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Prosper Winners and Losers

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Personal Finance blogger left a comment during Prosper week. He suggested that:

  • The GIGANTIC WINNER is - Prosper
    • No risk
    • All reward
  • The RUNNER UP is - the Borrower
    • Pool of available lenders where more traditional methods have failed
    • Will always get a better deal than they could have gotten otherwise
    • No pre-payment penalty
    • Variable underwriting process (many loans completed with minimal information). For example, did you know the debt/income ratio is based upon income entered by the BORROWER? As I understand it, there are no screens to check this (unless you asked for a W-2) Someone correct me if I'm wrong on this.
  • The BOOBY prize goes to - the Lender
    • I believe there is a bias in the Prosper borrowers market and that historical default rates do not apply
    • Variable underwriting process (less documentation / verification can only benefit the borrower, not the lender)
    • Immature market and business - Prosper is continuing to improve transparency in its reporting and tools available, but the whole concept / model is in it's early phases
    • Very difficult to truly diversify - both because of the biased market I mentioned above and that people do not usually have the funds to do so.

I agree with giving an award to Prosper. They do incur a risk as any starting company does. Still it's very efficient business and it's hard to imagine them not being really successful.

I'm not sure I can agree with the Borrower being a universal winner. The point of "will always get a better deal than they could have gotten otherwise" doesn't seem right to me. Maybe as far as unsecured credit goes it's one of the best, but there are credit cards that offer 0% for a length of time. As a home owner, I'm using my HELOC for around an 8% interest - I can't beat that on Prosper.

Let's take the part that I'm most concerned with, The Lender.

  • I will agree that historical default rates do not apply in the Prosper market place, but Prosper lists the default rates within Prosper. You can't get better information than that.
  • Underwriting process. It is true that there's less documentation, but if you use the default market rates mentioned in the previous bullet, it shouldn't matter if there is less documentation. The default rate is the default rate.
  • Immature market and business - I think this is what is helping lenders right now. Because the market is immature it's possible to exploit.  Once the market matures and other lenders realize there's money to be made here, there's the distinct possibility that good loans will get bid down.
  • Diversification is easy - I think it's possible to diversify with as few as 20 loans.  With a $50 minimum, you can get started with as little as $1000.  If you don't have that kind of money available, stay out of the lending game.

In the end, I'm not seeing a reason why it's NOT possible for the lender to make money.  Of course, some will win and some will lose.  I plan on being the one of the winning lenders.  Stick with me, and we'll follow the journey together.

Last updated on September 2, 2009.

This post deals with: ... and focuses on:

Prosper

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9 Responses to “Prosper Winners and Losers”

  1. […] LazyMan addressed a comment by a reader that stated the Big winner was Prosper, the runner up was the borrower, and the loser was the borrower…  While I fully support Lazy’s post and views I wanted to add […]

  2. Dong says:

    I’m just starting to do prosper lending, so I don’t really have opinion on it on a personal level. However, I think the main thing to keep in mind that the losers in this really are tradition banks assuming that prosper delivers as promised. Prosper basically undercuts the middle man. Since they charge a transactional fee, the lenders and borrowers benefit by the lowering the spread that a traditional bank charges when it lends out savings.

  3. Lazy Man says:

    Thanks Dong, when I had outlined my response to the article originally, I meant to put the banks as the big loser myself. Of course, I got a little tied up in defending the points for the lender.

  4. limeade says:

    As with anything there’s risk and reward. I think the Prosper idea is a
    fantastic one. I’ve been thinking for awhile now that I should start
    experimenting with it, but I just haven’t gotten around to it yet with
    everything else I have going on.

    -limeade

  5. MossySF says:

    I’m in on 16 loans — soon to be 17. At this point, everybody is current (I had one flip late for a month and then catch up) so I’m getting 16% return from Prosper. I’m in a bit of a pause right now while I evaluate my picks — and also wait out the wave of new lenders who’ve come from the recent press (Smart Money magazine, CBS, etc).

  6. Kev says:

    LazyMan: After giving the Prosper thing a try for ~6 months, I have to agree.

    For me, getting into prosper wasn’t so much an ROI as it was a way to create a self-perpetuating charity-type account. Basically enabling people to help themselves. With that in mind, I have to factor in the value of my time, etc. And I have to agree with your assessment of the “Lender” being the bottom-of-the barrel at Prosper.

    I also think the lender rewards (ie: 2-millionaires) really put regular lenders as 4th class instead of 3rd class.

    I plan to not put any additional $$ into Prosper and let it dwindle. It’s simply a sucker’s game (for the lender) in its current form.

  7. The point that “the borrower always gets a better deal than they could have elsewhere” has to be taken in conjunction with the first borrower point, that Prosper is there where traditional loan methods aren’t in place. The people who are getting loans on Prosper (from what I’ve seen) usually aren’t in a position to get 0% credit cards or HELOCs. If they could, why would they be on Prosper?

    Okay, so maybe there are a few idealistic-minded, tech-savvy people who hear about Prosper and figure that it’s a neat way to fund a business venture or something, but even then you have to consider that if they really had a good case then they could take it to the bank for an SBA loan or something.

  8. […] Man And Money has Prosper Winners and Losers, which discusses the players in the world of Prosper. Again, Lazy shares his views on this online […]

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