zcommodore

With Prosper so young and with defaults so high, this doesn't happen very often.  However it does happen.

My very first loan is now on the gravy train (I've received more in payments than I originally bid).  Ultimately, the lenders are probably lucky on this one in the grand scheme of things.  Of my original $50 bid, I've received $53.20 in payments (it actually hit the gravy train last month but the payment was late).  If you don't feel like looking at it, it's a E grade loan in a "bad group".  It has been late a number of times and I've received some late fees along with normal interest and principal.  Based on the original payment schedule, the borrower is behind on his payments even though the loan is listed as "current" due to all the late payments.  He still owes me over $20 of my original bid where he should be around $18.42 if he had been paying on time every time.

It's nice to see a few good loans sprinkled in with all the lates and defaults in my account.

Today is my 2-year anniversary since I found Prosper.  My last bid was ~5 months ago.  I may bid again but the likelyhood is dwindling.  In the between time, I've done some thinking about this whole person-to-person lending idea.

When I first found Prosper, one of the big drawing points for me was the interest rates.  Wow!, I thought, I can earn 15+% rates on people who would otherwise be paying 18-30%.  That's a win-win situation if I ever saw one.  So I signed up even though I didn't really have a lot to bid, I figured I could make a few $50 bids and see how it went.

Well, 2 years later, I've made a total of 35 loans, 3 are paid, 14 are current and the remaining 18 are in some stage of lateness including 6 defaults.  The stats-sites show my ROI as negative and they're probably close.  I have received some money from my activities as a GL and through the various referral programs so that helps to offset some of the losses.  Still, overall, it has not been a positive financial experience.  I've definitely learned a few things though.

People who don't have money, can't pay their bills.  Even if they say they want to.

People who don't have good credit history, aren't likely to pay their bills either but they'll tell you anything they can to get you to loan them money anyway.

Overall, Prosper's credit ratings are accurate.  AA borrowers as a whole have a lower default rate than A's and so forth down to HR's and NC's (no longer available).  Some AA borrowers have defaulted, and more will over time but as a group they're doing better than lower credit grades, but not as low of a rate as the old Experian numbers tried to indicate.

Unsecured loans need high rates to offset relatively high loss rates.  Prosper's model bids them down too low to reasonably compensate for the risk and the innefficient tax treatment.

Prosper, due to many issues related to privacy concerns, can't allow lenders to see full credit reports.  This is a huge handicap for lenders.

Lenders on Prosper are amateurs.  Any time you have a bunch of amateurs doing something, you know there will be a learning curve.  In this case, borrowers are making out like bandits and the amateur lenders are losing their shirt.  You can't blame either side individually for this, they're both responsible for their share of the blame.

Prosper may survive but they may have to make some significant changes first.  As things stand now, they're losing a lot of money and aren't going to survive despite their huge lead in this niche market.  Their website technology-wise is second to none but their product leaves somewhat to be desired.  Supposedly this is a growing segment of the marketplace but I don't see banks shaking in their boots from the competition.

Borrowers with good credit can get money cheaper and easier elsewhere.  I've got AA credit and I have a credit card balance that I've rolled from one 0% credit card offer to another more than once.  The people who are coming to Prosper have a reason they are going to a site like this generally--they can't get credit anymore.  There's a reason they can't get credit and that is because they aren't as credit worthy and are less likely to pay their bills.  Some will, but there's no good way to automate the process of finding out who.

In all cases, banks have an advantage loaning money to people.  Banks can make secured loans at relatively high rates and unsecured loans at even higher rates.  There's a reason they make loans at the rates they do--so they can make money even if some borrowers default.  Even then, as we've all seen with the mortgage crisis, they sometimes lose money.  Still, banks have the benefit of having access to the whole credit report, experienced people making lending decisions, the ability to charge higher rates, and much more favorable tax treatment on their earnings.

Some lenders, who wish to take the time, will likely end up with a positive return.  But given the poor tax treatment and the amount of time it takes, they will have to make relatively large bids to make it worth their time.  Unfortunately, larger bids increase their risk exposure which goes against the whole diversification idea that would make their return regress to the mean.  All I can say is "good luck" to anyone who considers this as an "investment".

In the end, the poor lending decisions I've made have been a valuable learning tool.  I'm glad I found Prosper just for the learning experience.  Ultimately, it's been a relatively inexpensive education but there has been a cost.  I've made some new online friends for which I'm thankful.  Shoot, I even started a blog for the first time, something I never really considered before.  For now, I'm stuck here for at least another 2+ years so I'm not going anywhere any time soon.

Yes, it happens once in awhile.  A borrower comes to Prosper and asks for the maximum at a high rate and actually pays it off.

This morning, I had one borrower do just that.  About a year and a half ago, in IRC, Bama told me he wouldn't pay for another 6 months, that he would default.  I didn't save the log so I can't prove it but, suffice it to say, he was wrong.  At any rate, since pensioner had over $18K of that loan, I'm sure he's happy with the results.

I did a bit of checking on ericscc.com and found that between Prosper's launch and the end of February 2007, 24 borrowers were successful in getting $25K loans at rates 25% or higher.  Of those, 10 are current, 5 are paid and 9 are 1-month late or worse.  Obviously, with rates even 25% or higher, if 37.5% default, you're not going to make any money.  And, incidentally, I was on one of those defaulted loans as well.  In that case, the borrower declared bankruptcy and it was recently finalized.

Oh, and one other thing, the borrower I had who paid in full got a new loan for nearly $22K at 35% about a month ago.  I have no idea how he's going to make any money paying those kinds of rates but he seems to think it's possible.  I wasn't aware he was seeking a loan until just the other day when I saw his previous one was paying off.  All I can say is, "good luck" to his new lenders.

It's taken 19 months and a few extra payments along the way, but I finally have an unpaid loan that has reached the breakeven point.  I've had two other loans that were paid off early that I obviously got all my money back on but this is the first one that is not yet fully paid but I've received more interest on it than the balance that is still owed.

If you do the math, a loan at 29% will reach the breakeven point at around 24 months if the borrower only makes the minimum payments.  A loan at 14% reaches it at 30 months and a loan at 8% reaches it at 32 months.  In the case of this loan at 28.5%, there were a few extra payments along the way that bumped up the "breakeven" point.

I look back on this loan and I'm happy to have reached this point (as is pensioner as well, I'm sure :-) ).  I doubt I'd bid on it now for numerous reasons.  I consider myself lucky for the most part.  It does ease some of the pain of all the defaults I've had.  Still, my ROI according to the 3rd-party sites ain't all that.  I don't know how many 29% (including GL fees) AF loans at $25K that stayed current there are but I doubt there are many.

In the future, I look forward to reaching breakeven on more of my loans.  It's nice to finally reach this milestone on one for now though.

A couple of weeks ago, I passed the 18-month mark since I found and joined Prosper.  Earlier this week, my first loan reached 18 months old.  This morning, I got my 18th payment from that loan.  I've said it before and I'll say it again, I probably would never bid on that one today but, in this case, I seem to have gotten lucky.  If he pays for 6 more months, I'll have gotten all my principal back.  In the mean time, I'm half-way to a full-term payoff.  Too bad some of my subsequent loans didn't do so well.

Incidentally, my first loan has been late a few times.  Still, he's current at least for one more month.  I sent him a thank-you once after he caught up from nearly reaching 1-month late.  I got a note back saying he had had a hiccup in his finances where several things were due all at the same time.  I'm happy to see he's still paying.  Sometimes those 29% AF loans do pay....