My Prosper experience
April 28, 2008
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Over the past few months, I’ve been putting aside some money and sending it off to Propser.com, a site that has been described as the “eBay of loans”. Essentially it is big kahuna of the growing peer-to-peer lending movement. Essentially, I am loaning money out to people who “need” it.
I know, the words “money” and “Internet” always sound suspicious when found in the same sentence, but Propser seems to be on the up-and-up from my limited experience. Basically someone posts that they need X amount of money @ Y% interest, and people bid with the lowest interest rate they are willing to pay. So if enough people are interested, and the loan reaches 100% met, the interest rate starts going down until the listing ends. So I might bid $50 at a 12% interest rate, but a bunch of people bid 11%, and my 12% bid is outbid. The interest rate is largely driven by the credit rating of the person asking for the loan. So someone who has a credit rating of D or E is likely to not get what they are asking for, and if they do, it might be at like 25% interest, because the lender is taking a lot of risk. Meanwhile, someone with an A or AA credit score, will often get an interest rate under 10%, since they are less of a risk.
The minimum bid on a loan if $50, so I’ve slowly been sending over money and picking up $50 loans. Currently I have 8 loans, each right around $50. Of those, 2 are to borrowers with a AA credit rating, 5 with an A, and 1 with a B. The average interest rate on my loans is 13.21%, which is a lot better than the less than 3% my money market account is paying right now. Obviously there is more risk involved, hence the premium, but I’d like to think that as long as I stick to loans with good credit scores, and spreading my money out across many loans, that I’ll be pretty safe and come out ahead of where I’d be with just leaving all of my money in a money market account, even if a loan goes bad every now and then.