I think the prosper idea, which is beautiful in and of it self, went awry along the way. I believe the original idea behind prosper was that borrowers formed a group with their close friends and the entailed support and moral responsibility. E.g. if a borrower started being delinquent it would reflect badly on the group and the group would step in and get borrower on the right track. This “moral support” would be the thing that could be turned into economic profit for the lenders.

Instead I see a lot of “single” borrowers with no moral backing who see it as a way to get an easier loan. These borrowers won’t think twice about defaulting on a loan on people they don’t know even if those people are not big banks.

I also see lot of groups where the point is simply for the group leader to score an easy 0.25% e.g. they’ll list anyone who asks. I have lent to some groups where the group leader actually took time to verify W2’s etc. These have generally been more profitable. I think the message with prosper is that you don’t get something for nothing. Risk adjusted, prosper loans have the same return as junk bond ETFs (check out lending stats) e.g around 8% APY, except prosper is less liquid and requires more time. If you don’t risk adjust portfolios, you will, not surprisingly, see that some portfolios are doing really well, whereas others are doing really bad.

The main “scariness” in selecting loans to invest “by the numbers” (ie, through some third party (numeric) screening process or through Prosper’s standing orders) is that neither can take into account the “duh” factor. Automated agents simply do NOT read narrative text in the listings.

If you’re interested in dumping >$10k a month into Prosper, the time involved in finding good loans may eat up some of your return – sure. But this assumes you’re following the “diversify at all costs” line touted by Prosper. Many lenders seem to be finding that putting larger amounts of money into a smaller number of much higher quality loans offers a better return than dumping little chunks into a wide variety of loans via SO in order to “diversify”. Diversification into a large pool of loans of varying quality is… not the greatest idea ever.

Until someone invents an agent that can read listings (and filter out listings like “No job, but God will provide! Thank you for bidding!” or “Great business opportunity! I’ve run the numbers and have decided that opening an online poker site will make me rich by next Tuesday! I just need $5k to get the ball rolling!”), there is definite edge to be had in reviewing listings manually for financial innumeracy, illiteracy, dishonesty, crackpot-ism, pipe dreams, plain old bad ideas, and other things that would make a loan officer blush – and politely show you the door.

-t

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 was also intrigued by the concept of Prosper when I first learned of it. I spent some time in the forums and came away with the strong impression that it’s not really a means to make money…but rather “fun”…like GAMBLING.

In looking at other blogs who have had some experience with Prosper, my overall perception has not changed (small monies invested, nothing they would mind “losing”, it’s fun, etc)

If you like the to “play Prosper” on the chance you might “win” (again, just like gambling), then I don’t really see the harm in it. If you think that at this stage of the process it’s a reasonable means to create superior returns on your investment (verus other alternatives)…I disagree (risk / return equation not worth it).

May “Lady Luck” be on your side!