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Why Not Prosper?

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Tyler with an anonymous e-mail address writes:

Why prosper? There are much better ways to earn returns on that money that 1) does not put other people in to debt and 2) are not as risky. You may be convincing yourself that Prosper helps others out, but I find that putting people into debt is a terrible and very sad. Put that $600/mo into a good mutual fund and earn 10-15% easily on it and you'll reach your 2.25M goal in time. Stop putting people into debt.

Ouch! Let's examine this in depth...

Assertion #1 - Prosper puts people into debt.

I'll provide a little anecdotal evidence - Tricia at Blogging Away Debt credits Prosper.com for helping her consolidate her loans at a lower rate. This means she can put more towards principle and get out of debt faster.

I don't need to convince myself, I know that I'm helping people escape credit cards and pay day loans.

Assertion #2 - Putting the money in mutual fund will earn 10-15%.

I don't think mutual funds return 10-15% after inflation and taxes. I've said as much before. On average you are doing well at 10%, but it's more likely to be about 4% after those costs. At that rate, it would take quite some time to get to 2.25M.

When you take a minute and think about it, the stock market, at least those don't play dividends, is to some degree a Ponzi (or Pyramid) Scheme. If you can convince people to join in the game, the value goes up. What are you actually buying when you have a 100 millionth of a company that doesn't pay dividends? You get the voting rights, but when was the last time any of the shareholders with less than 1/10 of a percent banded together to overthrow the majority shareholders? It never happens.

Last Point

In the end Prosper.com eliminates the middle man - banks. The institutions make personal loans at 13+% and often only give people 1% on their savings. That's an amazing minimum of a 12% margin for the banks. Prosper does the same thing, but uses automation and scale to make the spread under 3%. That's good for both borrowers, lenders, and Prosper. The loser here is the banks, and to be honest, I'm fine with sticking it to them.

Posted on February 22, 2007.

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9 Responses to “Why Not Prosper?”

  1. Tyler says:

    I definitely see your points. I understand that consolidating loans at a lower interest rate would be beneficial to one with a lot of debt/high interest. But I still think that most people don’t use prosper.com for this purpose. If it is used for this purpose, then I see the benefits. Otherwise, I don’t – putting people into debt, whatever their case is, is against my beliefs. Sure I like to see the banks lose, but I don’t like to profit from other’s need for a loan. Again, it boils down to personal agendas and what you want – but I sure know that my money is much better spent on something that is not so personal, like real estate, stocks, bonds, mutual funds. I know that mutual funds will provide for my investment needs just fine – and they have. I started out with around $10,000, I make $700 monthly payments to my investment account. If just earning 5.05% (my online savings account rate compounded monthly btw), I’m going to have $1.15M after 40 years (I’m only 24 right now so I have the time). And that is just at 5.05 in a savings account. Sure that doesn’t account for inflation etc. but it’s still fine for me. I’m earning, overall, around 13% on my investments after all fees etc. I feel better not putting people into debt and earning 13% than I would putting people into debt making 10%.

  2. Lazy Man says:

    Thanks for stopping back Tyler, getting feedback like this is why I run a website.

    I see what you are saying. I guess one of the differences that I see with Prosper is that if people request a loan for a luxury item, it’s unlikely to get funded. To that point here are the titles for last 13 loans that I funded:

    Down Payment for Home, Consolidate Credit Cards, Consolidation for Financial Freedom, Relisted with lower amount HELP!, Relist w/higher rate: Help make Prosper our only creditor, bill consolidation, Property Taxes and Debt Payoff, Great Pride in my Credit Rating, Payoff a car loan and propety taxes, Business growth and Expansion, Credit / Home Repair, Waiting for 2nd house to sell, Consolidating

    If there’s a theme in Prosper, it’s loan consolidation, business start-up (which I endorse taking a loan for), or an emergency situation such as medical payments.

    The other side of this is Propser’s existence don’t put people into debt, people put themselves in debt.

    I agree with mutual funds stance. My Prosper holdings are about 5% of my stock and mutual fund holdings. However, if you think mutual funds and stocks don’t have a negative social impact, look at 1929’s stock market crash or talk to the average Enron shareholder from a few years ago. As for real estate, you might want to read Housing Panic or Casey Serin’s story. Enron and Casey are clearly edge cases, but the real estate market in California (where I live) is not what I’d call generally “investable.”

    As for your 13% in mutual funds after fees (does that count capital gains taxes?), I think you are in lucky time in the market. From 1996-2000 (roughly), I was making 22% . It didn’t last and, historically speaking, 13% after fees for the next 40 years won’t either. I wouldn’t be fine with not accounting for inflation – it’s a huge factor. My parents bought their home for around $40K, 40 years ago and it’s worth $600K today. You may need 1.15M to purchase a small home in 40 years. You are doing all the right things and I would continue with them – I’m doing the same with 95% of my money.

    To be clear, my Prosper projection of 10% is a long term estimation taxing into account inflation, taxes, fees, etc. If you wanted to compare apples to apples your 13% in the mutual fund gains is equal to the 18% that Eric’s Credit Community says.

    Lastly, Tyler, I hope your mutual funds don’t hold any consumer electronics companies. I believe plasma TVs (I have one), Tivo’s, and Ipods put many million more people in debt than Prosper does.

  3. Guns don’t kill people. People do.

    To imply that lending on Prosper is predatory is simply inaccurate. People are coming to Prosper because there other choice is payday loans at 300%. PayDay loans are predatory. Not simply because of their existence, but because of the advertising. They are not truthful (at least they obfuscate) with their terms. Prosper is transparent. In fact, they go out of their way to educate borrowers and lenders.

    Another huge benefit to Prosper is the ability to get a loan in less than 10 days without the headache of a local bank loan manager.

  4. threadbndr says:

    Disclaimer – I haven’t any association with Prosper. I have donated via my church women’s group to ‘microbank’ funding for women’s co-ops in India and Latin America.

    Actually, the bank that Tyler has his online account with most likely uses his funds to make loans to their clients in order to pay him his 5 % interest. And the companies that he invests probably carry substantial corporate debt that can impact their employees (as you pointed out re Enron above – it wasn’t JUST shoddy accounting practices that brought them down, they were WAY overextended and overleveraged.)

    Tyler, I agree that personal indebtedness and mis-use of credit is a terrible burden to an individual, but I’m not sure you can distance yourself from it if you engage in any kind of modern investing or economic activities.

  5. Tyler says:

    No need to defend yourself on the loans you made. I wasn’t on the attack. I just offered an opinion – take it or leave it as you wish.

    Prosper provides a way for PEOPLE to gain debt. Yes I know Prosper is not the cause, but it provides the very easy means of doing so.

    My stance with mutual funds does not come without hesitation on my part. Of course there is no perfectly 100% secure investment. That’s why it’s called investing – it comes with risk. The stock market crash has creates policies and reform in the financial industry for those types of events to not occur again in the future. And I do not invest in stocks. Too much risk.

    My 13% accounts for capital gains tax. You may call my returns lucky – I call them wise decisions. 13% for 40 years – probably not. But over a 50 year period, the S&P has earn about 8% or so. Maybe more. I am not in it for the short term. I have enough right now. My long term projections include my income going up, thus putting more away. The more I put in, the more I’ll get out. Not to mention, the different kinds of investments I will have the ability to look at when I am at that level.

    I understand what inflation is and how it affects consumers. Your housing market is totally out of control over in Cali. Out here in the midwest, a 150k home will buy you a fine house. Over there, maybe a blade or two of grass. Also, housing prices have nothing to do with inflation. What your money will buy does.

    I would not consider your 18% returns on risky investment an apple to apple scenario to what my investments return at 13%. The more risky the investment, the greater chance for higher returns. My risk strategy and yours are completely different, so comparing them is not going to help.

    And lastly, your point on how consumer electronic companies put people into debt more than prosper does? Well, all I can say is my mutual funds (and the many companies represented in them) don’t put people into debt, people put themselves into debt – by using sites like prosper as their fix to bail themselves out of the hole they put themselves in.

  6. Lazy Man says:

    I wasn’t trying to defend myself on the loans I made, just informing you that the majority of Prosper loans are for the purposes that I made… ones that you (Tyler) had said were beneficial.

    As RateLadder says, guns don’t kill people, people kill people. You can say that Prosper provides a mechanism for people to easily gain debt, but I could also say that cars provide a mechanism for drunken drivers to kill people. Prosper and cars are tools, people should take responsibility to use them to better their lives.

    Tyler, as you say, over 50 years the S&P returns about 8%. After taxes that’s about 6% (government takes 25% or so). Inflation is 3.5-4%, which leaves you with a 2% gain. I’m not saying, don’t invest in the stock market, it’s a wise thing to do and I’m doing it too, just be careful to not over estimate how much your money will grow.

    “Also, housing prices have nothing to do with inflation. What your money will buy does.” And if you want your money to buy a home, you’ll find that inflation impacts that. I was just using housing as an example as it’s typically people’s largest purchase. I could have used a new car or a gallon of milk. The point remains that 150k may buy you fine house where you are now, but in 40 years, things will be different. At the 6% that housing prices have been averaging over the last 25 years, the 150k home will cost you $1,542,857. Granted you might not be looking to buy a home at the age 64, but it’s a small example of how your 1.1M estimate might be undershooting thing unless that number takes inflation into account.

  7. fin_indie says:

    Not to be rude to the original commenter, but lets be honest: with the claims being made, it’s hard to argue with them using informed information and logic. Anyone claiming an easy 10-15% in mutual funds just doesn’t know what they don’t know yet. Again, I’m not trying to be rude, it just doesn’t make sense arguing with people like that.

    At the end of the day, people are going to have an opinion about prosper — good or bad. The only opinion that matters is your own. (btw, prosper rocks).

  8. […] which I’ve found fascinating. Here’s where he further explains this venture: Why Not Prosper? This article has been a magnet for dialogue on the subject of […]

  9. Tim says:

    Absolutely absurd! Personal responsibility is the key. If you invest in a mutual fund, all those stocks are what? that’s right…debt. anything you invest in has some link to someone else’s debt, so get real. prosper also is constrained to state interest maximums. this is much more restrictive than most credit card companies who can base themselves in states like delaware with the highest interest rate ceilings. the absurd part about prosper, is that people are trying to get loans at interest rates far below their credit worthiness. it is adjusting itself for the most part to the normal lending market. the margins will narrow over time as more people provide loans; however, it is like any other grey market where there is a disparity between official (i.e. bank) rates and unofficial rates. so get them while they are still good. people are going to side toward maximums just like banks would for higher risk individuals after a few defaults. the real deals are to be had for people with good credit ratings (according to prosper), but cannot get a loan otherwise from their banks.

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