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In Defense of Prosper.com – Other Common Complaints Rebutted

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(Jonathan at My Money Blog has a very in-depth two part review of Prosper.com. My Money Blog is one of my favorite sites, which is why it's in my blog roll and feed reader. It's worth familiarizing yourself with that article before continuing here with my rebuttals.)

Jonathan notes that there are significant times where your money is not getting invested, possibly eating 1-2% of the ROI. The time that money goes "uninvested" is one of my biggest pet peeves and while it does seem like an eternity, I've never seen my money take more than 30 days to get invested. Once the money is invested, it's invested for 3 years or (1095 days). In that light, I'm not sure how significant 30 days is. It looks to me to be 2.7% of the 9-10% ROI, thus you'd still make 8.76-9.73%. It's unfortunate that the money is not earning any interest during those 30 days, but I'm not sure it's completely disastrous to the return. My math may be faulty here, so please correct me if I'm wrong.

"Another slight concern is prepayment risk, when a borrower pays off the loan ahead of time. For example, interest rates might drop, and the borrower may find a better deal elsewhere. Even though you can reinvest the money, you're still facing the extra lag time to find another listing, bid on it, pass review, and fund."
a) This is a valid concern, but it's rare. Thus far of the 95 loans I've had, only two have been repaid early. Some of those are new, so it's probably too early to tell what my real percentage will be. It's worth noting that when this occurs there's zero chance at a loss of principle. It happens so rarely that only if I make 1% on these loans, I don't mind.
b) On the other end of the spectrum, there are people who are chronically late with their payments, but keep paying. This leads to a situation where the loan might be extended over the 3 year time period. Taking one of my loans as an example, one borrower has made three payments since October, 2006. Each of these have been late and are interest only payments - no money has gone to pay of the principle. In total the borrower has paid off only $2.70 in principle, but has paid me $6.50 in interest. I would prefer he'd pay on time as it feels wrong to continually collect interest like this, but it's not my say - it's entirely up to the borrower.

"It's far too much work" - While I'm quoting Jonathan, I've read this many, many times.
a) While some find it "fun," let's assume that you are one of the people that find Prosper as "work." How much time you spend on Prosper is entirely up to you. The return and success or failure you have there is not related to the time spent. The advanced search that Prosper provides users a way to filter the loans that would never be right for them. Using that tool, my typical Prosper session is probably about 5 minutes, maybe less. I tend to sign every other day and not much on the weekend. So that's about 3 times a week for 5 minutes -- 15 minutes of time spent a week. I'm a Lazy Man - I even put it in the URL - but even I'm not that lazy. Why is it quick for me? I try to avoid the stories - Jonathan put it best, "I'd personally rather not be emotionally invested in my lending."
b) Prosper also something called the standing order. The standing order is a set of loan conditions set by the lender, which, if met, will trigger a bid placement. I have some standing orders set up, so that if someone with A credit, with good debt-to-income, and few delinquencies, wants to borrow money at 20% interest, it will place a bid. I don't even need to be around. Prosper could be working for me while I'm out of the country, on a beach. There are a couple of downsides to this. If someone says they are building a bomb with the money, I can't retract my bid - I'm stuck. No one has said that though, so thus far I'm fine with this. The other drawback is that I have leave some money in the account to get these great loans. I generally try to leave just enough money to get one of them a day - around $50. So that $50 doesn't earn interest while it's waiting, but I had go into some great loans with this tactic. I missed on last week because I didn't have the spare $50 lying around.
c) On Friday, I'll go into more depth about how I quickly make loans.

Posted on March 21, 2007.

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10 Responses to “In Defense of Prosper.com – Other Common Complaints Rebutted”

  1. EasyChange says:

    I recently wrote about my prosper experience as well. Do you mind if I ask how much you currently have in loans? And also, how much of a percent of your net worth it is?

  2. Lazy Man says:

    I just crossed the $5,000 mark. Using the Net Worth in the top right of the blog, it looks like it’s around 3% of my net worth. A lot of that net worth is in my investment property and retirement accounts, for what it’s worth.

  3. I don’t understand why prepayment is a risk… You obtained the interest rate over the period of the loan… Perhaps along the lines of fallow money, but other than that…
    However, if given the choice I would like to have all my loans be 1month late contniuously… Keep making those fee payments and the ROI goes up…

  4. For those of you interested in actual numbers from the Prosper Marketplace (or those of you who, as lenders, realize that information is the name of the game when picking loans online), I’ve collected a number of links to (what I think is probably 90% of) the nascent Prosper third-party information ecosystem (including some rather sophisticated third-party data sites that operate off of Prosper’s newly accessible market data).

    Of special note is that the market data Prosper releases makes it as easy to track lenders (and their “bidding” behavior) as it makes it to model potential borrower-selection strategies (or “standing order” backtests run against the market data).

    I’ve put a small amount into Prosper so far and am pleased with the results – but the learning curve does appear to be steep, for some…

    -t

  5. Hey Rateladder,

    Prepayment is an additional risk (assuming you’re reinvesting) because:

    When payments come in and re-originate in a new loan, that money begins again at month 0 of the default curve and has to travel the entire length of the curve, including the more risky early parts. (There may be more risky middle or latter parts of the curve, but we haven’t had enough time to see that yet…)

    -t

  6. […] Wednesday – In Defense of Prosper.com – Other Common Complaints Deconstructed […]

  7. Jonathan says:

    I think I should redefine “work”. Work is not just time.

    Work = Time x Enjoyability

    There are tons of things that I do that takes way too much time (tons!), but I enjoy it so it doesn’t feel like work. I think the root of this is that I hate the idea of something “stealing” my money and not paying it back. It would grate on me! :) I guess that’s why people look at it like gambling, but I like gambling better because either I can know the odds or it’s (kinda) skill vs. skill like poker.

  8. […] this week, I defended the Prosper’s business viability. I spent two posts rebutting the idea that it might not be a good investment. Just yesterday, I discussed the Prosper […]

  9. Joy says:

    I enjoyed reading your blog about Prosper.com. My son told me a while back that he and a couple of his buddies had invested some money with them. I will have to ask him how things are going. My son is a market maker/trader who works for Knight.

    Also, I have started listening to a lot of podcasts that I subscribe to through iTunes. And one of them is on entreprenureal innovation by “Iinnovatecast.com.” It is put out by two Standford University students and each podcast has been an interview with a recognized innovator, such as the CEO of Google, or Craigslist, or Intel, etc. Today, I listened to their interview of the founder of Prosper.com. It was a very interesting interview. Check out their site and you may also want to subscribe to their podcast.

  10. Joy says:

    P.S. I forgot to ask you where you got your language translation buttons down at the bottom of the right-hand side of your site. I would love to add those to my site.

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