Prosper - eBay of Loans

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?