Saturday, January 27, 2007

Prosper.com?

A while ago, I heard about a website called Prosper.com. This is a marketplace for individual consumer loans. The concept is like eBay where you have borrowers asking for and lenders bidding on small personal loans. It works like this, a borrower requests a loan. Lenders then compete on some or all of the requested loan amount. The attractive part of this exchange is that potentially higher interest rates can be found than in a regular savings or CD account. For borrowers, it provides an opportunity to apply for loans that they would not usually qualify for using traditional avenues. In exchange for the higher interest rates, the lenders bear the risk that a borrower may default.

I have not signed up for a Prosper account, and probably won't do so in the near future. Since I'm not in the market to request a personal loan, I would be looking at this venture from the lender's prospective. I don't have a problem with the Prosper.com concept. However, it does take time to review and vet each of the loan requests. This is akin to the type of stock research that I do before I before I invest. With a typical loan bid running about $50-$250, this can quickly become a lot of research to do for even a small investment. Of course, one is welcome to offer larger loan amounts, but this also increases the risk in the event that one larger loan defaults.

I'm not saying that Prosper is a bad thing. Quite the contrary; I think that it may work out for a lot of lenders and borrowers. However, in order to invest the same amount that I would in a typical stock transaction, investing in Prosper loans would end up using a disproportionate amount of time for me. It is fair to say that Prosper is not necessarily right for everyone. My philosophy, when considering an investment, is to either invest a lot at once or not at all. Thus, small little loans are not consistent with my investment strategy.

All said, I invite others to share their experiences with Prosper.com. I guess that I'm interested in know if you've had any bad experiences, and whether or not you feel that the extra boost in interest rates is worth the extra effort (and risk).

PF Stock

4 comments:

fin_indie said...

Prosper -- I've written a bunch on it so far. I have about $3k invested with an average interest rate of about 16%. Not bad. For me, it's still an experiment, however. I'm not sure how viable it is as a long term investment or what the real risk profile is yet. Time will tell.

Smarty said...

I'm a little skeptical about long term investing in Prosper. One bad apple can ruin the whole investment. Of course, that's just me.

pfstock said...

I wonder if anybody has calculated the rate of return they are really earning from Prosper. In order to lend money, you need to have funds on deposit beforehand. Funds that aren't loaned out don't earn interest in that interim period. Besides default risk, there is another risk that most lenders probably haven't considered: prepayment risk. When a borrower pays a loan, the proceeds go back to that 0% interest rate until new borrowers can be found.

Prosper said...
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