Last week, Get Rich Slick asked the question, What Happened To All The Prosper.com Blogs? Two years ago, along with RateLadder, I probably wrote about Prosper more than most personal finance bloggers. So when RichSlick asks why the blogs have seemingly gone silent, I feel that I should stand up and answer.
Here are the 2 main reasons I think bloggers (myself included) aren’t writing about Prosper as much any more:
- It’s Getting Old – Peer-to-peer lending was a new asset class for the average investor. I think any time a new asset class comes around, people are going to want to write about it, dissect it, and analyze it. That’s been done over and over the last two years. Is there a new angle to write about? I’m out of things to write about unless they add new features like bidding though the API (something announced at the last Prosper Days, and I’m not sure if it’s being used by anyone or not).
- The Returns Aren’t Where I Thought They Be. When Prosper came out, I used the Experian default as my main guideline. It seems that Prosper loans default a lot more often. I don’t know if I was just not informed enough to realize that differences between the Experian data and the loans I chose to participate in. For instance, I know that the Experian data applies to debt-to-income ratios under 20%, but at the time I figured that 25% wasn’t too much different. And I didn’t look at other information like delinquencies as I didn’t know how to process it. I basically made the mistake that a lot of mortgage lenders did – I took on too much risk. Unfortunately, I wasn’t a lending professional and the government won’t bail me out.
Here are some other comments I wanted to get in, while on this topic:
- Tricky Math – The next day after asking the question, Get Rich Slick Fishes Through LendingStats To Learn About Prosper. He takes the top 10 lenders (by money invested in loans) and calculates that the estimated ROI at 1.518%. If you look at the page he uses, the 10th person is the worst lender of all… 15% worse than any of the other 25. If he had chosen the top 9 he would have had a 3.70% return. If he does the top 25 people the return jumps to 3.36%. If you take out the best and worst lender in that top 25, you have 3.94% return. (Note, I’m using a simple averge, not a weighted average because I’m Lazy). I’m not going to say that a 3.50% is great (I think you can do better at some banks), but it defintely beat my stock returns of late.
- People’s Rate of Returns May Look Worse Than They Are – Here’s where the data gets even trickier. Prosper is always changing and adding new features. When I made most of my bad loans, I didn’t have their tool that says, “People who made this bid on a loan like this have an estimated return of -10%.” That’s powerful stuff. It changes your lending practices. Also, people may change their lending practices as they learn. I didn’t know that delinquencies were that important when I started. A few bad loans in the beginning can really torpedo your overall returns. However, those bad loans become less “impactful” (is that a word?) over time. If you look at the top 10 lenders mentioned before, they typically were early adopters and likely victim to these bad decisions.
- What About Other Market Conditions? – People are likely going to pay off their mortgages before a peer-to-peer loan. After all, it’s their home! Yet we see that many people aren’t able to pay back their mortgages. It’s the worst it’s been in years. Perhaps judging Prosper’s performance now is like judging the stock market in 1929. If the economy gets back to normal, one could reasonably expect that fewer people would default on Prosper loans, right?
- Lending Club is Performing Great For Me – I have 60 loans with Lending Club. Of those 60, 6 have been fully repaid, 53 are still current, and one is 16-30 days late. (The late one has already repaid 20% of the loan, so if I eat that one it’s not bad). My weighted average interest rate on these 60 loans is 9.21%. While this is not Prosper, the concept is the same. It’s great… I love it… I’m making a lot of money… ;-).
I stand by what I’ve said over a year ago… You have to treat Prosper loans like bonds – and that’s essentially what they are, right? I don’t know anyone who invests in a diversified bond fund and says, “It’s great… I love it… I’m making a lot of money…” Instead, you are going to say, “I’m more diversified than I was. I recognize that investing isn’t about making a lot of money quickly. I love that I didn’t lose 30-40% of my money in the stock market.”
Four Pillars says
Come on LM – are you telling me that the fact that Prosper shut down their referral program had absolutely no bearing on the amount you wrote about them?
Not to pick on just you alone – there are quite a few blogs out there who just sort of stopped prosper blogging the day the referrals stopped…
Lazy Man says
I actually wrote a lot more about Prosper before they had a referral program. Plus, up until an hour ago when I just got an e-mail from them, I was still in the referral program. It seems that due to the SEC filing and no longer allowing lenders to sign up, the referral program doesn’t work.
Amber Weinberg says
I tried telling a friend who was interested in investing in Prosper about the amount of trouble multiple bloggers have had with people defaulting, but he didn’t care. Wonder how he’s doing now…
Brett @ Personal Loan Portfolio says
Four Pillars: The Prosper referral program only shut down today according to the email I received. Regardless of previous program closure announcements, they seemed to still be paying out bonuses. Despite posting not very positive information about Prosper, I was still having people use my referral links. Oh well, some people have to prove it to themselves.
I must agree with LM&M that it is getting tiresome to write about P2P lending. There are only so many times you can slice LendingStats’ data and re-post announcements without becoming bored of the topic. The stats Get Rich posted are no surprise to anyone who has followed P2P lending regularly. I also agree that the returns are less than I had hoped — although, my loans are still doing reasonably well at both Prosper and Lending Club.
Plus, the industry seems to be having regulatory and possibly profitability issues. I would rather not invest a great deal until I am certain the platform will survive.
By the way, see the comments in this post to find out more about Muleshoes, the $400K lender with -17% return.
Four Pillars says
Fair enough – coincidentally one of my main affiliates is a discount brokerage which I wrote posts about before they started their referral program.
I see your point (and Brett’s) about running out of angles to write about.
Well I disagree with you on one point – there is plenty to write about. I think of about two posts a day for p2p lending. Sadly, I’m lucky if I find the time to write two a week. I have a whole list of things I’d like to write about but just don’t have the time to tackle.
As for the referral program – let’s be honest. It does influence frequency of blog posts. Although I have not been disappointed with my return on Prosper (yet) I have been disappointed in the payout rate for referral bonuses. I haven’t tracked it but I’m guessing for every 20 new members that signed up through my site only one became a borrower or lender.
I’ve been much more impressed with Lending Club and Revolution Money Exchange as far as referral bonuses go. Once a person signed up through their programs they were much more likely to result in a bonus.
When Prosper comes back hopefully they will come back with a new and improved referral program.
Dividend Growth Investor says
Prosper was a nice way to make money by refering people. Other than that the bad part is that they seem to have done nothing with delinquent/late loans there.
Anyways most people were seeing double digit interest rates and got hooked on without considering the fact that defaults could occur. Anyways, now we know why credit card companies charge such high interest rates, don’t we?
Lazy Man says
Tom, maybe their referral program influenced the frequency of posts for other people, but not for me. (And I am quite a bit insulted if people imply that without going back and researching my posting history.)
I not only agree with DGI, but it also explains the high rates of payday loans.
WRT the referral program, Prosper shut down just as LendingClub started up again – if you wanted to write about p2p lending, you could still do it and replace Prosper with LC and still get referrals.
I think Lazy Man’s point on novelty wearing off is true, I didn’t write about it a lot but after the initial announcement, I don’t see much point in writing more about p2p lending myself.
Lazy – I guess my point is that if Prosper had a better referral program it would probably encourage me to post more often and think creatively on how to generate referrals. The program was okay but certainly not motivating.
regardless of why you stopped promoting them, I appreciate you giving some facts in this post. I had always been intrigued by the “promised” returns, but just never jumped in. I am a bit relieved now that I know they weren’t what they were cracked up to be…
Lazy Man says
Again, we don’t really know if they won’t be what they are cracked up to be. The stock market returns the last two years weren’t what they were cracked up to be either.
How about publishing an update on your Lending Club performance?
Lazy Man says
Hi Rich been too long since I stopped by your way. Hope you are doing well. I gave a brief Lending Club update last week, but a commenter made a great mention that I should a much more in depth look.