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Continue reading "Prosper Decision: Choosing a Group (To Join or Not to Join)" »

Posted by spotsearch at 01:06 AM | Permalink | Comments (0) | TrackBacks (0)

Prosper brings a lot of great things to investors.  It opens up a whole new arena of fixed income investments, promising credit-card like interest rates to investors (and the associated risks as well).  In addition, it allows you to fund peoples' dreams, or help people reach their goals.  It's satisfying to know that your money is really making a difference in someone's life, and it's fun to watch the progress of loan payments.

Loans on Prosper.com are unsecured debt, meaning they're not backed up by any assets, just by the promise of the borrower that they'll pay you back.  First a technicality in terminology. Although prosper refers to people bidding on loans as "lenders" technically, you are a more accurately a loan repurchaser, as Prosper actually puts up the money and does the actual lending and then sells you the loan. Prosper currently has only 3 year loans. The loans can be up to $25,000, and the interest rates are often capped by state lending limits. The first thing you need to know about Prosper as a lender is the risk. Lending to people is RISKY. Just how risky depends on the borrower and his or her situation. The most important thing to look at is the borrower's credit grade. This Prosper link shows the default rate for various credit grades:

Rating Avg. Default 
  AA     0.20%
  A      0.90%
  B      1.80%
  C      3.30%
  D      6.20%
  E      10.40%
  HR     19.10%
  NC Cannot estimate (no credit history)

Credit Grades used by Prosper are based on the Experian ScoreX PLUS credit scoring system. What you'll notice is that High Risk borrowers have a really high default rate, in other words, almost 20% of high risk borrowers are likely to default on your loan, so be careful when considering who you lend to.  Fortunately, Prosper lets you spread out your risk by letting you bid on small fractions of a large loan- in fact, you can bid as little as $50 on a loan.  All bids are pooled together in funding a loan, and the loan is filled by the set of lowest interest rate bids which fully fund the loan.  Thus, you can spread bids across a variety of loans and build up a portfolio of loans.

So what happens if someone doesn't pay?  There are a couple of stages, starting with a late payment, which progress from being late, 1 month late, 2 months late, 3 months late, to being in default.  When a loan goes in default, a credit collection agency (which you chose before bidding on the loan) will attempt to collect.  In addition to the threat of collection agencies, Prosper.com also reports late payments to major credit rating agencies, so lenders can damage their credit by not paying.  It's a well-thought out system, and I'm quite happy with it. 

Once you decide to become a lender, you'll find it a fascinating and rewarding new world.

Posted by spotsearch at 10:45 PM | Permalink | Comments (0) | TrackBacks (0)

One of the most important things about getting funded on Prosper.com is writing a good loan description. A good loan description will have to accomplish several key things:
1. Describe why you need the loan.
2. Describe your current expenses. If you're getting rid of loan debts, what are the current debts and interest rates you're paying?
3. Describe your income (and/or your spouse if applicable).
4. Describe your insurance situation (are you covered with health, life, auto, home insurance).
5. Give confidence to the lender of your ability to repay the loan.
6. Tell your story - give the lender a good view of who you are, what your situation is. Let your personality shine!

Here are some examples of well-written loan requests on Prosper:
I Want to be Free - good detail
Debt Consolidation - good detail
Help Consolidate High Interest loans - good detail and story
Help Bring Barking Dog Coffee to Life! - Telling a good story

A few other useful hints:
* Include a nice picture of you and/or your family. Since the lenders can't meet you in person, it helps to make your request more personal.
* Don't end your listings on weekends or strange hours. Ending your listing during normal hours is better because as your listing is about to expire, it shows up high on the list of soon-to-expire listings and you want to maximize the people that see it near the end.
* Be honest. It's all about trust here, and your honesty will be appreciated.
* ONLY join groups that do 100% reward sharing.  Groups that don't do full reward sharing are basically tacking on a fee for your loan, and there's nothing a borrower hates more than someone adding fees.

See Also:
Prosper Decision:  Better Joining a Group or Not (Choosing a Group)?

Posted by spotsearch at 11:43 PM | Permalink | Comments (0) | TrackBacks (0)

As I mentioned earlier, my lending philosophy on Prosper is to give to people that I believe in. I'm not just out to make a quick buck- I like the social aspect of lending to help out someone and seeing them succeed at their goals. I just funded two loans on Prosper.com (Technically, I repurchased fractions of loans from Prosper, as lenders on Prosper are actually loan repurchasers). My first two loans, I believe, are great ones, and I am quite positive about them, and feel great about helping out these people.

The first is a loan to BloggingAwayDebt, a blogger who has put her financial life online for everyone to read. She is writing about tackling her large amount of credit card debt and gives interesting tips along the way. It's fun just reading her blog- check it out. If you're interested in reading about the borrower's perspective on Prosper, read her posts here.

The second loan was to the owner of Barking Dog Coffee, a (soon-to-be-started) dog-friendly Coffee House located inside The Book Worm Book Store. There's a yard area too, where dogs can be tied, and walked around. They'll have not only coffee, but smoothies, milkshakes, baked goods, and doggy treats. This is such a great idea, and, I believe the owner has the experience and enthusiasm to make it a success.

Both borrowers had great credit grades (A and AA), both are married with dual incomes (usually helps in that it's less likely both people in the couple would end up being unemployed at the same time), and both exhibited great enthusiasm for reaching their goals.

Posted by spotsearch at 11:40 PM | Permalink | Comments (0) | TrackBacks (0)

As a lender, you have a choice of a range of borrowers based on credit ratings, from AA through HR (High Risk). The rate you get goes correspondingly higher the more risk the loan.

Here's an example of the Credit ratings and default rates that Prosper cites from historical Experian data.

Rating Avg. Default
AA 0.20%
A 0.90%
B 1.80%
C 3.30%
D 6.20%
E 10.40%
HR 19.10%
NC Cannot estimate (no credit history)

Reasons borrowers request a loan are interesting and varied. There are some downright bad borrower ideas- for instance, borrowing money (at rates around 10% or more) to invest in the stock market. This is just plain dumb because you are starting off with a 10% handicap, and over long periods of time, the U.S. stock market (S&P 500 Index) returns around 10.2% so you are unlikely to make much money borrowing at 10% interest. The fact is, most PROFESSIONAL mutual fund managers are unable to consistently beat the S&P 500 Index.

Another often-seen borrower on Prosper is someone looking into borrowing money to lend to more risky borrowers on Prosper. Borrowing (even at reasonable 7% rates) to lend to riskier borrowers is a rather risky proposition. You're starting with a 7% or more rate handicap due to your loan interest, and you're exposing yourself to a huge amount of risk as a borrower lending to even more risky borrowers.

So, should a lender part a fool from his/her money? Or should a lender try and educate them on their folly? Or just avoid these loans altogether? Hard to say. My inclination is to find loans that are for a good purpose, loans that will help someone, make a difference in their lives in a positive way, while earning a fair return.

Posted by spotsearch at 11:39 PM | Permalink | Comments (0) | TrackBacks (0)

It's kind of addictive browsing listings on Prosper.com. For investors that like to take personal control of their finances, it gives you a whole new class of fixed income investment options. Deciding who to fund can be rewarding in multiple ways- the prospetcts of helping out others, and earning a higher rate of return than most fixed income investments. Risks abound, of course. People often put up their sometimes sad stories of misfortune, and your heart goes out to them. Yet, at the same time, it's a question of trust, as they are difficult to verify. Some have poor credit records, and are on the brink of financial disaster. Although Prosper does credit checks to try and prevent fraud and verify identities, Prosper doesn't seem to have any fraud protection guarantees. Paypal for instance, provides at least some guarantees against fraud and partially reimburses those who were defrauded. One mitigating factor however, is that you can select a collection agency so that if a loan goes into default, the agency will try and collect for you (while taking a HUGE cut of what they are able to get).

Well, despite the risks, I decided to jump right in as a lender. Unfortunately, the way Prosper handles new accounts, it takes quite a while for you to get rolling. First, you apply for an account, which gets approved fairly quickly - it takes about 15 minutes. Then, you have to verify your bank account- they make a deposit and withdrawal that you need to enter to verify your account- this took 3 days for me (I signed up on a Saturday). Then, you need to wire transfer money to your account which takes another 2 to 4 days. This is in sharp contrast to the speed and efficiency of doing the same thing with my ETrade account. ETrade has "instant" wire transfers- talk about great customer service and instant gratification! ETrade probably does this by doing a quick balance check, and initiating the transfer from your bank, but then they actually temporarily put up their own money in your account while the transfer is happening so you can start investing immediately. Prosper needs to learn a few tricks in improving their operations and customer experience here.


(Disclosure: I own stock or options in ETrade at the time of this writing)

Posted by spotsearch at 11:38 PM | Permalink | Comments (0) | TrackBacks (0)

I just came across a new site, Prosper.com. Prosper is a fusion of Ebay+P2P+Lending. It's a site where people can post their loan requests, and then lenders (individuals like yourself) can then bid on them to lend them the money. It's a fantastic idea, with the power to transform a whole industry, similar to what EBay did with product auctions.

I just signed up for it as a lender.... we'll see how it goes. Signing up is straightforward but you need a bit of information, such as your drivers license, a bank account routing number, and information from your credit report (it asks you questions based on the report it pulls from you to verify your identity, such as the servicer of your last auto loan, or a previous employer name).

The attraction to borrowers is that they can try and get loans at lower rates than would otherwise be possible, since people are bidding and competing to get their loan. Also, some people in difficult situations (poor credit) might be unable to get loans otherwise. People with good credit may be just looking to get a better deal or pay off some debt. The lender is there to get a better deal than their traditional fixed income investments. In addition, it's actually gratifying to help someone out of a difficult situation. Risks abound for the lender. But it's a bold and interesting experiment.

Posted by spotsearch at 11:38 PM | Permalink | Comments (0) | TrackBacks (0)