Counterpoint: Why Prosper.com Will Succeed
Posted by Justin McHenry in General
Yesterday I made the case for why Prosper.com, the peer-to-peer lending site that has a ton of buzz behind it, would ultimately fail.
To avoid accusations of being mean-spirited, negative, a party-pooper, or just plain stupid, I now offer the many reasons Prosper will succeed:
1. It fills a niche. The biggest Catch 22 of the credit industry is that you can't get credit until you have a credit record, but you can't build a credit record until you've had credit. Because you have no credit record, the only institutions willing to give you credit do so at exorbitant rates–17, 18, 19 percent and up. People without credit don't deserve that–having no track record shouldn't automatically mean you're pegged as a bad customer.
Prosper gives people without a track record the opportunity to have money lent to them without paying through the nose.
Similarly, Prosper allows people who have had a couple of bad breaks get back on their feet before their financial situation snowballs out of control. For people without a credit record who have fallen just a bit behind on their payments, the only option is often payday lenders, who will gladly give you $500 today for $550 next Tuesday, equivalent to a 200%-plus interest rate if calculated over a year. Prosper gives these people an opportunity to get a small safety net–and they're willing to pay fairly high interest rates to do so–after all, what's 18% or 20% when you were paying 200%?
So Prosper is making reasonable loans possible to needy people who aren't currently being served by anyone other than spiffed-up loan sharks. And Prosper lenders are getting a good return on their investments at the same time.
2. Multiple safeguards protect Prosper lenders. It's not foolproof, but Prosper has put in place multiple ways to reduce risk and encourage borrowers to pay the money back, thus making lenders more apt to keep lending.
These safeguards include credit checks with credit ratings of borrowers posted on the site, automatic deduction of monthly payments from borrowers' bank accounts, the creation of "groups" of borrowers in which any particular borrower gets pressure from group members to pay back the loan lest the whole group's credit rating be hurt, and an active forum in which lenders can grill borrowers on why they need the money and pick out any discrepancies in their stories. Scammers may show up, but between the investigative work of Prosper and its community-policing members, most will be ferreted out before doing any harm.
In addition, Prosper strongly encourages you to diversify your loans over many borrowers instead of throwing $500 at a single person. Just like stocks, don't put your eggs in one basket and you won't find all your eggs missing.
3. It's more heartbreaking to screw 3BoyMomi than to screw MBNA. In other words, as a borrower, it's harder on the psyche to know that your lack of paying is going to hurt a real person who trusted you with their money rather than some faceless institution that is just out to screw the consumer anyway. MBNA's not going to starve if you don't pay that loan back, but the Mom in Wisconsin might have it a little tougher.
4. You could just as easily get robbed by the next Ken Lay as get bilked by an unscrupulous Prosper borrower. Risks are inherent in any investment. Who would've guessed that huge companies like Enron, WorldCom, etc. would cook the books and throw millon dollar parties for their cronies on your dime? Now you know better, and you know there are more of them out there waiting to be uncovered–the stock market doesn't seem so warm and cuddly anymore, so why not diversify your investments by taking a chance on the honesty of Prosper borrowers who aren't driven by pure greed?
5. It feels good to help someone. Let's not forget that there are still people in this world who like to help others. Prosper allows lenders to help people that need help. Even if one or two borrower loans default and your hoped-for 12% return goes down to 5%, it still feels a lot better to have helped a struggling family while making 5% than to have gotten a paper statement on the 5% you're making on your bank CD (or whatever boring financial instrument you could be using instead).
6. It's already working in the UK. The Web site Zopa has already been successfully doing in the UK for over a year what Prosper just started doing here (Zopa's going to be in the U.S. soon, btw). They have a slightly different business model, but close enough to make you pretty confident that this peer-to-peer lending thing is workable.
So, it looks as though I'm ready to jump in, huh? Well, not so fast. I have my reservations, as I've already stated, and, more than that, I try to follow the advice of Polonius in Shakespeare's Hamlet:
"Neither a borrower nor a lender be."
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Which is it, for or against? Take a stand!
The anonymity of Internet has always been a monster lurking in the dark. But all the negative talk is forsaking some key moments of delight in what prosper.com is doing:
1. They do credit-check, income verification, address verification, ask for Driver’s License for lenders.
2. This is no different from me closing a loan online.
3. Many stories posted online on Prosper are not hyperbole but realistic.
4. Ebay has been an anonymous tradingmarket and a phenomenal success at that.
5. People can spread their loans in small amounts, thereby reducing their lending risk. They can also diversify among high and low risk candidates.
6. Posters offering mutual fund diversification are forgetting a very key point – Prosper.com brings in steady returns month after month if defaults are manageable. Mutual funds can stink for 5 years, ask anyone who bought Fidelity fund in 1999 (including me).
7. Prosper.com is very addictive to lenders. And lenders WILL get smarter over time, as Ebay buyers have.
8. Prosper.com is bound to bring in varying loan terms, going as short as 6 months on loans. I wouldn’t be surprised if they also put 2nd or 3rd liens on borrowers’ houses (and assets), as some private (non-banking) lenders do.
9. Prosper.com is very easy to use for both type of parties.
10. The group idea is very interesting. Once it catches on, there will be groups based on alumni, ethnicities, families, cities, employees where the chances of defaults will be tad lower, as people may know each other personally. This kind of lending is very popular in the developing world.
Kudos for prosper.com
I’m a Propser Lender, currently with $1,000 on loan across ten different borrowers. My average interest rate is 15.19%. The credit ratings of the borrowers are 5 B’s, 3 C’s, 1 D and 1 HR (high risk). My first loan was originated on Dec-05-2006 and I’ve already received my first payment (for $3.81).
What I’ve tried to do is to create my own mini-Collateralized mortgage obligation (CMO), except without the collateral.
I also tried to reduce my risk by ensuring that all the borrowers were part of well-established groups that had good track records.
It remains to be seen what my return will be over time. I have confidence in Chris Larsen’s idea. We’ll see if he’s right.
This blog and others like it, which discuss pros and cons of Prosper, is a perfect example of why Prosper will succeed. This just isn’t the blind leading the blind into an online version of the Enron collapse. No, what I’m seeing is serious discussion on lender blogs about how to maximize returns, investment strategies, discussions of computer programs and excel spreadsheets which help in reducing lag time before funds which you bid become part of a funded loan, and so on. And, borrowers, like myself, are forced to think competetively in order to produce good listings that will beat out the listings that don’t offer as much security to the lender. The more you think about it the more you see that banks today aren’t helping the consumer become part of the forces of competition that are necessary to make markets grow. Most modern banks are stale and old institutions. They suck!
I encourage you to take a look at my listing ~ it is my first listing on Prosper and it has caused me to really open my eyes as to the power of what individual lenders can do collectively and what I as a borrower can do to help these types of lenders. It also has inspired me to eventually become a lender once my financial situation is stable.
Meanwhile, the Prosper system is helping me save my home from foreclosure and, adding to help I’ve gotten from friends who’ve simply written me a check, Prosper will help me make it to the end of March when I’ll get my first paycheck from my new job!
Check out my listing at: https://www.prosper.com/public/lend/listing.aspx?listingID=102009
First off I am a Prosper lender for over a year and a Group Leader. I have made about 8% after defaults. I have found that prosper will succeed in smaller circles. It seams that small tight niche groups will beat the odds for lenders, even no group loans beat the odds. its the investing in mega groups that will destroy a lenders pocketbook and ultimately prosper. Groups who do scrutinize their borrowers will help reduce default rates.
I was a bit shocked at the ‘Fail’ article, and very pleased to see the other side. I would agree that your reasoning is valid. I am more than excited about the opportunity to help others. My first loan as a group leader is a friend who would not have any other opportunity to do what he is trying to do without Prosper. I have made numerous personal loans, and am more comfortable facilitating these through the Prosper community
I was so excited about being a lender with Prosper at first, but now I am on the edge of my seat. I have over $30,000 invested and 357 active loans, with an average interest rate of 22.16%. After three months with Prosper, there are 51 loans in default and continues to grow every week. Zen makes good points in his articles, especially about the scam artists. Many of the defaulted loans are from people who “promised” to make their payments or have great credit. I just wanted to let people know my experience so far with Prosper. Good luck and happy Prospering!
Read my August entry on Prosper under redtoblack on networthiq.com .
Prosper does not offer any method for lenders to liquidate and leave, other than to stop lending and wait for their existing notes to mature or default. They need to create a process for other lenders to buy other lenders notes that are not in default.
For Prosper to succeed they need to provide lenders with outside audits of the their accounts and a method for lenders to leave.
Prosper does not offer any method for lenders to liquidate and leave, other than to stop lending and wait for their existing notes to mature or default. They need to create a process for other lenders to buy other lenders notes that are not in default.
For Prosper to succeed they need to provide lenders with outside audits of the their accounts and a method for lenders to leave.
I wouldn’t mind hearing your updated thoughts on Prosper. I’ve been lending for about a year and a half, and I have not seen a single default. However, I’m not greedy and don’t reach for the 15%+ rates. I mostly stick with B-rated borrowers, and I see a decent 12% average return.
I notice the “groups” concept died a predictable death. That was never about using peer pressure to encourage paybacks. It was just free marketing for the Web site.
Microlending works in third world countries quite successfully. I am sure people in the US can handle it as well.
I think Prosper is here to stay. It provides us the lenders another alternative way of making money in additional to stock investing, CD, and cash.
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