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blog (coffee shop)
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?
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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:
America’s first people-to-people lending marketplace, today announced the closing of a $20 million Series C financing round led by DAG Ventures and Meritech Capital Partners with participation by existing investors: Accel Partners, Benchmark Capital, Fidelity Ventures and Omidyar Network. This financing brings the total amount of capital raised by Prosper to $40 million.
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
Based on Matt's analysis an investor would have made the following rates of return based on credit grade:
- AA: Expected Rate 9.5% (Start with an average rate of 11% and subtract 1% for defaults and the 0.5% Service fee)
- A: Expected Rate 9.5% (Start with an average rate of 13% and subtract 3% for defaults and the 0.5% Service fee)
- B: Expected Rate 7.5% (Start with an average rate of 15% and subtract 7% for defaults and the 0.5% Service fee)
- C: Expected Rate 6.5% (Start with an average rate of 17% and subtract 10% for defaults and the 0.5% Service fee)
- D: Expected Rate 7.5% (Start with an average rate of 21% and subtract 13% for defaults and the 0.5% Service fee)
- E: Expected Rate -4.5% (Start with an average rate of 24% and subtract 28% for defaults and the 0.5% Service fee)
- HR: Expected Rate -21.5% (Start with an average rate of 24% and subtract 45% for defaults and the 0.5% Service fee)
- NC: the performance wasn't good on these loans, so Prosper has discontinued allowing people with No Credit to borrow
Keep in mind that these stats are based on a historical average which may not predict future results. Also, this is based on only about 18 months of data on 3 year loans. Once more longer term data for a larger number of loans is available these types of statistical analysis will become more precise.
Looking at your profile I see loans in all credit grades. One third of your portfolio (by number of loans) is made up of E, HR and NC loans. The percentage of your loans that are have defaulted or are late loans in these categories are at 27%, 22% and 60%. In C and D categories your default rates are running much lower than the average. Based on what I have seen so far (and I haven't lent any money yet) it seems a good idea to stay totally clear of all E's and HR's.
By the way, I like your site. The Mac Lenders' articles about Prosper are very informative.
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.
Leporello – thanks for the feedback and tempering my optimism. It’s always good to get all the facts, especially the ugly ones before making an investment and that’s what I was hoping to get in feedback to this article. One thing I think is important to note is that there are only 18 months of data on Prosper loans. Since loans are made for a period of three years we still do not know the full default rates. Unfortunately, returns on investment can only get worse – not better. As I have been reading the Prosper forums over the last week I sense a lot of negative feelings among lenders. Returns have not been what investors had hoped for and there has been a very high default rate among the high risk and E loans. The delinquency rate was even so high among no credit borrowers that Prosper does not permit them to use the site anymore.
You’re right, the overall default rates are much higher than just the default rates due to bankruptcy and I should have included that as well in the article. Thanks for bringing it up in the comments. There was no intent to mislead.
From a look at your portfolio it appears that you are actually doing very well. Out of 245 loans to AA, A, and B none of them are late. Of course your average loan age is 3-4 months so this could get worse. It looks like the biggest hit to your portfolio has been the E and HR loans with 7% (9/122) and 9% (7/80) defaulting.
Based on your experience, would you recommend Prosper to new investors? I see that you still have 102 active bids so it appears that you still see some value in making loans. What would you recommend to new investors?
Tomtolman,
I would still recommend Prosper to new investors, yes, but with a caveat: Go in slowly, read the discussion fora, and be prepared to take a big financial hit if you're not careful. As Prosper grows and matures, more information about borrowers has become available to lenders, so I predict that investors' returns will, on the whole increase, but Prosper is not easy money. It's quite time consuming, but then you also get to know some interesting personalities while you're investing.
It's interesting how important the "social" aspect of a site is. I've been working on establishing a "wiki" at work for the company to use as a "lessons learned database" or "knowledge base." The uppity-ups have warmed to the idea, but they were initially very wary. They worried about the ability for "any employee" to add content - and the potential that had to lead to litigation. In the end, however, having a site employees actually use is most important - especially in a lessons learned / knowledge base type of application. Previous attempts at such failed because, in my opinion, they they were a pain to use - too much up front "paperwork" and no social aspect. Wikis, on the other hand, are easy to use and involve a large social scene, which may explain their online success.
Getting back to the topic, however, I think a functional social aspect is critical to the success of most anything - not just the social-first sites like MySpace and Facebook. The gaming industry has shifted in a social direction (e.g., World of Warcraft, RTS games in general, voice communication and teams in FPS games, etc.), and here we're seeing social interaction playing a part in the success of what would seem to be a purely financial site. People - even computer geeks - are motivated by social interaction, and it would pay for any site (or business) depending on user interaction to take notice.
People - even computer geeks - are motivated by social interaction, and it would pay for any site (or business) depending on user interaction to take notice.
How's this for social interaction on Prosper? Just because the social interaction is online that doesn't rule out the possibility of a full-on soap opera. Crazy.
Matt--
Fabulous summary. From what I've read, the "hot girl" has a much better chance of securing a loan on Prosper. Silly to loan hundreds to someone because of a cute picture, but it happens.
My research has led me to hold off on Prosper. I am all about bucking the banks, but banks seem to be the only ones with the infrastructure to deal with deadbeats.
That's the main reason- after reading a lot of forums it seems Prosper's debt collection apparatus is practically nonexistent. I like the concept but I'm not willing to be an early adopter. Besides, I'm getting 6% at FNBODirect.
Tom, anyone else, let me know if you decide to jump in. Or if you'd like to borrow some money at 10% :)
I do plan on investing some money in Prosper. Not much. Right now I'd much rather my investments be liquid and Prosper loans are not. I think there is educational and entertainment value in social lending and so I will fund a couple/few loans with the $50 minimum. It's a fun experiment.
The rumor is that Prosper will be starting a secondary market near the end of the year or early next year. This would increase the liquidity as it would give you a way to cash out of your loan positions by selling your loans to other lenders.
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.
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
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.
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
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Full disclosure and $25 by tomtolman :: NR6 :: on 19 June 2007
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.
RE: Full disclosure and $25 by jmarkdavison :: NR6 :: on 19 June 2007
This is very intriguing. I heard about Prosper a few months ago but now that I know someone who knows someone who uses it, I'm considering joining as a lender. I make 5.08% on my USAA savings account- good but not great compared to 10%+. With a stock market slide inevitable, Prosper might be a good move.
I get the default rate info. It's great how you Prosper aggregates the mini-loans from lenders, thereby reducing the risk. I get that.
What makes me curious is this: why don't the A or AA folks just borrow from a bank? The rates seem high compared to banks'. My perspective is that of someone who has only ever borrowed with collateral--a car or house--maybe unsecured loans just run higher, but aren't a lot of these people using their home equity as collateral?
Tomtolman, let me know what you end up doing. I intend to ease into the lending business, with a couple hundred bucks I can afford to lose.
Very interesting!
RE: Full disclosure and $25 by Anonymous :: NR0 :: on 19 June 2007
That is how I started, a couple of hundred at a time until I had a good feel for the site. Your questions about why the AA or A borrowers don't go to a bank for a better rate is a really good one. I have AA credit with no delinquencies. At my bank, which happens to be Wells Fargo, the current rate on a 36 month unsecured $10,000 Personal Loan is 11.44%. This varies by State and loan amount - they have a tool on their website that helps you calculate the current rate. For home loans the rates are less, but there are also upfront fees, and not everyone is a home owner. For car loans you can also get a better rate, but not everyone with A or AA credit has a car that is completely paid off to use as collateral. You can see the average loan rates for Prosper at http://prosper.com/lend/rates.aspx&referrer=mateo . I think what you will find is that Prosper rates end up being very comparable to loan rates that you would get from a bank on a Personal unsecured loan. I have funded loans to AA borrowers for between 8.5% - 12% which seems right in line with what banks charge. Also, I am wary of giving loans to people who are trying to use it for buying a house or something where they should be able to find traditional financing - I prefer loans where people are doing things like refinancing their credit card debt at a lower rate.
Why would a borrower use Prosper? by tomtolman :: NR6 :: on 21 June 2007
Mark - in addition to answering your question in here, Matt has written a deeper response here:
Why would a borrower use Prosper instead of a traditional bank?
He pulls some examples of rates for personal unsecure loans for people with good credit.
RE: Full disclosure and $25 by mtolman :: NR3 :: on 19 June 2007
That is how I started, a couple of hundred at a time until I had a good feel for the site. Your questions about why the AA or A borrowers don't go to a bank for a better rate is a really good one. I have AA credit with no delinquencies. At my bank, which happens to be Wells Fargo, the current rate on a 36 month unsecured $10,000 Personal Loan is 11.44%. This varies by State and loan amount - they have a tool on their website that helps you calculate the current rate. For home loans the rates are less, but there are also upfront fees, and not everyone is a home owner. For car loans you can also get a better rate, but not everyone with A or AA credit has a car that is completely paid off to use as collateral. You can see the average loan rates for Prosper here.
I think what you will find is that Prosper rates end up being very comparable to loan rates that you would get from a bank on a Personal unsecured loan. I have funded loans to AA borrowers for between 8.5% - 12% which seems right in line with what banks charge. Also, I am wary of giving loans to people who are trying to use it for buying a house or something where they should be able to find traditional financing - I prefer loans where people are doing things like refinancing their credit card debt at a lower rate.
RE: Full disclosure and $25 by mtolman :: NR3 :: on 19 June 2007
My previous comment had a bad link:
Here is the corrected link for the 30-day average lending rates for Prosper by credit grade.
Soldier consolidating debt by tomtolman :: NR6 :: on 20 June 2007
You're not the only one dropping bad links. I'm guilty too. From the article:
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.
My first link - the one to a soldier consolidating debt actually goes to someone looking to pay off their credit cards. Here's the soldier I intended to link to. After two deployments to Iraq and with a bunch of bad payday loans, wedding/marriage expenses and a daughter on the way he is looking for help.