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.Â 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.Â With a $50 minimum, you can get started with as little as $1000.Â 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.Â Of course, some will win and some will lose.Â I plan on being the one of the winning lenders.Â Stick with me, and we'll follow the journey together.
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