an opinion
article
by Six months ago, on an OmniNerd poll, we discussed what were the best stocks to buy and hold. Of smcbride’s ten poll options, Apple was a heavy favorite followed by Google and Genentech. How have we done? Six months later Apple is up over 50%, Google is up 10% and Genentech is one of only three stocks to lose ground at -4%. There are plenty of smart investors on OmniNerd and I wanted to get your opinion on another relatively new investment option – lending through peer to peer networks.
Prosper, in many ways, is similar to eBay. People list and bid on loans. Lenders set the minimum interest rate they are willing to earn and bid in increments of $50 to $25,000 on the loans they choose to fund. Those wishing to borrow money build a listing showing how they intend to use the money. Examples include a soldier consolidating debt after two deployments to Iraq, an entrepreneur buying a franchise and an investor borrowing money just to reinvest in Prosper. Some lenders have invested nearly a million dollars in loans to strangers through Prosper.
Although it may seem somewhat risky to fund the loan of someone you have never met, Prosper takes many steps to prevent fraud. Everyone’s identity is verified. Credit scores are checked. Those borrowing money basically go through the same rigid process required by any normal lender. Monthly payments are made by automatic withdraw from the borrower’s savings account. So far Prosper has over 300,000 members and has brokered over $67,000,000 in loans. It provides loans to people who need a lower interest rate than they would be able to get through a bank or credit card and provides lenders a higher interest rate than they might get through a savings account, certificate of deposit, or other investment. If someone is late on a loan or defaults, the loan is turned over to a collection agency or sold to a debt buyer. Only 9 of 11,640 loans have defaulted due to bankruptcy.
As the first peer to peer lending network in America, Prosper has received a great deal of attention since its launch in early 2006. It’s been called the eBay of Loans by Forbes Magazine, the #1 website of the year by Time Magazine and has received plenty of other rave reviews. LendingClub, which launched in May, is Prosper’s newest and biggest competitor. LendingClub differs from Prosper in several ways. Most notably, they do not provide an auction format. Lenders and borrows can simply commit funds at pre-determined interest rates. UK-based Zopa plans to move into the market soon and has launched a U.S. discussion board.
While you will never see phenomenal 50% returns on your money as we have seen with Apple stock in the last 6 months, it seems like peer to peer lending may provide greater returns than high yield savings accounts. You would not have the same liquidity, but with a careful investment strategy, I think Prosper may provide 10%+ returns with very manageable risk. Are the rewards worth the risk?
Similarly tagged OmniNerd content:
- Comparing Very Small Business Free Checking Options, by Brandon about 2 years ago
Print Friendly
Write an Article
Full disclosure and $25 by tomtolman :: NR5 :: Show
As I mentioned in the post, Prosper doesn’t really have any significant competitors. That could change very soon. Facebook’s LendingClub is a new threat. Zopa will launch in the U.S. very soon. In an effort to ward off these potential threats Prosper is reaching out to their members in an attempt to grow. They just started a new referral program. If you sign up after following one of the formatted links in the article or this link you will get a free $25 in your account once you fund a loan with $50 or more. So will I. :) If you do sign up, post your referral link here too and share the referrals.
I have yet to fund a Prosper loan but my brother has been investing for nearly a year. He’s careful about who he lends money to. Mostly he loans money to people with AA credit ratings. So far he’s earning more than an 11% return. None of his borrowers have been late with a payment. This is his lending profile. He has started a Prosper lending blog with some of his tips. For example, when to bid on loans (it’s not like eBay), how to avoid funding bankruptcies, and a quick review of some of the 3rd party tools to analyze Prosper statistics. This peer to peer lending thing has certainly captured my interest.
Prosper Secures an Additional $20 Million in Capital by tomtolman :: NR5 :: Show
If I could have seen into the future I would have waited a day to post the Prosper article and made it news instead of Coffee Shop. Just this morning, Prosper announced they have secured an additional $20 million in venture capital. This will help them combat the new threats from LendingClub and Zopa. From their press release:
Trials and tribulations by Anonymous :: NR0 :: Show
I’ve been lending on prosper for over a year and after 300+ loans and $20k in capital I’m performing at CD rates… So it has not been a money making op like I hoped but most of my defaults have been early loans that has less scrutiny and less information available. I do believe prosper will have a long term market but it is unlikely to produce better than 8-10% returns. I can usually get 10% in the stock-market so unless prosper can improve its default rate significantly it will have a hard time becoming the next ebay…
I also run the Apple User Group @ Prosper feel free to message me with any questions also take a loot at our group site Apple User Group @ Prosper
Misleading statistics by leporello :: NR0 :: Show
Only 9 Prosper loans have defaulted because of bankruptcy, but 345 have defaulted because of delinquency, and over 500 more are on their way to defaulting because of delinquency (two months or more late).
Prosper has serious customer-service issues, and their collections efforts are scandalous — essentially nonexistent.
Believe me, I know, because I am one of top 60 lenders on Prosper, with over $75,000 invested. The scenario isn’t as rosy as you’d have readers believe. Three of the top five lenders with seasoned portfolios have stopped lending because their ROI didn’t justify the risk.
prosper loans by Anonymous :: NR0 :: Show
I’ve been in the game now for ten months. Way too many dq’s so far. I’ll probably not put any new $ into the program.
Prosper Lending Blog by tomtolman :: NR5 :: Show
One month ago when I found out about Prosper I was intrigued. I wrote this article for OmniNerd and started a blog with my brother. The blog, Prosper Lending Review, has been a great experience. In the first month we have written 36 posts (more than one per day) and we have received tons of positive feedback from readers. So far we are already averaging over 100 visitors a day-not bad for a brand new blog. Our visitors are chatty (great quality) have left some great comments. It’s been a very fun project. I’d invite you to check it out and let me know what you think. Here’s a short list of our most popular posts. I’ve placed a double asterisk next to my favorites.
Lending on Prosper
Prosper: A hands-on education in risk management* – I recommend all new lenders read this before placing their first bid. Addresses diversification and the risk of low credit grades. It opened my eyes.
Prosper lending – How to avoid bankruptcies
When to bid on Prosper loans* – another must read article for new lenders written by Matt
Most Prosper lenders do not diversify their portfolio
Prosper Lending 101 – a review of Prosper’s lending webinar including FAQ from new lenders
Analyzing Prosper data – a quick look at some of the third party tools
Prosper lenders avoid high risk loans – the marketplace has changed
Build your own fantasy Prosper loan portfolio
Are all Prosper loans within a credit grade created equal?** – the results of this analysis surprised me
An analysis of pre-payment risk on Prosper loans
What effect would a recession have on the Prosper marketplace – I don’t think many lenders are thinking about this yet
Borrowing on Prosper
Why would a borrower use Prosper instead of a traditional bank?** – Mark inspired this post from his comment above
Loan money to family and friends through Prosper
Prosper news and information
A Prosper scam: The story of Jessica Wolcott – This is by far our most popular story with twice as many views as any other single post. It is also the most popular topic in the official Prosper forums.
Review: Top Prosper Blogs** – our review of Prosper blogs
Do Prosper lenders discriminate? – this article provoked a very spirited discussion in the official Prosper forums
Prosper secures an additional $20 million in capital
TechCrunch’s bias – Prosper versus Lending Club – my response to the heavy media coverage of Lending Club
eBay + MySpace + ? = Peer to peer lending
50 best websites of 2007 – Prosper scores again – Prosper makes Time’s list for the second year in a row
Rent A Coder: Prosper clone for $250 – also see the related story of another entrepreneur hiring someone from iFreelance.com to create a Prosper competitor
Prosper referral program
We have also written about Prosper competitors Lending Club, Zopa, and CircleLending. I’m interested in your feedback. Please let me know what you think.
Making fun of Prosper listings by Anonymous :: NR0 :: Show
Hey guys- I thought you might enjoy my new blog: KyleMStephens.com. I poke fun at some of the Prosper listings I come across while discussing whether I would bid on it or not.
Enjoy!
Kyle