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.
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.
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