Another Prosper.com Experience
Posted by admin in General
Shortly after Prosper.com debuted in mid-2006, I did two popular posts on the potential of the service – Why Prosper.com Will Fail and Why Prosper.com Will Succeed. The site has definitely succeeded in that it still exists and gets a lot of press; the jury's still out on whether it's a good place for your investment dollars.
Guest blogger troy Bryant has just jumped into the Prosper pool as a lender and relates his early experience below. I'm going to nab him 6 months from now and a year from now and see how he feels then. Should be interesting. If you have a Prosper.com experience to share, please do so in the comment area below. Now here's Troy…
When I came across Prosper last month I had to try it. For those that don't know, it's a person-to-person online lending network. Prosper borrowers seek a cash loan ($25K is the limit one can borrow). They get the cash from Prosper lenders, who bid on lending the borrower money-this bidding process knocks down the rate for the borrowers (better than what they could probably get from a bank or credit card).
I scraped together $200 bucks and started as a Prosper lender (my wife and I just had a baby so I'm sure we'll be Prosper borrowers soon enough). You can lend as little as $50 bucks to a person, so I split the $200 into four different loans. I figured that would be less risky than having money riding on just one loan. For borrowers, that means they'll potentially have hundreds of lenders providing the funds for one large loan. Every loan is a three-year loan, but a borrower can pay it off early.
I divided my $200 into four $50 loans…and then I used Prosper's "Portfolio Plan" to pick loans to automatically bid on. There's four different Portfolio Plans: Conservative, Balanced, Moderate and Aggressive. The difference is that the more aggressive plan gives a higher return to the lender. But on the flip side, the loans are to borrowers that have a worse credit grade (borrowers are rated as an AA-E grade on credit) or a larger debt to income ratio. I stuck with a moderate plan.
I have fours loans out-three at a 14% interest rate and one at a 19.8% rate. My borrowers credit grade ranges from B-D. Three of my loans are to help people pay down their credit card debt (what most borrowers on Prosper seek to do) and one is to help someone open a restaurant. As a lender you get all kinds of info on the borrowers: credit grade, past delinquencies, employment status, income, their monthly expenses, debt-to-income ratio, a picture of the borrowers (or their kids, or dogs, etc.), and any message they want to include. They can also have friends or past lenders post a message vouching for them.
It's been exactly one month now and I just got my first monthly payments from the borrowers-that means none of the loans are delinquent (woo-hoo!). I figured it out and 2% of the money I received went to Prosper for servicing fees.
My take: It was a good option for me because I had money earning very little in my bank account. With Prosper I can earn at least 8% (usually more) on that money. Plus, it helps borrowers get a better interest rate. Of course, the money you lend is tied up for three years. And if your borrower defaults, it goes to collections, but you probably won't see it again. Since it's uncharted waters you don't know if online scammers may lurk.
* So far so good for Troy. We'll see if it holds up. Again, if you have a longer-term Prosper.com experience, feel free to relate it below.
Also, if you are interested in guest blogging at Zen Personal Finance, drop me a line at j.mchenry@indexcreditcards.com. (You may want to read this before contacting me.)
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I actually just updated my Prosper experience on my blog. I joined in the wild west days of Prosper and put in a grand because like you I’d just had my first kid. I went aggressive and there was no portfolio feature back then. I tried to pick judiciously for the lowest risk high interest options. Boy, did I get it wrong. To date 10 of my first 24 loans have defaulted or are headed to default. Starting about a year ago, I switched my strategy to high interest AA’s and A’s only with an occasional higher interest loan if the borrower already had an existing loan on Prosper with a perfect payment history. The result: no late loans or defaults since 2/07. I fund about 1 loan a month now off the payback of the loans currently in my portfolio and post my thinking behind each bid…
My experience with Prosper has been pretty good. I am making about 12% so far in my experience with only one default. I have @ 3,000 invested.
But open up the floodgates for nasty comments from others! This blog was just linked on a website that is dedicated to P2P lending. While the intention of the website is to be a open forum for people to discuss the pros and cons of P2P lending, what it has become is a haven of bitter lenders who have made bad decisions investing their money. People went to fast, to soon and were burnt. Caveat Emptor. Prosper bears some responsibility for a few early on errors, but the people on this site act as if they were FORCED to pump thousands of dollars into an unproven platform, and that is simply not true.
Heaven forbid you disagree with these early adopters or they will run your out of Dodge! Disagreement on this forum is frowned upon and while the owner of the site (a sane, rationale person) will not ban you for disagreement, the natives will sure make you feel not welcome — they love fresh meat too. I have lurked but posted only a few times because of the mod mentality.
So my advice is to invest in P2P lending carefully, read everything you can, do lots of due dilgence (including reading the P2P lending forums) BUT take with a grain of salt what the more bitter lenders who have made foolish decisions say.
I have been a lender on Prosper.com since March 2007, with about $2,400 invested. Although my projected ROI is currently about 9%, I stopped lending in October for a variety of reasons all linked to Prosper’s management. Basically, the best way to summarize Prosper is that it is a wonderful concept, executed horribly due to the incompetence and arrogance of management.
There are too many serious problems with Prosper to list here, but brief review of http://www.prospers.org, which is the largest Prosper forums, will provide anyone interested with a long list. Here are a few:
1) The default rate on Prosper is MUCH higher than advertised. Chris Larsen, Prosper’s CEO has been quoted in news articles saying the default rate is 2.7%. While perhaps technically accurate using Prosper’s narrow definition of “default,” this is utter balderdash from any real perspective. Prosper only counts a loan as defaulted when it sells it to a junk debt buyer for pennies on the dollar. However, Prosper currently has such sales only quarterly, so it is not uncommon for there to be many loans that are 5, 6, 7, or more months late. Historically, loans almost never come back from being even 3 months late, so all of these loans are defaults in everything but name. Moreover, Prosper calculates its official default rate as the number of defaults divided by the number of loans, but because many loans are too new to have defaulted even if the borrower never made even the first payment (which happens far more often than you might think), this also tends to understate the default rate. So far as can be seen, the real default rate appears likely to be close to 20%.
2) Another problem with Prosper’s handling of defaulted loans, is that the process completely lacks transparency. Prosper flatly refuses to disclose the identity of any of the junk debt buyers that have purchased defaulted Prosper loans, the identity of (or even the number of) any junk debt buyers that have sought or been solicited to participate in the junk debt sales, the process Prosper uses to advertise the junk debt sales to possible buyers, or the method used to calculate the sale prices of the various defaulted loans. Prosper lenders – who, after all, actually OWN the defaulted loans being sold by Prosper for pennies on the dollar – have no idea whether Prosper diligently and/or successfully obtains as high a price as possible for the defaulted loans, or simply sells them off to the first buyer it can find, regardless of price. For that matter, without transparency there is no way to be sure that Prosper doesn’t simply sell the defaulted loans at a favorable price to a company controlled by a Prosper insider. Given Prosper’s many other shortcomings, there is no good reason to believe that Prosper handles the junk debt sales in an appropriate and competent manner. Moreover, there is at least one piece of evidence that it doesn’t. Long before the last junk debt sale, a lender and forum member made a firm offer to purchase a particular loan that was headed to default. He made this offer by sending it certified mail, return receipt requested, to Prosper’s VP of collections and to its General Counsel. Prosper completely ignored this offer for almost two months, and then sent a rejection letter at the same time it sold the loan (along with others) to a junk debt buyer for considerably less than what had been offered to Prosper. This unjustified rejection by Prosper collectively cost the almost three-dozen lenders on that loan $500, which was the difference between the rejected offer and the actual sales price to the junk debt buyer Prosper chose to sell the loan to instead.
3) One of the contributing factors to issue #1, is that Prosper’s collections are anemic. When a loan turns 1 month late it is turned over to Prosper’s collection agency, but historically, only around 15% of loans in collections are brought current. There have been many anecdotal stories by late or defaulted borrowers on Prosper’s old forums that they either were never contacted by the collection agency, or the contact consisted of an email or 2 and maybe a phone call or two. Prosper’s own newly-hired VP of Collections admitted that the call logs from the collection agency showed that they were repeatedly trying to contact borrowers at the same time of day, such as between 3-5 pm, so if the borrower worked during the day, no contact was made.
4) Very little information about the borrowers is verified by Prosper. Prosper selects a subset of fully-funded listings to verify employment and income, but many listings become loans without such verification. Prosper has already had to repurchase about $400,000 of loans under its ID-theft guarantee, meaning that Prosper let many fraudulent loans through its systems. Indeed, there is one case (identified by a diligent forum member) where one person obtained a dozen loans from Prosper under different identities. After the forum member outed this on the old forum, Prosper repurchased the loans and sued the borrower in Los Angeles Superior Court to get its own money back. However, there is substantial doubt among the lending community that Prosper tries very hard to identify ID-theft loans, because when it does, it has to repurchase them from lenders.
5) Although Prosper has funded a number of fraudulent loans, it has also cancelled a number of legitimate loans, apparently through incompetence. One such loan involved the brother of a well-respected Prosper lender and very active forum participant. After claiming that faxed documents were illegible and then that Prosper couldn’t open a .pdf file, it cancelled the fully-funded listing with no opportunity for the borrower to resubmit the documents. There have been many other Keystone Kops situations involving Prosper’s verification.
6) Related to issue #5, Prosper’s customer service is terrible. Often, they let the phone just ring and ring without answering it. When you send an email, the response is often irrelevant boilerplate. Lenders used to provide a lot of Prosper’s customer service for free on their old forums.
7) Prosper’s advertising is highly misleading in many ways, if not downright fraudulent. They overstate interest rates in ads directed to lenders, and understate them in ads directed to borrowers. Prosper was caught once apparently having photoshopped a screen shot of an actual listing in an advertisement about the rate (changing the actual rate to something more beneficial). Also, Prosper has repeatedly sent out mass email ads featuring borrower and lender testimonials that were quickly proven to be false. After the first time, Prosper admitted that it hadn’t verified the facts claimed by the person, and said it would do so in the future. But whoops, they promptly did it again (in a different testimonial) in the next ad.
8 ) Prosper used to have a vibrant community on its official forums, with about 400,000 posts. These forums were an amazing learning experience for lenders, so that new lenders could avoid the mistakes of their predecessors. Prosper banned me from the forums and from lending (although I had already publicly announced that I had stopped lending due to Prosper’s mismanagement) because I sent a bunch of PM’s to new lenders alerting them to the existence of Prosper’s own official forums. Then, the day before Thanksgiving, Prosper deleted its entire forum with no notice, in an effort to hide the truth from new lenders. It then replaced the old forums with a super-moderated version that is completely useless (every post must be approved before being posted, which often takes days even when the moderator lets it through).
9) When another forum member made an archive of the old forums available on http://www.prosperreport.com, Prosper had its lawyers send a threatening letter seeking to take the domain away on baseless trademark, unfair competition and cybersquatting grounds. Undoubtedly, Prosper figured this person would cave in and take down the site. Instead, he retained a lawyer from Public Citizen, who responded to Prosper’s letter by explaining how Prosper’s claims are entirely without merit. Both letters are posted on the site. Prosper has yet to respond.
(10) Prosper also misappropriated thousands of dollars of lenders’ money by charging its servicing fee on loans that were more than a month late, contrary to Prosper’s own legal agreements. This too was discovered by yet another forum member. Prosper admitted that its action was “in error,” but only recently returned this money to lenders despite having promised to do so months ago.
(11) Another significant issue is whether Prosper will even survive as a company for the three-year term of its loans. As can be seen on http://www.Lendingstats.com, loan originations have been essentially flat for the last nine months, and Prosper’s CEO has admitted that loan originations need to increase 400%-500% in order for Prosper to turn a profit. Given that, clearly the outlook is troubling. Although the Prosper Lending Agreement specifies that if Prosper goes out of business the loan servicing will be taken over by another servicing company, there is no guarantee that any such company can and will be found, or that the transition will go smoothly, or that the new company won’t require higher fees in order to do the servicing.
The above issues are really just the tip of the iceberg. If anyone is considering lending on Prosper, do your due diligence. Read http://www.prospers.org, and check out the actual performance of lenders on http://www.lendingstats.com. For example, you will see that looking at ALL moderately seasoned lenders on Prosper (those with >20 loans and >6 month average loan age), the median projected ROI is around a mere 4.5%. That isn’t much more than what E-Trade is offering on its FDIC-insured, 100% liquid savings accounts.
Caveat lender!
I started lending at Prosper approximately 2 years ago. All was great until the first non-payment happened. It seems Prosper just figured that everyone would share the love and there wouldn’t be an issue of non-payments. As of today I have had over 100 borrowers default, over 20 bankruptcies and Prosper still has not found a way to conduct proper collections. It wasn’t until recently that they even reported to more than one credit bureau.
I’ve had AA’s go belly up and HR’s pay every payment so you can’t even go by their scoring system which is so bizarre that you can have a bankruptcy within a year and still score a high “grade”.
If you want to play with your money, go to Vegas and at least get free drinks and comps.
The person who posted as “Not a bitter lender” is simply wrong.
Prosper is a great concept and is the passion of many lenders. A few months ago Prosper switched it’s forums to a tightly moderated environment which I understand. The unofficial forums at Prospers dot org has since become it’s replacement for many people. The discussions are open, honest, and for the most part unmoderated. This leads to a variety of opions as with any place that allows free speech. Some people will be passionate. Some people will be unhappy. Some people will be lurking. Some people wont care. There often will be discussions that dont interest you but there will also be many that do. It’s up you to manage this kind of community properly. If you prefer a place where you only see happy pro-prosper postings unrelated to reality all the time, then of course Prosper’s new official forums is the best place to go.
i have been a lender for about two years now. i do not think i have made any money yet, but luckily i do not think i have lost any yet either (except interest income). i tried to choose good borrower but the current credit crunch is affecting all. prosper.com is learning, adding the portfolio manager is a great help since they have all those past loans to do statistics on and help make good loans. i currently have 82 loans ($50) only 67 are current, 4 loans have been default and sold. i am only reinvesting, one about every month, no new cash is going to be added to prosper for loans, eventually i think the kinks well be worked out and i well be making some money.
so who is monitoring this site? i posted my experience as a lender and now i have comeback and find that it has been removed. why is that. comments were optimistic and overall neutral even though no money has been made yet.
Hey,
I have noticed that quite a few people just throw their money in the prosper without even considering what they are doing. Those credit ratings are bs for the major part, same as fico. If you ever work for auto financing or home financing and see hundreds of credit report, you will realize that a strong borrower does not always have a 700 fico or AA in this case. I really urge people to learn about credit and risks without looking at the ratings first, and only then start considering will a borrower with a C credit but 25 years of credit history, no derogs and 15 open accounts will default on a $1500 loan vs. an A credit who has 2 lines for $100 max line is really unknown and more riskier. Also, all the text that people write about themselves is really useless, you can make it up, no one will checks. I am not even sure how they check the income or that you are a homeowner, so the only thing I was betting was credit. So far I got 14 month of solid record with 14% average, $500 investment, crossing my fingers.