Prosper Lending - Peer to Peer Lending

Prosper is a peer to peer lending institution.

www.prosper.com

Essentially, one can transfer money to Prosper and bid on individuals who have applied for loans.

You can enter search criteria to find loans that you are looking for whether it be the individuals credit rating (based on their FICO Score), whether or not the individual is a homeowner (verified by Prosper), Loan amount ($1,000-$25,000), their payment history, and even on the interest rate that they are offering.

For example, you could choose to lend only to an individual with an AA credit rating that was seeking to borrow $5,000 at an interest rate of 9% for the purpose of buying a wedding ring or you could choose to lend to an individual with a D credit rating that was seeking $12,000 at an interest rate of 22% for the purpose of credit card consolidation. You can choose the criteria you want based on the level of risk that you are willing to take. All loans are on a three year time horizon with monthly payments. There is no penalty to individuals for early repayment.

The concept behind this is very interesting as it allows individuals to become micro-lending institutions. I personally have lent out $2,641.84 so far at an average rate of return of 15.78%
I began using this institution as an investment site, bidding on individuals posing a moderate risk at higher interest rates but have since put some money from my savings accounts into Prosper to invest in individuals with excellent credit ratings (A &AA) at interest rates from 9%-12%. I figure that this is a much better savings vehicle at a much higher interest rate than my current savings accounts. (~5% vs 9%-12%=4%-7% better)

I have even taken this method of investment to a new level. I placed a loan listing for $1,000 and received the loan at 8.25% interest. I then immediately relent the loan to individuals with low levels of risk for an average rate of 16%. I am not actually pulling 6% interest out of the air; there are service fees (very reasonable) and I must pay taxes on my return. My basis of this test was that I have more than enough capital to cover the loan even if there are 100% defaults on the loan...and $1,000 for an interesting educational class is a lot less money than I paid for college classes. (~$5,000/class)

Anyhow, I've been lending on Prosper for the past few months and ave 0% of my loans in default. If there is a default, Prosper covers a small amount of the loan for that monthly payment and if the individual is unable to pay, you can even choose which debt collection agency you want to go after the individual to get your money back.

The basis of this model is that you can lend out your capital (say...$1,000) in amounts of $50 to 20 individuals while sharing the risk with others who are also lending in small amounts. The risk is spread over all the lenders and you can choose your own method for selecting lenders. I personally will be sticking with the AA,A,B lenders although I do have a few loans to C individuals and one loan to a D. I will not, however, be placing loaned on any HR or NC individuals...they either have no credit, or their credit is so bad that it is essentially non-existent...investing in them simply wouldn't be financially responsible.

Anyhow, I highly recommend doing your own due diligence before opening an account, but the economic impact of peer to peer lending institutions could have quite a large impact if it ever reaches the mainstream lending world. I highly recommend checking out Prosper as a potential investment vehicle.

Until next time,
Thor