Saturday, March 04, 2006

Updating My Prosper Experience



Since washu commented on my last Prosper post, asking for an update, I'd like to take a few moments to do just that.

I'm both a group leader and a lender on Prosper. Most money bloggers and readers understand that the risks involved with lending on Prosper are pretty substantial. Just to recap, I'll highlight a few:

1) You're lending to complete strangers. Duh. (Although lending to family and friends is a bigger no-no in my book. I'll give money to them, but I won't lend it. Thanks to Dave Ramsey for this little trinket.)

2) Prosper's "debt-to-income" ratio is meaningless. Each borrower's "debt-to-income" ratio is available for all lenders to see. However, the "income" of this "debt-to-income" is self-reported by the borrower. I haven't found anything to tell me that Prosper validates this in any way. Thus, the ratio is pretty much meaningless. You can read what Andrew from Prosper has to say about this, as well as some other good stuff, in this SavvySaver entry.

3) If Prosper closed up shop next Wednesday, where would your money go? Well ... away, most likely. EDIT: See Andrew's comments below. This situation looks to be a non-event.

4) "Social" and group lending is a neat idea ... until you get a group that makes an organized attempt to defraud lenders on a larger-scale basis. What then? (People are concerned with the possibilities for individuals to take advantage of the Prosper setup, certainly, but I haven't heard much discussion regarding the potential for groups to do this.)

On the flip-side of all that, thanks to having a few coworkers go through the process of signing up to borrow on Prosper, I've also discovered that Prosper doesn't give all folks an easy pass to borrower-ship. Because their identities couldn't be easily substantiated (it was an Experian, addresses-don't-match thing), my coworkers had to fax copies of their driver's licenses and Social Security cards to Prosper, and answer some questions. They then awaited approval.

Lending on Prosper
When I said I was alotting a very limited amount of money to my Prosper experiment, I wasn't kidding. My Prosper account holds only $300. Of that, I commit only $50 to any one loan.

At the moment, I have two $50 loans active. A third $50 loan is still in the bidding process.

Finding "suitable" loans takes a bit of time. The first time I viewed Prosper, there were about 4 pages of available loans upon which to bid. As of this morning, there are now 13 pages, with 251 total listings. Thankfully, there's a screening function that can help you narrow down the list of choices.

Bidding on loans is really easy. The bidding screen looks like this. Like the rest of the site, it's pretty clean. Elements are easy to understand, I think.

The account-management portion of Prosper is detailed. There are a multitude of screens, one of which is the Lending Overview. Overall, it's quite simple to keep up with your outstanding loans and bids, as well as your interest accrual.

Obviously, I can't say much about the repayment portion of Prosper lending. Neither of my loans have been in effect long enough to merit their first payment.

With what I've seen up to this point, I'd have to give Prosper a thumbs-up. But we're still very early in this social-lending game. Years will have to pass, and lots of monthly payments will have to be made (or missed), for us to have even a decent idea of how successful such a setup can be.

If you're interested in lending on Prosper — if you're the sort of person who can handle the risk — then I can't think of any great reason not to do so. But I'd suggest that you start with a small, won't-hurt-much-if-you-lose-it stash. You might as well think of it as a high-risk investment, because that's what it is.

Just remember: The pitfalls of social lending are substantial. It just isn't for everyone.

Posts in this Series: Index of Prosper Posts

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— Posted by Michael @ 10:49 AM








13 Comments:
 

Good info, please keep us posted.

I can't belive Prosper doesn't even ask borrowers for a recent pay stub or something to verify income. Perhaps this will change as the finance blog community takes note.

Anonymous Anonymous
, at 12:14 PM, March 04, 2006  
 

I don't know. With the amount of consumer debt out there, I just can see people jump ship. Hope I'm wrong.

 

credit card companies don't ask for your a pay stub to verify income any more than prosper does. So, Prosper isn't any different than credit card companies.

Anonymous Anonymous
, at 4:39 PM, March 05, 2006  
 

Thanks for the update - the way you're doing it is just how I was considering. Right down to the $300 (my ebay profits from February).

 

Hi Michael,

I wanted to correct a couple of your statements on Prosper:

Point 2: As you state, we do use self-reported income as the income component of the displayed debt-to-income ratio. However, we do reserve the right to validate incomes, and have done so in several cases. I'm surprised you would rehash this falsity even after mentioning my comment on SavvySaver's blog.

Point 3: Actually, if Prosper were to close shop today, we would transfer loan servicing to a third-party. Your money would not go away. From our FAQ: "... if Prosper were to experience significant financial difficulties that would prevent us from continuing operations, Prosper's ongoing loan servicing and loan administrative obligations would be transferred to a third party loan servicing company."

Point 4: Fraud at the group level. There are two points here: 1) we verify group leaders' identity the same way we do for every borrower (which you admit is not a cake-walk), and 2) we have controls in place that don't allow groups to create too many listings without going through a deeper verification process.

I appreciate your "kicking the tires" of Prosper, and I hope that these answers satisfy some of your questions.

Best regards,
Andrew

 

Excellent info, Andrew. Thanks for the comments!

On Point 2, I have to stand by my assertion that Prosper's "debt-to-income" is largely meaningless. In my world, there's a large difference between verifying (within a reasonable percentage) each borrower's income, and, in your words, "reserving the right to verify any individual's income."

While the threat of verification probably will keep most borrowers from pumping their reported gross incomes, that's just not the same as knowing that whatever number you report as your income will be verified to within a range of some sort.

I have to say: This is the only questionable issue I've yet seen with Prosper. Everything else seems as advertised, or better.

 

While credit card companies do not ask for a pay stub, loan companies are a bit more meticulous. They will ask for bank statements, brokerage statements, and IRS returns to name a few.

 

after 2 months of trying to be approved as a lender i have little faith in Prosper longivity. i am shell shock that cant figure out who i am or dont much care. six times of faxing in doucments
four times of calling in to people that english is seventh language.
no one could even tell me why im not approved. WOW and i was going to invest money in this
RUN AND RUN SCARED , I FEEL SORRY FOR THE PEOPLE THAT WILL GET HURT ON THIS SHAM

 

LAST COMMENT BY CHRIS3645@AOL.COM

VERY DISAPONTED WITH PROSPER

 

Any recent updates on your Prosper Experience?

 

I am thus far (2 months) a satisfied lender on prosper. Took me a week to be verified and a week to transfer initial funds, with 5 days for my 2d funds transfer. I'm 26/26 on the first payments due for my first batch of loans, all less then $100. My average borrower's rate is 20% and average credit score is "D", with several HRs. Except for my first couple of loans where I didn't screen carefully, I now screen listings using delinquencies (0 is ideal, but no more then 3 in last seven years) and number of defaults (0 unless they have very good explanation) as primary screens. Group status, amount of loan, and explanations are secondary. I reinvest re-payments as quickly as possible, though it can take up to a week to get a bid through on an acceptable loan. 1 week out of 3 years isn't bad. With just a little common sense, prosper works for lenders. I would not bid on HR with multiple delinquencies or on loans with rates under 10% (9% after fee) - first is too risky and second is only for those who like the social aspect of p-to-p lending. Money markets/CDs, etc pay close to a guaranteed 6%, are more liquid, and your money works for you right away. I do not use money I need, but money meant to be invested with a little risk.

 

I've been a lender on Prosper since Oct, 2006 and have 10 loans. All current, one paid out, and I try to fund one or two loans each month. Love the concept and I get real excited to give a person a second chance. I believe most people are good and take pride in making their second chance work for them.
Live lone and Prosper.
A Happy Lender

Anonymous Anonymous
, at 2:03 PM, March 25, 2007  
 

On March 30, 2007, Prosper locked down discussion of the largest Prosper group, and banned several users from their forums for criticizing the leader of that group, claiming 'This thread has been locked because it violates the forum policies of "Baiting other members into a fight or displaying other aggressive behavior" and "Being mean-spirited, unruly, or rude."'. Discussions of other prominent groups were not locked, leading many forum users to speculate that the lockdown was in response to complaints from the leader of that group.

Anonymous Anonymous
, at 4:37 PM, March 30, 2007  
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