If you’ve spent any time in the archives or if you are a long time reader, you’ll know that I used to write about Prosper.com quite often. I’ve since taken this blog in a more general finance direction. However, I find that I need to continue to cover the peer-to-peer lending space since it’s quite possibly the most new and exciting thing to hit personal finance in some time.
First up, Prosper launched their own blog last week. I had the opportunity to talk with their Chief Marketing Officer more than six months and made this suggestion. I’d like to say that I’m the reason it got off the ground, but I imagine it might have more to do with Lending Club’s Blog. The bigger news, at least for readers of this site, is that I’m writing for Prosper’s blog. In fact you can read my first article about multiple income streams which came out today.
Now that I’ve firmly established the bias I have for Prosper and peer-to-peer lending in general, I’d like to highlight the other side of the story. Free Money Finance decides that investing in Prosper isn’t for him. Here are the reasons he’s highlighted:
- Stock index funds will average about 10% return over the long-term. That’s roughly what Prosper loans earn too — at best. It could be 1% lower. And we all know that over a couple decades, that 1% can make a really big difference in your total investment return.
- The Prosper loans take a lot of time to select and manage — at least more than index funds do. The latter are easy, especially when you set up your investments automatically.
- Index funds seem less risky. It’s not that stocks are without risk, but do I really want to lend money to someone who can’t get a loan from a bank? Think about it — people who do this professionally (bankers) have said this person is a bad risk. So why do I want to give them money.
I’ve read these reasons before and on the surface they make a very convincing argument. However, when dig under the surface some of these are not 100% true for all Prosper loans. I’ll give counter points in order:
- It’s very tempting to take the average Prosper loan as what your performance would be. When we talk of the stock market it’s been documented that monkeys throwing darts at stocks don’t beat the average performance. However, when you are evaluating Prosper loans, this isn’t really the case. You don’t have to settle for average if you read my keys to Prosper success.
- Prosper loans don’t necessarily have to take any time to manage. I can go months or years without logging into my account, yet my money can be invested on a regular basis. You simply set up automatic withdrawals from your bank and then set up standing orders to bid on quality loans. Another alternative to this to take Prosper’s portfolio plans which earn up to 11.56%. Who wouldn’t mind that, especially with no work attached?
- I’m not sure how index funds seem less risky. The assumption with this one is that someone on Prosper can’t get a loan from a bank. I never understood this assumption, but perhaps someone will explain it to me in the comments. I personally would rather not deal with a bank, if there’s a choice of going online. It’s similar to buying a stock through an online broker vs. the traditional way of calling up a stock broker. The old way takes longer, costs more, and is simply less convenient.
In the end, I don’t see how peer-to-peer lending doesn’t win. If you think about banks, they are happy to give you somewhere from 1 to 4.5% interest on your money so that they can lend it out to people at rates that are often more than 12% or 15% – even if you have very good credit. The banker collects that fee of 8-10% for his work. Peer-to-peer lending comes along and says, “We want 2% of that banker’s cut and will give you the rest for doing his job of evaluating risk. Oh and if you want we’ll help you evaluate risk by allowing you to invest in historically good loans.” That sounds like a disruptive industry if you ask me.