From lender to loan shark

Someone defaulted on me!

With only $500 spread among nine loans I don’t spend too much time minding my Prosper investments. Prosper, the peer-to-peer lending service, sends me an occasional account statement but really my participation was more of an experiment given my interest in community platforms.

My loans themselves were based on a few principles:

  • only people with B or better credit ratings
  • <$100 participation in any single loan
  • biased towards people looking to pay down school or credit card debt

Given this somewhat risk averse profile my average interest rate is about ~9.94% (7.5% – 12.5%). My net gains are lower given Prosper’s fees (both lender and borrower pay) and the fact some of my borrowers paid off their loans at an accelerated pace.

Recently I discovered that one of my loans has gone bad – two months late and sent to a collection agency after four months of payments. “Helping son with school” was the solicitation and with a AA credit rating, the loan closed pretty quickly. Now apparently we’d be lucky to get just pennies on the dollar.

My first reaction was curiosity. I wanted to know more about the situation. Extenuating circumstances? Subprime mess? Was this loan his only debt or were there other people he was letting down? Does he intend to repay and just needs a little time, or is he looking to pull one over on a bunch of people he’s never met? Were the other Prosper lenders pissed?

Interestingly enough, i can make a community payment – put money towards this loan without hope of repayment (although i might be repaid). This donation would count as a gift for tax purposes. Now that’s really fascinating. I’d love to see this extended to a feature where the borrower can plea their case, try to renegotiate the terms of the loan, etc. Get some dialogue among the different borrowers – should we support him again?

That $100 is working for me

So finally funded two $50 loans on Prosper. I was outbid several times as it took me a while to understand the market rates being offered. My selection criteria was:
* Loans that were already at least 50% funded by Prosper lenders
* Grade B credit or better
* A reason for borrowing that made sense to me – I focused specifically on people looking to pay off their credit card debt

One loan is at 8.45%, the other 8.94% for an average of 8.7%. Since this is more of an experiment for me, I wasn’t really focused on maximizing return. Since the market is still relatively small and participants are new, I’ve gotta believe there’s a wide disparity of interest rates being paid out and very little internal consistency.

Some of the Prosper guys came and spoke at Google — haven’t watched it yet but there was some good email chatter afterwards.

Prosper: the bids

ok, with $100 transferred into my Prosper lender account i’ve now bid on two loans – $50 each. I was pretty conservative in my selection – both have A credit ratings and reasonable debt to asset ratios. Both loans are 70%+ funded and close within the next few days so we’ll see if I “win.”

Go forth and prosper

Who deserves my money? That’s the question I get to ask after joining Prosper, a new peer-to-peer lending system. The concept was always appealing but I was moved to action after a conversation in NYC with a friend who has ‘put some money on the street’ via Prosper and found good results (no defaults, 10%+ interest rates). Funds are being transferred to my lender acct from my bank so it’ll be a few days before i get to make a loan.