As some of you know, I’ve been lending money on Prosper since February 2006. I’ve been intrigued by P2P lending for at least these two reasons:

It makes available an asset class not heavily correlated with stocks, real estate, or commodities
It provides an opportunity for a more efficient marketplace for loans by opening it up to everyone

Some people disagree with these statements. That’s fine, there’s definitely some room for discussion on either side of the fence.
When I went to Prosper Days to learn more about Prosper, one of biggest things the company talked about was social capital. [...]

Continue reading → Prosper Borrowers: Buy My Endorsement For A Better Loan Rate

Never lower your standards just to create diversification

I don’t know really what else to say! There is no excuse for bidding on a poor Prosper listing. There will be plenty of listings coming through the Prosper pipeline. You’ll find another listing to bid on.

Don’t rush, take your time, and never lower your standards!

Find your sweet spot

We’ve all heard the adage “Don’t put all of your eggs in one basket” and that’s terrific advice. The question is often asked “How many loans do I need to be diversified?” Rather, the first question you should ask is “What is the fewest number of loans I would be uncomfortable holding in my portfolio?”

Continue reading → Diversification NO-NOs on Prosper.com

A few days ago Time.com announced their “50 Best Websites 2007″ list, which included our friends at Prosper!

From Time.com:

Our 2007 picks are the best examples of what’s new and exciting about the Web right now. Here we honor sites with exceptional style and smarts, sites that offer new and improved ways to access and share content, generate our own and otherwise enrich the online (and off-line) experience.

Continue reading → Prosper.com Makes Time’s “50 Best Websites 2007″

Prosper.com uses Experian’s Scorex Plus model for credit scoring. A credit grade is then assigned to each borrower based on that score. For more information on Prosper’s grading system, and the definitions of the credit data, click here. (link)

The exact method of calculating the credit score is proprietary to Experian. Some of the data that Prosper lenders can see go into creating the credit score. Some other info that we cannot see most likely also affects the calculation. It is clear that some data details have a larger impact on the grade, such as utilization, while others are less important.

Any lender that has perused the Prosper marketplace can see the wide variety of credit data that make up each credit grade. Have you ever seen a “B” grade borrower’s credit data, only to exclaim “how in the heck is this a B?!” The smart people at Experian might disagree with you, but it does seem that using only the credit grade to assign risk on Prosper is not enough. (see bottom for related articles)

Today we’ll look at 10 “C” grade borrowers on Prosper.com to show some of the variety in credit data within that credit band.

Continue reading → Anatomy of a “C” Credit Grade on Prosper.com

In an earlier post (link), I had addressed the issue of Prosper.com itself. (not a scam)

However, the users of the Prosper.com platform are an entirely different matter. Four things about the marketplace draw out all sorts:

- the site is relatively new
- there are users that need money, some desperately so (borrowers)
- there are users that have money (lenders)
- there are ways to make money that involve neither borrowing nor lending (group leaders)

The site is relatively new.

While doing the best to provide an open and fair marketplace, there is only so much that the developers of Prosper could foresee when developing the site. As problems arise, it appears that Prosper is doing its best to make subtle changes to minimize fraud and/or “scamming” on the site. However, as a new and growing site, there are other developments that need attention as well. Resources get tight, and problems might not be addressed as quickly as one would assume.

For example, in February 2007, Prosper announced its “100% Identity Theft Guarantee”. (link) It appears this guarantee has been used on some fraudulent loans already, but don’t expect it for every bad loan.

There are users that need money.

It seems that finding an audience of those desperate for money is quite easy on Prosper. Although not all borrowers registered on the site can be classified as “desperate”, a quick perusal of the open listings on the site shows that many are.

Financial products, outside of Prosper, targeted toward the desperate by all appearances seem to be quite profitable. There has been at least one allegation of harvesting names and e-mail addresses from Prosper users for the off-site marketing of such products. (link)

There are users that have money.

If you are a lender, it should be obvious that lending money to strangers on the internet is risky. When presenting a listing, borrowers have a small area to describe why they need a loan, how they will pay it back, or whatever other information they feel like providing.

Can you be sure that all borrowers are telling the truth, or that Prosper verifies the accuracy of everything stated in a listing? - No

One of the most notorious borrowers on Prosper can be read about here. (link) and (link) I should note, however, that the mother’s loan appears to be paying on time at the moment.

There are ways to make money that involve neither borrowing nor lending

Group Leaders on Prosper can make money through their group. Group Leaders do not need to be borrowers or lenders.

Prosper offers Group Leaders compensation for their activities on the site. The reward package for Group Leaders was changed in February 2007, increasing the amount of money one could make as a Group Leader. These large incentives have the possibility of tempting many to “game the system”.

Here is an recent example of a Group Leader allegedly violating Prosper Terms of Service and perhaps causing financial damage to a borrower. (link)

Also, here is an announcement of the removal of a Group Leader (mentioned earlier in the post) from the Prosper marketplace (link)

So what does this mean for the typical Prosper user?

- Educate yourself about the Prosper marketplace (link) (link)
- Trust no one but yourself!

Oh, and use a little common sense.

Continue reading → Is Prosper.com a Scam? (part II)

Yes

(based on my last post, one can tell I am not a fan of Groups on Prosper)

How should I describe the group failure at Prosper.com ? Poorly Executed? Unequivocal? Colossal?

I view the failure of groups as they stand only on my observation. But luckily there are some much smarter and more educated than me that are in the process of researching the structure of groups.

I cannot wait to see the final results, but here are a couple of blog posts by a researcher, sanjeev, who has discussed his initial research. Enjoy!

Group Reputation System at Prosper.com

Group Reputation System at Prosper.com - II

sanjeev’s blog

Continue reading → Has the Prosper.com Group System Failed Borrowers and Lenders?

In my last post (link) , we took a look at the validity of the Experian default statistics used by Prosper.com (go)

Do Experian default statistics really mean anything then?

Well sure. But one needs to think like a bank for the data to be relevant.

The default statistics provided by Experian is generated from the performance of “Bank Card Products”, meaning the bank both approved the application, and set a credit limit.

When lending on Prosper.com, one cannot use the credit grade (AA,A,B,C,D,E,HR) as the sole means of assessing risk. This chart was shown in the previous post:

As you can see, based on credit grade alone, Prosper loans do not appear to conform to the Experian default data (compare yellow and green columns).

What happens when the lender begins to use some of the additional credit data provided by Prosper.com? (begins to think like a bank)

In the above data set, if a lender were to only lend on listings where the borrower had 0 current delinquencies, the performance of the loans changes dramatically.

When comparing Table 2 to Table 1, there are several things to take note of:

- The Average Interest Rate drops slightly. This means that lenders on these loans are assigning a lower risk to this type of listing.

- The Average Annual Return improves. This means that despite the lower interest rates, this loan set is performing much better.

- The Net Defaults (actual performance) still do not come close to the expected performance (Experian’s default data)

One more table. In addition to the criteria of Table 2, we will only look at loans where the borrower had 0-2 recent credit inquiries, and requested $7,500 or less:

Again, there are several things to take note of:

- The Average Interest Rate drops again. This means that lenders on these loans are assigning an even lower risk to this type of listing.

- The Net Defaults (actual performance) start approaching the expected performance (Experian’s default data)

- The Average Annual Return actually drops for the AA and A grades

It is easy to see that when applying a little logic to one’s Prosper.com lending strategy, one can approach the expected performance given by the Experian default data. However, in doing so one can sometimes effect their overall return.

What does this mean for the Prosper.com lender?

- Think like a bank when analyzing listings

- It is more important to maximize your Average Annual Return (which includes defaults and service fees) than it is to try to maximize your Average Interest Rate, or to match the expected default performance provided by Experian

- Learn to love Prosper’s “Performance Page” to see how loans have performed in the past (link)

Continue reading → Lending on Prosper.com? Think Like a Bank.

Experian is the credit reporting agency that Prosper.com uses to provide credit information and assign credit grades (AA,A,B,C,D,E,HR) to borrowers.

Prosper says “A credit grade is a measure of the likelihood that a borrower will repay his or her loan. We also provide the following table to lenders, which shows historical default rates by credit grade for borrowers with normal (<20%) debt Link

Here is the table provided:

Which has this explanation underneath:

“Source of data: This data comes from Experian, one of the major credit reporting agencies. The credit grade is derived from the Experian Scorex PLUSSM model which is built for predicting risk on new accounts on all types of traditional consumer credit products. Consumer credit products include, among other things, auto finance contracts and loans, mortgage and home equity loans, and credit cards. The average annualized default rate of borrowers is derived from performance of new accounts on bank card products. The default data is observed over an industry-standard 24 month period, which is then converted to an annualized average rate. Accounts in “default” include those which are charged-off and where the borrower has filed bankruptcy. Default data was created using a sample size of 251,000 accounts. For more information about the data used to arrive at these numbers, please contact Experian.”

The key sentence in the explanation of the chart is “The average annualized default rate of borrowers is derived from performance of new accounts on bank card products”

What this means is that the data used to derive the historical default rates for each credit grade are based on the repayment performance of individuals that can actually get a credit card. Not only that, based on the applicants credit, the credit card company will also assign a credit limit (max amount of money that can be borrowed).

What criteria do credit card companies use when accepting/denying credit card applications and assigning credit limits? I certainly don’t know that, and I don’t expect them to share their secrets with me either (we are competing with them after all).

What I’m getting at is that on Prosper.com, a borrower that shows a “C” credit grade only falls into the “C” risk profile if their credit information is good enough to allow them to get a credit card. On top of that, if a credit card company would typically assign them, let’s say, a $1,000 credit limit, and they are asking for a $15,000 Prosper loan, the risk for that borrower is much different.

To prove the point, I offer the following table. (see Prosper.com for explanations of the data and the terms used)

* - Experian default data for these grades are shown different than the first chart shown in this post. Credit grades E and HR were redefined after the loans in this sample originated, and the default rates shown represent Experian’s data at the time.

Now, compare the “Net Default” column (actual performance) to the “Experian Avg. Default Rate” column (predicted performance). Big difference, right?

Is Experian’s data wrong? What is the cause of the discrepancy? In my opinion, Prosper lenders are lending money to people that, based on the credit information provided, either:

- shouldn’t be loaned any money at all (a credit card company would reject the application)
- are requesting loan amounts far higher than the credit limit a credit card company would assign

What does this mean for you, the lender?

- Understand the data you are using (i.e. Experian’s default rates) before you bid on a listing
- YOU are underwriting these loans and must be responsible for what you bid on
- Learn how to use the additional credit data Prosper provides

Hopefully, this blog will become a source for you to improve your lending experience on Prosper.com. Stay tuned for more great stuff.

Continue reading → Do the Credit Grades Given on Prosper.com Properly Assign Risk?

Before diving into lending on Prosper.com, one must ask “Can I really make money on Prosper?”

Most suppose they can. Many suppose they will make a killing. Many think they are smarter than most other lenders, and can produce returns of over 10% easily.

Before you begin lending on Prosper, it is wise to see how others before you have done. Excellent sites like www.lendingstats.com and www.ericscc.com use and display data provided directly from Prosper.com to track lender performance.

The total number of lenders that are included on the graph is 338.

The mean ROI of this group is 5.8%

The weighted average (based on dollar amount) ROI of this group is 4.6%

Why do you want to be a lender on Prosper? (link to previous post)

Do you wish to make a killing and expect a return greater than 10%? You better be pretty damn good then. As you can see, not many are achieving this.

Are you hoping to just beat what you could make on traditionally “safe” investments? (about 5%+) Again, you better be pretty damn good. Almost half of the lenders used in this analysis are underperforming this benchmark.

You can also see on the chart that there are many who are losing money.

The point of this blog is not to scare you away from the Prosper Marketplace. This blog hopes to be a resource for you and offer strategies that will give you the chance to make it on the right side of the bell curve above.

Continue reading → Can I Make Money on Prosper.com?

From my conversations with other Prosper.com members, and from reading the Prosper discussion forums, it seems there are various reasons people become lenders on Prosper:

- to make money (period)
- to help those in need (and make a little money in the process)
- to participate in changing the lending industry (if that is possible)
- to experiment with the new platform (with fun money)

Prosper describes itself as “Prosper, America’s first people-to-people lending marketplace, was created to make consumer lending more financially and socially rewarding for everyone.” link

The idea is that lenders will be willing to lend money at rates lower than those offered by banks yet higher than what could be made off of traditionally “safe” fixed income investments, such as money markets, CD’s, and US treasuries.

But is it possible to achieve rates higher than “safe” investments?

The short answer is “yes”. It is also possible to achieve much lower rates compared to “safe” investments or even lose money. (more on this another time)

So, if you want to lend to help those in need, you will not have a problem on Prosper.com

If you want to lend on Prosper for any of the other reasons (to make money, change the lending industry, or to experiment) you must do so successfully and beat the returns of “safe” investments, which is no easy task on Prosper.com.

The next post will show how lenders on Prosper have done so far.

Continue reading → Why do you want to lend money on Prosper.com?

Is Prosper.com a scam?

Simply - no

This is the first thing that came to my mind when I first heard of Prosper.com more than 1 year ago (in early 2006, not too long after they launched the site to the public). An internet startup that requires full name, address, and social security number?

Yikes!

Based on my own involvement with Prosper, I can comfortably say “Prosper is not a scam!”.

Here are some recent articles on Prosper:

U.S News and World Report: “Loans From Strangers Can Help a Start-Up to Prosper” (March 4, 2007)

“Launched just over a year ago by E-Loan cofounder Chris Larsen, Prosper has already attracted 200,000 users.”

Forbes Magazine: “The Ebay of Loans” (Feb. 23, 2007)

“Prosper’s loan volume is growing at $6.3 million a month. Larsen, 46, has himself invested $120,000 in 240 loans. He prefers proven borrowers; his portfolio’s mean interest rate: 11.4%. “It’s fairly addicting,” Larsen says of the loan-picking process.”

ABC News Good Morning America: “Bad Credit Borrowers Can Get Loans From You” (March 5, 2007)

“Penic’s only alternative would have been to borrow the money on a credit card — in her case, at a staggering 29 percent interest. But now, she has the money for her chocolate fountain, at 15 percent interest. “

Kiplingers: “Be Your Own Bank” (March 2007)

“The online-auction culture strikes again. Prosper.com, a person-to-person lending organization, is aiming to be the eBay of personal loans. “

Smart Money Magazine: “The Banker Next Door” (March 20, 2007)

“Everyone agrees that it’s a clever idea. ‘The basic concept is appealing,” says Jack Guttentag, professor of finance emeritus at the Wharton School. “It brings lenders and borrowers together and takes the hassle out of it.’ “

There are certainly more reviews and articles regarding Prosper, but the above is just a sample.

So, the next question is, “Is Prosper safe?”

Read what Prosper says about the safety of their marketplace: link

Please do your own due diligence before giving out personal information over the internet. Personally, I have not had any problems regarding my information on Prosper yet. I have also withdrawn cash from my lending account with no problem. It certainly seems safe to me.

(See Part II here -> link )

Continue reading → Is Prosper.com a Scam?

My spouse and I have been lenders on the P2P borrowing website prosper.com for almost one year now.

The allure of the Prosper marketplace is that borrowing and lending takes place directly between individuals, and removes banks from the picture. We believe strongly in this concept, and wish to see it flourish in the years to come.

Borrowing on Prosper.com

Although we have not borrowed on Prosper, Prosper offers huge advantages for those seeking money; whether for debt consolidation, financing for large purchases, or financing a business expansion. Lenders on Prosper are usually willing to lend money at a lower interest rate than what banks offer, thus saving you money.

Borrowers, there is great potential for Prosper to better your personal financial situation. Prosperous PF Strategies will help you learn how to use Prosper to your advantage!

Lending on Prosper.com

Prosper offers investors a whole new assest class in which to further diversify an investment portfolio. Prosper should not be an investor’s first investment or comprise an entire investment portfolio. As investors, we use Prosper to compliment the fixed income portion of our portfolio.

When used prudently, a satisfactory rate of return may be achieved on Prosper, while offering interest rates at or below what banks offer borrowers. Prosper.com truly delivers a win-win for all participants.

Lenders, there are many opportunites to expand and improve your personal finances. Prosperous PF Strategies will help you learn how to use Prosper to your advantage!

About the Authors

My spouse and I have over 150 loans on Prosper in our accounts. After almost one year on Prosper, we are achieving an ROI greater than our other fixed income assests. Our goal is to see the Prosper Marketplace as the primary financing engine for personal loans.

Continue reading → About Prosperous Personal Finance Strategies