zcommodore

Today is my 2-year anniversary since I found Prosper.  My last bid was ~5 months ago.  I may bid again but the likelyhood is dwindling.  In the between time, I've done some thinking about this whole person-to-person lending idea.

When I first found Prosper, one of the big drawing points for me was the interest rates.  Wow!, I thought, I can earn 15+% rates on people who would otherwise be paying 18-30%.  That's a win-win situation if I ever saw one.  So I signed up even though I didn't really have a lot to bid, I figured I could make a few $50 bids and see how it went.

Well, 2 years later, I've made a total of 35 loans, 3 are paid, 14 are current and the remaining 18 are in some stage of lateness including 6 defaults.  The stats-sites show my ROI as negative and they're probably close.  I have received some money from my activities as a GL and through the various referral programs so that helps to offset some of the losses.  Still, overall, it has not been a positive financial experience.  I've definitely learned a few things though.

People who don't have money, can't pay their bills.  Even if they say they want to.

People who don't have good credit history, aren't likely to pay their bills either but they'll tell you anything they can to get you to loan them money anyway.

Overall, Prosper's credit ratings are accurate.  AA borrowers as a whole have a lower default rate than A's and so forth down to HR's and NC's (no longer available).  Some AA borrowers have defaulted, and more will over time but as a group they're doing better than lower credit grades, but not as low of a rate as the old Experian numbers tried to indicate.

Unsecured loans need high rates to offset relatively high loss rates.  Prosper's model bids them down too low to reasonably compensate for the risk and the innefficient tax treatment.

Prosper, due to many issues related to privacy concerns, can't allow lenders to see full credit reports.  This is a huge handicap for lenders.

Lenders on Prosper are amateurs.  Any time you have a bunch of amateurs doing something, you know there will be a learning curve.  In this case, borrowers are making out like bandits and the amateur lenders are losing their shirt.  You can't blame either side individually for this, they're both responsible for their share of the blame.

Prosper may survive but they may have to make some significant changes first.  As things stand now, they're losing a lot of money and aren't going to survive despite their huge lead in this niche market.  Their website technology-wise is second to none but their product leaves somewhat to be desired.  Supposedly this is a growing segment of the marketplace but I don't see banks shaking in their boots from the competition.

Borrowers with good credit can get money cheaper and easier elsewhere.  I've got AA credit and I have a credit card balance that I've rolled from one 0% credit card offer to another more than once.  The people who are coming to Prosper have a reason they are going to a site like this generally--they can't get credit anymore.  There's a reason they can't get credit and that is because they aren't as credit worthy and are less likely to pay their bills.  Some will, but there's no good way to automate the process of finding out who.

In all cases, banks have an advantage loaning money to people.  Banks can make secured loans at relatively high rates and unsecured loans at even higher rates.  There's a reason they make loans at the rates they do--so they can make money even if some borrowers default.  Even then, as we've all seen with the mortgage crisis, they sometimes lose money.  Still, banks have the benefit of having access to the whole credit report, experienced people making lending decisions, the ability to charge higher rates, and much more favorable tax treatment on their earnings.

Some lenders, who wish to take the time, will likely end up with a positive return.  But given the poor tax treatment and the amount of time it takes, they will have to make relatively large bids to make it worth their time.  Unfortunately, larger bids increase their risk exposure which goes against the whole diversification idea that would make their return regress to the mean.  All I can say is "good luck" to anyone who considers this as an "investment".

In the end, the poor lending decisions I've made have been a valuable learning tool.  I'm glad I found Prosper just for the learning experience.  Ultimately, it's been a relatively inexpensive education but there has been a cost.  I've made some new online friends for which I'm thankful.  Shoot, I even started a blog for the first time, something I never really considered before.  For now, I'm stuck here for at least another 2+ years so I'm not going anywhere any time soon.