Person to Person Lending

[corby]

Has anyone here tried Prosper.com as an investment vehicle? I was thinking that someone with great credit might be able to borrow money at a low rate and loan that out at a higher rate for an easy profit.

Just a thought.

Even if you had to use your own money to lend, it still might be worthwhile.

[FirstConsul]

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[WallStGolfer31]

The credit risk is too high. With limited capital, you're not able to fully diversify amongst your intended population, so therefore risk metrics can't be enforced nor analyzed, there's just too much idiosyncratic risk present. I would never do person to person lending in my life, ever.

[peterfin]

Prosper.com and similar sites are now poping up all over the web and in lots of other countries too. I have done quite a bit of research into these social lending institutions and have to say that they are too risky for me. I agree with WallStGolfer31 - too high credit risk!

[Fredledingue]

I would never put a single cent in this.

Buy corporate bonds instead.

[aquaswim47]

I used it, but I put it at the same risk level as speculating in stock options. I wouldn't put any more than 1% of your capital in Prosper whereby for options, I tend to like to use a 0.5% to 1.5% rule.

Currently, I lent money to a D borrower. My money is sure for about a year (till about October, I think) then after he might default. When a person claims bankruptcy, they cannot claim bankruptcy for another 7 years; he claimed as a result of divorce. He currently pays me an 18% interest rate. He only had $700 in credit out of an $800 limit so I thought I'd take a chance on this guy. I only placed a $50 bet on it. In my opinion, it would cost him more to default than my $50 so I thought it was worth the bet. Also, his living expenses and debt were minimal to income. I think you have to understand manual underwriting to have even a slight advantage on Prosper.

There are so many corporate bonds and preferred stocks that are paying massive coupons. For example, Wells Fargo Preferred 7% coupon is selling at a 20% discount. JCPenney is paying 7.65% and it has a solid balance sheet despite a BBB rating. In other words, it's extremely easy to get 8.5% to 10% on your money. Corporate bond funds and municipal bonds are also attractive. Revenue bonds are quite risky, though.

Even as an expert, it's very easy to lose a lot of money with Prosper. In some cases, you could have a D or E borrower that you would have that's less risky than an AA or A borrower. I realize that on average an AA borrower should be the lowest risk, but why should an AA borrower go on Prosper if they can borrow at 4% with Iberia Bank via a credit card. It's equal to prime - 1% as a rate, which is a really good deal. To get to the level of Prosper, prime would have to increase to 9.25%; in other words, one quote in the Wall St. Journal out of an entire month would have to be 9.25% or higher for Prosper to have been cheaper.

[StockJunkie]

I used it, but I put it at the same risk level as speculating in stock options. I wouldn't put any more than 1% of your capital in Prosper whereby for options, I tend to like to use a 0.5% to 1.5% rule.

Great mentality, I am very hesistant to try sites like these and haven't found a good reason to. I think the world is finding out now that AA ratings aren't as reliable as they once were.

Any other big sites exist like prosper or is it the largest in this arena?

[aquaswim47]

Originally Posted by StockJunkie

Great mentality, I am very hesistant to try sites like these and haven't found a good reason to. I think the world is finding out now that AA ratings aren't as reliable as they once were.

Any other big sites exist like prosper or is it the largest in this arena?

To be honest, when I started there in September, I didn't put much credence in the credit score at all. I knew a long time ago that while it's a good benchmark, it as a standalone, may result in some form of misreading.

Manual underwriting is the only way that I come up with whether or not to take a chance on a borrower. Yes, I said the words "take a chance" since it's very high risk!!!! I use my own modified form of DTI. I also try to see if the data seems realistic. There was no guarantees that I will be right.

The D borrower I have pays me 18% on his money. So far, so good! He is an excellent credit risk since he borrowed $15,000 and had used up 95% of his "$800" available credit. The main problem is I have a lot of student loans and they didn't show up when I pretended to be a borrower. Also, it is off on my score by at least 15 points (have a score between 734 and 753) and it rates me at 719 so there could be upward and downward bias. Besides who, in their right mind, would borrow at 8.5% plus any associated fees if you can borrow from a credit card at prime - 1% if your credit is so good. The prime rate would have to rise to 9.5% or the credit card company would need to change the terms and conditions, but than you simply pay it off (if you can).

My drop on GOOG today as well as my daily expenses are more than if the borrower defaulted. In other words, I could care less. I bought GOOG at 416.47.