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Prosper People-to-People Lending Marketplace

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I’ve seen a bunch of personal finance bloggers talk about Prosper lately and honestly I don’t see the sense in it. For those who aren’t familiar with it, it’s a place where you can loan money to other people and earn, in some cases, a hefty interest rate on it. Everyone seems to be approaching cautiously, with good reason since your money is not protected in any way, because the business model hasn’t been proven in the States yet (Zopa, something similar, exists in the UK) and most people don’t like the idea of lending real cash to complete strangers.

Handling Defaults:

For privacy reasons, we do not disclose the identity or contact information (like an email or telephone number) of members on the site for any reason. If you would like to contact the borrower yourself, you can go to that borrower’s member page, and click “Contact member.” Your message will be sent to the individual anonymously through the Prosper messaging system.

You can’t get into contact with the person you are lending to for “privacy reasons.” So when the borrower misses a monthly payment:

Once the loan is one month past due, it is turned over to a collection agency to pursue collection from the borrower. If the collection agency cannot collect payment from the borrower after a reasonable period of time (within 3 months), the loan will be considered uncollectable, and written off as a loss.

It’s written off in three months and then sold at auction, where you will receive the proceeds. “Because the debt is already fairly old by the time it reaches the debt buyer, you should not expect to receive much of your original investment in return for the outstanding debt.”

If you have very weak credit score, it wouldn’t be unreasonable for you to get a high risk loan, avoid the collection agency for a mere 3 months, then get your friend to bid on the loan and clear it – all for less than the auction price. That’s what I’d do if I was a scammer and wanted to rip people off.

Borrower Statistics:
Now add that with the experiences of Savvy Saver and you’re left with an empty feeling plus an empty wallet. Through very savvy 0% balance transfer offers, she has $40,000 of credit card debt and still receives a grade of A (second best!) by Prosper! Since credit grades and debt to income ratios are basically the two fundamental pieces of information about a Prosper borrower, you’ve just lost credibility in half of the equation. If you read further in her post, she notes that you can enter any income you want thus making the debt to income ratio metric an entirely useless one.

No real protection for lenders + Borrower stats weaker than eBay’s feedback system = I’m keeping my money in my mattress.

{ 29 comments, please add your thoughts now! }

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29 Responses to “Prosper People-to-People Lending Marketplace”

  1. Ervin says:

    I guess this marketplace was invented by some collection agencies. ;)

  2. Will Kirby says:

    After giving this some thought, I can’t imagine why someone would do it. I’m sure we’ll get a lot of success stories in the future beacuse i’m sure some will roll the dice with Prosper and do well. It just seems like the risk just doesn’t equal the reward with this one.

  3. jim says:

    The repayment period is 3 years old and there are borrowers offering 15%, which is a great return, but you do accept a sizable risk. With great risk comes the potential for great return.

    It’s a great way for someone with a lot of credit card debt to get themselves out at a 15% rate instead of the ridiculous 20-30% rates.

  4. Wilson says:

    Its a good idea in theory.. kind of like a mix between ebay and paypal. You DO have to give out your personal information and SSN, credit checks, bank account numbers etc so unless you were really intent on scamming, it gives a bit of a deterrent for that. On the other hand, privacy is also important (your personal information you give to prosper). What if that gets lost or stolen? Identity fraud, here we come!

    The points you mention are valid though, as a huge concern seems to be their way of dealing with the risk. It borders on reasonable measures, but with the loans being unsecured, it is a pretty big step a lender would take. At least with paypal, they’ll go into someone’s bank account and take your cash back if you get scammed (Not sure if this is legal or not)…

    We’ll see how this one turns out. I have to admit, as a college student with a substantial amount of ‘bad’ debt (credit cards and loans), the site seems appealing because I’d rather get a big loan and pay off all the high interest stuff, and then repay that big loan.. easier to deal with 1 bill, and it’d be lower interest.

  5. Michael says:

    I’m already a Prosper member, group leader, and soon-to-be lender. The risks are pretty substantial; there is no way around that. That’s why the amount of money I’m willing to commit to this experiment is pretty minimal. If I lose it, well, no biggie.

    Some of the dollars that people are ponying up, though, make me cringe.

    I love a new idea, but not a stupid one.

  6. Jonathan says:

    I’m with you Jim. A commenter on my blog asked why not just do corporate junk bonds, they probably have better credit rating. I posted some points against that, but given that the income verification is useless, the reward does not justify the risk.

  7. Andrew says:

    Hi Jim,

    I’m the product manager at Prosper, and wanted to comment on your post. You have some good points: approach cautiously, this is a new, unproven model, and as always, caveat emptor.

    However, you are incorrect in stating that the borrower can enter any income he or she wants. In fact, we reserve the right to verify any borrower’s income, and have done so in several cases already. Borrowers who falsify their income will have their listing removed and their account shut down. It also happens to be a felony to misrepresent your income on a credit application.

  8. Mike law says:

    OOOOO so Mr product manager…. “several cases” you have verified the income…. How many felony charges have you made?

    And when the crooks set up the account to scam the guys who have cash to give I do see you take your share!!!!

    GOOD IDEA TO SCAM SO $$$ FROM LOTS OF WILLING PEOPLE!!!!

    Thay are asking for it.

  9. Sony says:

    Like borrowing from your credit card or the bank is a better alternative ?
    Maybe you should invest in the stock market and watch the executives funnel all the money out the back door to their off shore,tax shelter bank account.
    Maybe u can put your money under you matress or in a bank and watch it slowly be inflated away.

    As far as a bank goes, i’ve personally had my identity, atm card, and access code stolen by a bank employee. Thats supposed to be a better way to borrow money?
    If you go to any financial institution you must submit your sensitive information to be considered. If you mail in a credit card application, who’s handles the information and processes the information.

    My point is that i think this is a great idea and i would like to see it take off. I would however like to see the idiots out there that have no job, horrible credit and are considered high risk to be banned from putting up their sob stories and begging for money on the site.
    This platform should be for credit worthy people only and all the peoples identities and backgrounds should be checked before being allowed to participate.

  10. Jose says:

    If I’m to lend money, even if its $50 dollars, I should have the right to have an address and/or phone number of the borrower not just his/her “borrower’s member page”. When people ask for a bank loan they must go to the bank. I’d want to be like a bank and talk to the person and see what perceptions I get from this person. I think the Prosper.com folks have to do a better job of assuring lenders that their lenders have some sort of protection.

  11. Liz says:

    Whoa- hold on! Let’s sit back and reflect upon WHY people don’t go to the bank for loans. They are sick of rejection! It’s sickening to me, that one has to have perfect credit to obtain a loan, when most people who are requesting loans actually need them to consolidate all the high-interest debt they have in the first place. It’s one big, vicious circle. I agree that those who REPEATEDLY put themselves in a bad situation shouldn’t be able to get their 10th chance, but what about those of us that got into a bad spot at the hands of others? Bad marriage, death of a spouse, natural didasters, etc. ? Those are the people that need someone to help-not give a handout-but help them out of it. Those are the people who, because their credit score wasn’t perfect, are constantly being rejected by all those “friendly” willing to serve your needs banks.

  12. Michael says:

    A fine example of the potential for fruad at Prosper whould be the JessM and DebbieS loan listings. Search the forums for those two, it is quite entertaining. There are quite a few others also, but the individual behind these two just doesn’t want to quit…

  13. Rhonda Alfieri says:

    I join Prosper the end of July 2006. I placed a request for a loan. On the my homepage, I posted picture of myself, my son, my cat and my roses that I enjoy growing. I was ridiculed, called a bitch, made fun of my religious beliefs, was called other sorry names, made fun of, told me never loan money to someone like you, you’ll never pay it back. Copied and posted a picture of my son and made fun of him and where we are from Alabama. Made very nasty jokes and insulting remarks. Judge me down to nailing my coffin shut, and you’ll never get funded here. This is what people go through on this site. I am not the only one, there are many others who are requesting loans and they are treated with disrespect to the utmost.

    I have all 250 pages printed to copy and mail to various networks and magazines, and the BBB. I approached Prosper Customer Service with this, and they absolutely nothing.

    I do believe all of the media and online advertisement is given this site too much credit. People are treated extremely terrible to try and get funding. You need to go to there site, [site link removed, site is no longer available] and read the threads under Review My Listing. I am Miss Dixie, Need To Repair My Car. This will give you an idea of how they treat people.

    Please do not overlook this message, if you really want to know more about Prosper.

    • Alabama is Embarrassed says:

      Your grammar alone would prevent me from lending to you. Please check your posts prior to submitting, if you want to be taken seriously……..

  14. Fairplay says:

    In Michael’s May 20th post, he pointed out the Debbie and Jess listings.

    The loan is now defaulting.

    http://forums.prosper.com/index.php?showtopic=10050

  15. Dan says:

    Just a couple notes of interest:

    Prosper Borrower JessM arrested on extortion charges:
    link

    Rhonda Alfieri / Ms Dixie: I searched and searched and couldn’t find any abuse against you on the forums, just unfortunate advice that you apparently would have an uphill battle getting funded with your credit history and downpayment situation. Was there more to forum posts that I’m missing?

  16. Thomas says:

    Those who say that people with good credit wouldn’t even bother using Prosper are wrong because there are many situations in which traditional banks have parameters that might work ON AVERAGE but sometimes not on an individual basis.

    For example, my credit score is excellent and I already have a very lucrative job offer out-of-state, but I will be starting that job in mid-June. I just graduated from business school in December, and in the meantime I will stay in the same place after my fiancee graduates and we get married.

    For a business professional, it is very hard to get a temp job, so, now, I am technically unemployed, and banks would not lend me the money because of this. Most credit officials have no idea about risk management and only work based on parameters, don’t ask them to think or put some common sense into their policies.

    With this being said, something like Prosper is definitely great for those in my situation.

  17. Maclenders says:

    Prime grade borrowers can find great deals on prosper especially when they need to borrow more than 10000. credit cards often has short term rates and once you get above $10k the rates other lenders provide aren’t that good for unsecured loans..

  18. Dan says:

    I did a piece on Prosper on my Everydayfinance site, with links to some strategies and forums. I can attest to it somewhat since I signed up a few weeks ago and have done ~$1000 in loans so far. I only started with $2000, but the diversified income potential is very appealing. While I agree with the potential for abuse, there is a nice check and balance system with incentives, which is the group aspect. There are some groups which have 100% performance on their loans. If you stick with the successful groups, you may give up a bit on the return, but have a much lower likelihood of a loss. I would be surprised if anyone doing their homework actually loses money if they’re spreading out their loans. Will report back in a week or two on my personal experience once the loan payments start coming due. Until then, good luck! Dan

  19. Jane Doe says:

    I signed up for Prosper because a friend of mine told me about it, I was trying to get a loan to consolidate my credit cards & also some money for school. I got fully funded for a loan of $12000 @ 11.49% but when I didn’t answer my phone number to “verify” (yet again) who I was they canceled my listing, and will not allow me to re-list. I also called their “help” who was really no help and basically said I was SOL. And when I asked for the Supervisor I got hung up on & I’ve been playing phone tag with the Supervisor for the past week & it doesn’t sound like they’re going to let me re-list my loan. So just remember to pick up your phone when they call, it doesnt matter if youre busy or not.. you’ll miss out on your loan and all future loans by missing the call. STUPID.

  20. sarathy says:

    Hi,

    If you are interested in secured lending have a look at my-lending.com. It is a people to people lending on the strength of collateral given by borrower on book entry form in favour of the lender. Hence the interest of the lender is fully protected.

  21. Biz Lender says:

    As a self-employed, and self funded business owner, the Prosper model is appealing. I sweated for over 30 years to get where I am now. Without collateral or contact with the borrower I don’t see the risk as being worth it.
    I’ve borrowed from friends, family and banks, and all wanted and got enough info and contact from me to assure the payback. I never paid more than 6%.
    I used my receivables, my property, my car, anything to back up the loan and give the lender a stake in my success. Lending more to folks deep in high rate debt without collateral is bad business. Prosper needs to find a way to secure the debt first before many savvy lenders will open their wallets.

  22. PROSPER MEMBER says:

    I have had a great experience with prosper. I got a 18,500 loan for 10.6% saving me hundreds of dollars.

    They verified everything about me before they closed on the loan.

    I have since become a lender. I have had several loans that I lended to not make it through the verification process. That gives me confidence that prosper is doing their part to verify information that borrowers are submitting.

    Overall it is a great program.

    I limit my risk by not putting all my eggs in one basket. I also am very selective in which listing I will lend $ to.

    You cant get a better rate than on prosper.

  23. April says:

    I found out as a borrower that Prosper does not contact the borrower to verify income, though their website says they will. They use other means, such as a Credit agency.

    However, a person’s annual income can vary greatly from one year to the next or even month to month. For instance, I make $10 hour more this year than I did last year, and $5 hour more than I did six months ago.

    When Prosper could not verify income. They delisted the funded loan and canceled the account. Prosper made no attempt to find contact the borrower for income verification.

    If this is how Prosper does business, then you can’t expect much from them as a lender if Prosper will not even do real research.

  24. wayne says:

    I’ve used prosper as a borrower and also now as a lender.

    Yes, there is risk… I try to limit it by being very selective of who I lend to.. also, I keep my loan amounts small. That way if one goes bad, it wont kill me..

    but the AVERAGE interest rate of the loans I’m funding is 26.53%… Havent had one go bad on me yet. Youre not going to find that rate at the bank

  25. ed tse says:

    If we are picky, nothing is going to be perfect without fault.
    If we don’t believe in people and concentrated just on the bad side of people, nothing can be called “civilization.”
    I agree that some people is going to abuse whatever a system you name it and play with it, we simply can’t avoid it shortcomings just like a government that has been called “a necessary evil” for a long time. But nowadays, a lot of people are asking a more powerful government after subprime loan crisis.
    We are going to lost our right direction to disregard look down our human nature and ignore the good benefits of P2P lending if we just want to count on institutions.
    Please don’t assume anything has no value, except money or return. How we can help those unfortunate invisible poor folks? If you don’t mind, I will use an analogy of lottery system. You buy some lottery tickets in a hope to hit the Jack pot. How often you win and screwed up by our governments?
    Now, look at how often you can help those poor get back up. Besides the interests you may collect, there is one thing most reward to me: satisfaction to help others? In some cases I may take in a loss for some trash people, it will cost me some hundred bucks. It still be within my limits as a donation to charity. It won’t lose your arms or legs as those Wall Street big fats.
    So compare its bright side and ugly side of P2P lending. I believe in that most poor or working people are with honor and dignity; I read reports enough to make me so upset to stop writing a week. Clearly, they are abandoned by those politicians who just provide lip service to the Main Street.
    We have to extend our hands out to help each other when the Main Street is desperately in need of help.


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