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Prosper People-to-People Lending Marketplace

I’ve seen a bunch of personal finance bloggers talk about Prosper [3] 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 [4], 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 [5] 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.