk about setting up a similar business model to compete with them, I’m definitely interested.
My sister’s a resident surgeon at Harvard, seriously struggling with CC debt. Residents don’t make anything, so I’ve passed this on to her with the hope she can get a better rate on her loans.
For those of you curious about how Prosper lenders are doing you can check out http://www.lendingstats.com You can see Return On Investment percentages, default rates, length of loans (so you can see how investers are doing over the “longer” term) etc.
A problem with people “trying” Prosper is that they aren’t willing to put in enough to truly diversify. If you “start” with $500 or even $1000 dollars, how many loans will you make? How many can you afford to default at some point? Its not many, if any. Most people would never think of putting $500 into a single stock and considering that smart investing. You can’t become a lender (technically a “loan buyer”) with $500; at least not responsibly. If you want to “try it” to check out the process, then fine. But, if you want to test out the validity of the investment overall, you’ll need more than a couple of hundred of bucks IMO.
Cat, could you update us on how your experiance is going with prosper?
Thanks
“If you “start” with $500 or even $1000 dollars, how many loans will you make? How many can you afford to default at some point?”
Exactly! No return for reinvestment until you’ve about $6000 invested. Then, you can fund 4 new loans each month with the payments received.
Prosper is set up for the borrower!!!
The benefit for the lender is this:
each month you recieve interest AND principle. Once you’ve got 100 loans or so, you’re reinvesting interest and PRINCIPLE of the lendings into NEW loans. It’s a building process. Defaults, however, will kill you!
Keep in mind that we’ve got a shaky, downsizing, outsourcing economy. With job losses, people are in trouble. Let’s not forget drug use in the US, too. Also, people lie………don’t believe everything you read on a plea for help!
If you donate the money to the local church, though, it probably wouldn’t be spent any better.
Just signed up with Prosper – I have a D credit rating. Hoping to get $5000.00 loan!
Can anyone out there realistically tell me if I have a chance at all with Prosper?
If anyone has been in a similar situation – let me know your advice or insight!!
hello how can i get $540 us to borrow and pays for my visa and work permit so i can get to start work and then i will pay it back
how can i get a loan of $540 u s to pay the visa station in Canada so i can get my work and visa permit please can some one help me out here
Update:
It’s now been one year since I first delved into prosper.com. The last couple months have seen too many loans headed North (I live in the South!) As soon as $100.00 accumulates in my account, I sent it home to my bank. From there, I’ll be reinvesting in my retirement account with Prudential. It will be much safer and I won’t have to invest those hours searching for prospective borrowers.
Good idea….just didn’t work.
15 December 2007:
116 Active Loans
88 Current
2 Late
4 1 Month Late
3 3 Months Late
15 4+ Months Late (Too many not sold yet!)
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.
my credit score is around 720
im looking for a personal loan for about 15000
i make 70 thousand a year and ive been with company for 38 1/2 years
i have one credit card 1400 dollars
i have a sefcu loan out now 450 a month
not back on any bills
do i have a shot at getting a loan here?