by Tricia
Michael from It’s Your Money was kind enough to answer a few questions from me about Prosper. If you are unfamiliar with It’s Your Money, it is a site full of financial information as well as nifty calculators and Excel spreadsheets. He also has two blogs, It’s Your Money: Money Musings and Debtspiration.
Without further ado, here’s my interview with Michael:
What about Prosper made it appealing to you as a Lender?
Being an internet dork, and a money dork besides that, I was fascinated with the Prosper idea from Moment One. “That is way too cool,” was probably my first thought. And a few seconds after that I was registered.
I had no need to borrow, thank goodness, especially at the rates effective on Prosper at the time. But the idea of lending on a peer-to-peer basis fascinated me. I was so intrigued with the idea of being a Prosper lender that once I’d done a bit of research, I honestly
couldn’t wait to get my experimental (paltry!) $300 transferred into Prosper so I could start bidding on loans.
I didn’t get in it to “double my money” with Prosper loans, or make a killing, or anything like that. More than anything I was fascinated with the idea of micro-lending as facilitated by the internet. I wanted to see how it would play out. And I wanted to have a front-row seat. (Those seats are expensive … for a reason.)
Do you feel that Prosper is a good avenue for those seeking loans?
At some level, if a borrower’s credit is less-than-perfect, then yes, I think Prosper should be given strong consideration. I’d go so far as to say that in its current form, Prosper constitutes a much better setup for borrowers than it does for lenders.
Lenders can see much more relevant info about borrowers now than we could when I originated the majority of my loans. But even with that, the risk/reward scale still comes down heavily on the side of borrowers, in my opinion.
How “personal†are you with Borrowers? Do you contact them to ask additional questions?
Of my six open loans, I have only personally contacted one borrower either before or after the loan was originated. And I’m okay with that. I’m not interested in making Prosper a significant part of my investment portfolio, at least not right now, and certainly not in Prosper’s current form. If I were, I probably would be contacting all prospective borrowers. I would certainly be throwing a LOT more money into the Prosper ring in order to make the ROI more predictable.
Do you feel that a Borrower needs to join a group within Prosper?
Nope, not at all. I leave a borrower’s group affiliation out of my decision almost entirely. With 99 percent of the groups out there, when push comes to shove, group affiliation isn’t going to do a whole lot to get me, as a lender, my money.
Many lenders refer to a lack of “good listings†(loan requests from Borrowers). In your mind, what makes a “good listing�
That’s tough to put into words, really. As a lender, I want to see listings that make sense for all parties involved. I want to see the benefits for myself, obviously, in the form of “safety” (if there is such a thing in the world of Prosper lending) and in an ROI that’s fair
for the risk involved. I want the loan to benefit the borrower in some way. I don’t want the loan to simply dig them a hole deeper than the one they’re (likely) already in.
I want the borrower to be willing to divulge enough financial details that lenders can have a reasonable picture of the risk they’re taking on. I want a borrower’s story to be consistent with the answers they give to lenders and group leaders who make personal contact.
Here’s the gist of it, and what lenders ultimately have to try to decide on a loan-by-loan basis: That person you’re loaning money to — are they on the way up, or on the way down?
Money is a two-way street. If you’re a Prosper micro-lender, you sure want to stay away from the downhill side of the road.
What one piece of advice would you give someone that is thinking of borrowing money with Prosper?
I’d suggest that they do some serious math, run the numbers, and see whether or not a Prosper loan really makes things any better for them. Taking on additional debt is ALWAYS something that needs to be examined from all angles. Too many times it’s an emotional thing: The facts and the potential stress and the hard dollars on the line get brushed aside by short-term “wants” and “shoulds” and “maybes.”
In the case of replacing one form of debt (say, high-interest credit-card debt, which is open-ended in term) with another (say, a fixed-term Prosper loan which MIGHT come at a marginally-better rate) isn’t always a good idea, either. Again, you as a borrower have to
crunch the numbers. Are you making tomorrow better for your family … or worse?
In the world of money, when you get right down to it — when you really wrap your brain around all the costs and the “benefits” — the instances are pretty minimal where a loan truly carries a borrower to a better place than the one he was in before. This is especially true in comparison to the total number of loans being made.
Finally, how satisfied are you with your Prosper Experience?
So far I’ve originated eight Prosper loans. Two loans paid off early, and I reloaned those funds. Considering that two of my current six loans are right now in late status, I’d be outright lying if I said that this has worked out as I’d like. However, as the cliché goes, “Tuition to the School of Hard Knocks ain’t free.” And that is exactly why I have placed so little money on the Prosper line. (I didn’t like visiting the Bursar’s Office in college, either. Money always seemed to vanish when I set foot in there.)
Anyway, when I bid on these loans, I knew what I was getting into. The borrower info I had at my disposal was extremely narrow. I limited myself to loans where the borrowers involved had no worse than ‘B’ credit ratings. Yet I absolutely knew that credit scores tell you little about where a person is, right now, in life. And they tell you zero about what storms may be approaching borrowers’ doors and what thoughts are rifling through their heads. Any lender who thinks otherwise is pretty naïve.
From the lending side, Prosper had made marked improvements lately, and I’m glad to see it. As a study in human behavior, financial psychology, and the market forces of supply-and-demand, there’s nothing else quite like Prosper out there (yet). I read the Prosper message boards frequently, and scan through loan listings as I have time. I still shake my head in disbelief at some of the loans that are getting funded.
In a way, it’s nice not having any money in Prosper available to loan. It means I can just sit back and watch my non-late loans accumulate interest … and watch everything else that goes on at Prosper just for the entertainment and/or educational value of it.
Will I be loaning more money on Prosper in the future? Don’t know. Only time will tell. For now, Prosper is just a sideshow in my personal financial circus.
Thanks Michael for the interview 🙂
This was a fascinating interview. I had been wanting to know more about Prosper and whether it was a good idea to get involved on the lender side. Having two loans paid early and four out of six current loans paid on time is a great deal. Assuming both or at least one of the late loans eventually pays off the loan that sounds like a positive experience. Thansk for the info.
Andrew – probably one of the best places to go if you are thinking of lending on Prosper is to take a peek at the Lendor forum at the Prosper discussion boards prosper.spreebb.com/. They discuss many things in there and you can get to peek at some of the things Lenders are discussing. I’m glad you enjoyed the interview 🙂
Why your late % is so high? It seems Prosper average is less than 5%. Are you focusing on subprime loans?
2 out of 8 loans late may sound crazy, as Poster #5 above says, but remember:
1) Michael did say most of his loans are from before the expanded data was offered.
2) “Late” doesn’t equal “default”. It’s possible one or both of Michael’s lates have caught up by now.
Personally, out of 74 total loans, 6 paid early, 2 are 1 month late, and 1 appears to be headed for default at 3+ months late. From what I’ve read on the message boards, around 4%-6% late/default is the more common experience among most lenders. (FYI, I have loans in all grades and average a “C” grade.)
Hi,
I just found this blog and thought I could share my thoughts, if that’s ok. I’ve provided a link to my group, the Two Millionaires, who just started. They specialize in getting the higher risk borrowers a second chance. My group leaders are very strict and have VERY HIGH standards.
They do not automatically accept all requests to join the group. They also review everybody’s listings before they can be posted. The reason is, they want to give the high risk borrowers a second chance, so they demand a lot from us, especially dedication. They also want lenders to be confident in our group, knowing that they can take a chance, and trust that the payments will be made on time.
With this group, you will get a higher rate of return because most of the loans are at a high apr. I wanted to say, I almost gave up on getting loans through a bank. I made a small mistake and now I am paying for it. I listed my loan, my history and my dedication and my loan was fully funded in 2 days with an HR rating.
If you are looking at lending to get a good rate of return, with responsible people, I would have you look into our group on Prosper. Thank you for your time!!!! here is the link to our listings…. Two Millionaires
I thought this was a very good interview. I just found out about prosper.com and it seems like a really interesting idea. I am thinking about becoming a lender myself. I am hoping to acheive rates higher than I could in an ordinary bank account, but with all the risks enumerated here I am going to start small and see how it goes.
Max
Prosper is certainly an interesting idea. I imagine once there is a lot more loan completion and default rate information available to lenders, the picture will clear up quite a bit.
As an investment it is important to remember how banks make money. They make money on the spread between their borrowing costs and lending income. I don’t think it will be possible to earn much more than 10% after risks and fees, which makes it less attractive than the stock market. But what is attractive is borrowing cheaply, lets say 7 or 8% with your good credit score and then lending to worse credit scores at higher rates. You can profit from the spread between the two rates without investing your own money.
@Final Fantasy:
There’s plenty of default rate information available to lenders, and plenty of other market statistics as well. In fact, at the end of October, Prosper implemented bidding guidance that’s based on the historical performance of loans within the marketplace (rather than Experian’s super-optimistic default projections). So, when lenders go to bid on a loan at x% these days, they may get a popup saying “Do you really want to bid at 5% under the historical estimated return for loans of similar credit characteristics?” – and they quickly click “Nope!” and move on… 🙂
There’s actual data supporting that statement, and all kinds of other fun stat/analysis stuff to look at too, at: Prosper Lenders
BTW – do think it might still be a little early to go with your arbitrage idea. 🙂