Lazy Man and Money mentioned his tribulations with Prosper.com, a service where individuals buy and lend to each other.
I had looked at Prosper some time ago, and decided not to lend money there at that time for the following reasons:
- The advertised high interest rates are for the lowest-rated, riskiest borrowers and the forum told tales of defaults so it seemed unlikely to net a significantly high return (lend to 2 people at 25%, 1 of them defaults with the first due date, so you average a loss at -37.5%).
- You have to win the loan by bidding down against rival lenders so it seemed unlikely to net high rates with the highest-rated, reliable borrowers—yet there is always a chance that even an A-rated borrower might default.
- To diversify to hedge risk would require many hours of work to bid small amounts to many borrowers (you can lend $50 to a person who is seeking $5,000 in loans from many lenders).
- Bidding means that you might waste time in research with no result and 0% interest.
Please share your experience if you have used Prosper or a similar service.
Complete the Prosper motto: "Where people come together to . . ."
- Time: 2 timesavers are (1) you can set criteria and Prosper will auto-fund loans from your account, and (2) you are not allowed to be your own collection agency (this means that either the money gets repaid or it doesn't).
- Rates: Lazy Man's Prosper portfolio (thank you) shows A-grade loans at twice the rate that this Prosper page shows for average A-grade rates, about 20% v. 10% (which means other A-grade loans can be significantly less than 10%).
Update 6/21/07: You cannot cash out whenever you want as you could do with a money market. You cannot cash out early with a penalty as you could do with a CD. You must collect a few dollars per month and wait 3 years (a common loan term) to claim your full profit, if any.
Update 6/23/07: My Personal Finance Blog is pulling out of Prosper. Another point that new Prosper lenders might overlook is that "no defaults yet" after a year does not mean much because you might need 2 years just to get your principal back when I imagine that debtors are getting bored of paying and the luster of their vacation/wedding/business-that-did-not-take-off is long forgotten.
Update 6/25/07: My Money Blog posted data which so far support my 6/23 concern that defaults will increase over time.
Update 6/26/07: How To Measure Prosper Profits Accurately