I wrote up a post that compares the S&P 500 versus Prosper loans for the same time period and also included the tax treatment. It wasn’t so good for Prosper.

Taking their numbers on face value however, the tax treatment equalizes things, and I’d expect a premium for the decreased liquidity that Prosper offers (they’re unsellable – you have to wait for the loans to amortize out).

By all stats I’ve found, high quality borrowers have much less volatility than the stock market, which makes it intriguing. How it the default rates handle the sub-prime troubles will be the real test, however.

Foobarista,

Prosper requires you to register the account in your name and your SSN as your tax id. They don’t allow anything else right now (though I do like how you think).

Anyway, someone sent me an email about how to use IRA funds in something like Prosper. To do this, you have to open an IRA with a self-directed “IRA custodian” that lets you get at the money after letting them “touch” it. You open the account at Prosper in the name of the IRA account – it’s a legal investment entity that can own stuff – send your money to the custodian, and then they send you a check or wire your money to Prosper. After this, any Prosper gains are in your IRA’s Prosper account and subject to IRA tax rules.

Since there are fees involved, this sort of IRA is best for rollover IRAs and/or those with a fair amount of money in them. The ongoing funding of an IRA is probably best done with a more traditional broker custodian since they don’t have fees to deposit money. But since you can have as many IRAs as you like, you could use a special IRA for Prosper funding if you like, while having a “main” IRA at a brokerage where you do regular deposits and that is used for stocks or mutual funds.

An example of a self-directed IRA custodian is IRA Services. We have one of these IRAs that we use to invest in some “private” investments. These can also be used to invest in real-estate or other investments through an IRA.

I’ve been trying to grab some 9% rates on AA/A loans, but they keep getting bid down to 7-8%. That’s not enough risk premium for me.

Prosper should look into packaging loans to give instant diversification for those without the money to fund several different loans.

I wrote up a post that compares the S&P 500 versus Prosper loans for the same time period and also included the tax treatment. It wasn’t so good for Prosper.

Taking their numbers on face value however, the tax treatment equalizes things, and I’d expect a premium for the decreased liquidity that Prosper offers (they’re unsellable – you have to wait for the loans to amortize out).

I disagree with the market depth… The link I provided will show that the average for all AA, A, and B’s are over 9% for the last year. If you look at the performance data, there’s nearly 30 million dollars lent out at those averages. If you want to be picky and try to beat the averages significantly, I think you create your own market depth issue.

Someone could easily put down a million dollars and set it to invest a couple of thousand in each AA, A, and B loan. Of course if you are investing multiple millions of dollars it might not work, but that’s really not a big problem for most people.

I have been investing around $400-$500 a month, much more than the average income earning person should be applying to Prosper, and have not had problems finding loans. I look at only a very, very small subset of loans, probably only 3% or less of all Prosper loans.

There are several reasons why you might not choose the Prosper route though:

1. Tax treatment: Prosper income is taxed as regular income, which for many people is at a higher tax rate than the tax rates for capital gains and dividends.

2. Market depth: There just aren’t enough good loans on Prosper if you intend to invest a large amount of money. I have a small amount of money in Prosper but even at that level, I’ve had trouble finding enough good loans in which to invest.