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