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December 04, 2007

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I've often wondered about Prosper as well. While 9% (or thereabouts) may not match the long term return for index funds, it does offer some diversity (with risk, yes, but with very little, if any, correlation to the market). It could help soften the blow during downturns in the market, ala bonds, real estate etc. Not sure that I'm convinced, because, like you say, especially with a long-term perspective, it's hard to put $ into anything other than market index funds, but something to consider. Also, there seems to be a growing sentiment that the market won't match historical returns over the next decade (not sure I buy it, but many feel this way).

I'm not really sure if anything beats indexing. It's still an interesting idea. I haven't done it, but I could see participating.

I'm of the same mind. All it takes is a few (and possibly only ONE) deadbeat loan that has to be taken into collection for your profits to go bye-bye.

Would I avoid Prosper completely? I think with play money ("mad money" as I like to call it), Prosper could be fun. You could even argue that having a small piece (less than 10%) of your portfolio in Prosper could be good diversification.

But anyone who has a good chunk of their portfolio in Prosper is living on the edge. I'm just too conservative for that.

I think it may be a good diversification. It earns similar returns as stocks, but it may not correlate very well with the market.

Having said that, I am trying to pull all my money out of prosper. Consumer default rate is shooting up and I'm going to wait this one out.

Something to note (as a Prosper lender), is that the minimum required to lend is $50. Sure, Prosper as a whole is averaging 9%; however, individual investors are doing much better. Over the 3 loans I'm doing, I'm averaging 13%. Prosper also now has an automatic lending, where you tell it how much you want to lend to the individual categories, and it will do so automatically. More importantly than all of that, is that there is a collection agency tied to Prosper, so that if the borrower defaults, you can still get some of the money back.

Besides, your statement of "Think about it -- people who do this professionally (bankers) have said this person is a bad risk" is off... Banks also told people (correct or not, irrelevant) that they were a good risk for a million dollar home, which they couldn't afford...

I have been lending on Prosper for a year, and I have no defaults. My average interest rate is right under 17%. That being said however, I would not recommend Prosper for a large investment. So many people have lost thousands and thousands of dollars. The default rates on this site tend to be higher than the stated averages for the same credit grade. There have been major problems with the collection agencies. And yes, Glen, you may be averaging 13% now, and I hope it stays that way, but all loans are for 3 years and the site is still fairly new, so there's still LOTS of time for your borrowers to default.

I've been investing with prosper for a while now, and I'm averaging about 18% on my loans. I haven't had a default yet, although I have had a few late payments.

Finding loans can be fun, or it can be fast and easy if you just want to autofund based on certain criteria. I tend to do a mixture where I look for certain criteria, and then pick a few loans that match that that have interesting stories.

The biggest problem that I have with prosper is that any money that you don't have "invested" is sitting idle. I usually only lend $50-$75 at a time, but if I don't see a loan that I like then my money sits there not making any interest, and since I don't have autofunds set up then it earns no interest after I've been paid and before I reinvest it each month, which brings my total return down quite a bit. If and when I pick a dud and get a default, then this issue will be minor, but with the success that I've had I can nitpick the little issue.

I haven't really been putting much extra money into it lately, and have been sticking to the loans that I already have in place with a new loan every month or three depending upon when I get around to checking the site.

I'd say that if you are looking for a diversion, it's a way to experiment and can give you the same rush as gambling. Like Poker, I don't spend much time at it, and whenever I play I make money, but the money I invest is money that I assume is gone. It's been nice in that it hasn't actually been.

Risk/return ratio is high. For the same level of risk, I'd rather put the money in the red hot Shanghai market, at least I know I won't ever lose 100% of the money!

By the way, why not many people talk about junk bonds?

http://screen.yahoo.com/bonds.html

After researching Prosper I found it to be a stinker unless you have money to lose and are into that community of lending to the "disadvantaged."

I have heard a lot about index funds but I was more interested in building a diverse portfolio using Sharebuilder. I think researching and buying individual stock is more fun and rewarding and if you stick with blue chips you will beat index fund returns handily.

Does anyone have advice on sharebuilder versus index funds as I'm starting something up in Jan.

Thanks

One option you might think about instead of Prosper, but in the same P2P lending space is Lending Club. Borrowers must have a 640 FICO or higher...Lending Club hopefully will be able to avoid the defaults that have plagued many Prosper lenders.

They also have an automated process for matching loans based not only on your risk tolerance but other social factors (job history, location, etc) as well.

DebtKid

I read the details on Prosper and it seems REALLY easy for someone to default on a loan. Of course you can diversify, but I don't think the risk of total capital loss is properly rewarded by the returns available.

@BobTheCheapster

I actually gave up on Sharebuilder because I found the fees to be too high. Yes, they market it as being low cost, and the rates can be reasonable if you invest enough money, but so many people use it to make $100 investments (or less) and lose an instant 4% of that money in fees.

I signed up with Schwab One free brokerage and checking account. You have a large list of mutual funds to buy with no fees and only $100 minimums- that is one of the best deals I have found for the small investor.

You guys have got to be kidding me. Prosper is averaging 10% right now. Those numbers do not reflect even a single negative credit cycle. They don't reflect how your ROI will be effected if prosper (the company) goes the way of many other internet startups.

And some of you don't think that these cash-strapped subprime borrowers are correllated with the market?!?! Then what is? The entire market is revolving around the subprime borrowing story right now. As Mortgages and ABS and CMBS go, so goes the bond market, the stock market, and the Fed.

Just because something is correlated does not mean it does not provide diversification benefits. As long as the correlation coefficient is not -1 or 1, some gain is expected.

You probably need something like the Kelly Criterion or the Sharpe Ratio to guide you how many percentage of your portfolio is put into prosper. (It's probably some really small percentage)

Also, I got an email today saying that Zopa is launched in the US! Unlike the UK version, this one is more like a CD. It is FDIC insured but at the same time you can help other people out.

The lender returns are typically calculated after the servicing fee. You are correct that borrowers pay the closing costs.

Prosper is pushing their version of the index fund, portfolios ( http://www.prosper.com/lend/portfolio_plans_choose.aspx ). It will automatically bid for you and spread your money across a number of loans that meet certain credit criteria and are projected to have a certain rate of return. This is a new tool and there hasn't been enough time to see how effective they are at projecting that rate of return.

Well, I've got $200 sunk into it. It's actually more like $130 and then a reinvestment of my returns for a total of $200. I'm happy with it so far, but you do have to screen loans carefully. I'm doing well over 9% ROI, but certainly not that much better than a hot year in the stock market. But since the S&P is doing poorly this year, savings rates are down at online banks, Prosper is going well for me and I'll probably start adding more money to it in 2008.

Like anything, it's about managing risk.

as a prosper.com lender, I've been with them since Oct '06. ~$6k invested, I've returned ~$1k. ...and while I've aimed around $24% return, I'm seeing 5-8%. ....possibly even less as the late loans become more frequent.
My vote: it's fun to read people's stories and think I'm helping out, but really it's a bunch of work to get the money out there invested with carefully choosing your borrowers. And when you gain the interest; unlike stocks or mutual funds you hold and gain in value, the all interest is taxable the year you gain it; and while there's still the ability to compound the interest by reinvesting; you're completely exposed to taxes on the gains.
Now to be fair, the web site is improving; but I don't think that will alone do it. ...face the facts: many prosper.com borrowers simply come to prosper mostly because they can't get unsecured loans elsewhere. They've made mistakes going into debt, and I really honestly fear many borrowers are not really learning or will learn till they hit rock bottom; can't pay the bills and the debt is eating them alive.

...now who knows, maybe I'm not seeing the light, I would hope I'm wrong about prosper.com. Time will tell.

"Index funds seem less risky."

I'd prefer a claim on the future profits of hundreds of real businesses over the promise of repayment from a handful of people. Especially people who can't qualify for a bank loan and likely are not work 60+ hours a week to take back control of their financial lives.

I think Prosper sounds fun and could be a good vehicle for diversification beyond the stock market. That said, I would not even consider dabbling in it unless I had at least a couple of thousand dollars. Your risk is mitigated greatly if you fund 40 $50 loans than if you only have the funds in place for a couple of loans.

First, Prosper is not a substitute for long term stock market investing. Maturity on each loan is 3 years--not long term. Plus it's a fixed income investment which more closely resembles bonds. I view my Prosper portfolio as fun money, but I'm serious about it--just like my attitude towards my brokerage account. My reserves are in cash, and my "real" investments are in index funds. So if you've only got $10K to your name, Prosper (and day trading) are not for you.

Second, I agree that you have to be able to afford at LEAST 10 loans--preferably more than 20--in order to take the risk of investing on Prosper. Otherwise if/when you get a default, your whole return (and maybe even more) can be wiped out. You have to be able to afford to diversify your holdings.

My Prosper story: I have about $7K loaned out on Prosper, mostly in $100-$200 loans. My average interest rate is around 22% and I have 35 loans right now. I have been lending for just over one year.

I have had 2 loans default (one HR and one NC, which means the worst quality borrowers there are), but my return is still around 11% because I have so many other loans (though I have one very late borrower who may default-which would drop my return to around 8%).

Bob,

Try Zecco for individual stocks. You can make 10 trades free a month. You could also try DRIP's as well.

I tried prosper and lost about $45 from someone who defaulted. I've come to the conclusion that it's not all that good a way to invest, at least not for me. So as the loans mature, I am moving the money elsewhere.

Fortunately, I only invested $200, so I can't lose too much.

I've been investing on Prosper.com for almost 2 years now and have a NET LOSS to show for it. Amazingly my losses weren't even the ones with bad credit. They were those with A and B credit ratings. I absolutely DO NOT RECOMMEND Prosper. Since 31.7 percent of my loans have defaulted (SO FAR!!!)I would suggest you stay as far away from Prosper as possible. Every time I receive payments on my loans I don't reloan them ever...I cash out immediately. I would cash out the last loans I had if it were possible. Stay away from Prosper.

Prosper's been great for me. I'm at a double digit return after several months (including lates that I assume will default). 83 loans with 3 late. I happened to post a full take on Prosper at this week's carnival as well. But more importantly, I've listed out tips for success and mistakes I've made. I think given the non-correlated nature of the investment, it is a sound piece a portfolio. Even index funds can tank 30% over a couple year period, as US market did following the tech bust and 9/11. I'll take 10+% returns non-correlated with market returns any day!
dan at everydayfinance

From my perspective, life is too short to have to deal with something like this. It seems the odds are stacked in Prosper's favor - they win no matter what - like a casino in Las Vegas.

Best Wishes,
D4L

I've been in prosper since Oct. '06 and have been slowly bailing out for a couple months. I'll, no doubt, be in negative figures before this scenario plays fully out.

Here's my follow-up. I'm now about -5% on my loans. 66 loans are current with 96 being active. I'm managing to move about $200 a month out of prosper.

I have had one loan with prosper and I am within one year of paying it off. I certainly am no credit risk but understand others don't know that. I want to become a lender too in time as I think I can figure out who are the high risk personalities.

I have invested $500 with Prosper as of April, 2008. So far, NO ONE has defaulted and I am receiving a little above a ten percent return on my investment. I only lend to people with the HIGHEST credit score (AA). If you have an A credit score instead of an AA, I won't lend you a dime! So far, this strategy is working for me and I am thinking about investing even more money with Prosper.

Jake (Dec. 4 @ 4:12pm) in response to your uneducated comments. Sites like prosper will begin to do better and better as the banks get tighter and tighter. I have been in the financial industry for the last 13 years and as you will soon learn as banks get tighter there will always been institutions that will rise to meet the demand of the general public. As I am sure you know average credit score for the public is declining not improving. Which means as banks tighten up there will be a huge gap to service millions of people. Lending opport. like these will generate better and better returns.

Prosper is a dangerous place to place money. The biggest risk is no longer related to whether or not deadbeats pay back their loans (which they do not in 40% of the cases), the biggest risk is now related to whether or not you believe Prosper can survive another 3 years (considering they are weeks away from running out of cash). Now that Proser owns the loans (read their S-1 filing), lenders are nothing more than unsecured creditors of Prosper’s debt. The fact that Prosper is close to running out of cash is more than likely the actual reason behind all the new incentives to attract new money. If lenders were making money on Prosper, this promotion would not be necessary – as the almost 900,000 members would just reinvest the 8-13% Prosper CLAIMS everyone is earning…

Prosper distorts statistics to its own advantage. I believed in their model and invested $300,000, I will be lucky to get back half. Prosper has no skin in the game and collecting money from deadbeats is an necessary expense for them.

Knowing that this was risky, I put in the minimum $100 into Prosper about five months ago and ended up with an average of 16.79% (the loans I bid on were at a B/C prosper rating). All of the loans are still active (everything has been payed to date with no late payments with all four of the borrowers I lent money to), but considering I still have 31 months to go to see all of the money come back to me, only time will tell how well I've done at choosing borrowers. There were a few times when I had bid on loans and then after the bidding closed Prosper sent me a message, that after further investigation of borrowers they just closed the loan and never gave the money to the borrower. I don't know the criteria they use to do this, but it may be a safety measure they've put in place. I've been considering putting another $100 in, and I think some things may have changed since a few of these comments were posted because the minimum for bidding on a loan is $25 not $50. I think this lower amount gives for better diversification. I knew there was risk involved before I got into this, and I'm not planning on making a living off of it. But I think compared to what has happened in the market in the recent past, this may be a good option for me. I also probably don't have enough to get started in stocks, I'm still in college.

Been on Prosper for 3 years starting with 15K, now well over 30K. Average return is 31.93% since I started, 493 active notes and no defaults. Like anything, do your homework, spend the time, research your barrowers, talk to them and you can make money. Don't expect to invest and sit back, that’s what annuities are for. You need to work for it on prosper!!!!!! I would allocate 1 hour per 1K invested per month. The guy who said he put 300K in on prosper should have treated it like a full time job spending 200+ hours per month to stay on top of it. Like anything mitigate your risk, 10% in 10 baskets not 100% in one. For me Prosper is one of three investments I have not lost money in the last 3 years. Stocks down, rental property (way down), Roth/401K down, CD's under 2.5% now. Only Gold, Prosper and FX (hedging against USD) have made decent returns

I'm considering lending on Prosper, and this article came up in my research. While I haven't decided if it is a good idea, I think the reasoning in this article is very poor. First, expecting medium or long annual returns of 10 percent from index funds is just silly. Second, your logic that since these folks can't get a loan from a bank means they are a bad risk is flawed. Many banks will simply not make loans of the small size contemplated on sites like Prosper, and moreover, banks are riddled with rules and red tape that prevent them from making many very sound loans. For example, almost nobody right now, regardless of income or credit rating, can get a mortgage on a condo. Is every potential condo buyer a bad risk? Of course not. But federal rules in place inappropriately dissuade banks from making those loans. Prosper thrives on such inefficiencies in the mainstream market.

Anyway, still not sure if I'll lend there, but this article sure didn't help my analysis.

Ok so I have been investing with Prosper for 3 months and have put in 12,500 dollars in 205 loans avg. around $60 a loan. So far I'm avg. 21.45% profit and currently have 0 late payments and 0 defaults. I know it's still very early but I have a very nice diversification spread out from AA to HR credit scores. My goal is to have 20k in by May and then kind of coast from there. I hear the avg. is 7% defaults which isn't bad if 93% of the people are coming through in full making up the difference. Everyone I know that is in are avg. 18% a year which in this economy is amazing. I totally recommend Prosper.com and I hope for continued success. Remember if you're earning 20% interest a year, for every 5,000 you have invested it's like giving yourself a 1,000 dollar a year pay raise and it's working like a champ! :)

I've been lending on Prosper guys and it's a great way to have your money work for you at it's best. Prosper connects quality borrowers with us and then we get to choose which ones to invest in. Think about it this way, Prosper lets you play banker and essentially earn the kinds of returns banks have for the past 100+ years. When you have $5k in a bank and their giving you 1.5%, your bank at the same time is loaning your $5k out to someone for a car loan at 8%, pocketing a 6.5% margin on you. Instead, go to prosper.com directly and cut out the middleman, the bank.

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