Peer-to-peer lending

[Porsche-O-Phile]

Anyone else do this? I've used Prosper.com in the past to reasonably good success (lent out a bunch of money and made a tidy little return on it) but lately I've noticed their site has barred members from allowing people to underwrite (fund) new loans - some government thing apparently.

Are there any other sites people are using for P2P lending right now? I'm considering getting a small personal loan to help bridge my current unemployment and it'll be a lot easier than going through a bank. Heck, I might just fund some too.

I'm surprised more attention hasn't been paid to these sorts of arrangements as alternatives to conventional banking, especially given how screwed up banks are these days...

[on2wheels52]

"Prosper loans are unsecured, three year fixed rate personal loans for people with good credit."

I'm doing ok with my one month fixed rate loans but I'm having trouble understanding the 'unsecured' part. What am I missing?
Jim

[Porsche-O-Phile]

Most loans are unsecured. "Secured" loans involve collateral like cars, real estate, etc. If the loan recipient defaults, the collateral is seized and sold. Credit cards, personal loans, business loans, etc. are typical examples of "unsecured" loans.

The way propser worked is someone who needed a loan could post it, then a bunch of people could "bid" on the loan at a particular rate of return. For example, if John Doe needed $3,000 for a home repair or whatever and his credit was good, he'd post something saying this and the P2P service would report on the person's creditworthiness. Their request for the money was then available for everyone to see.

You or I could then go online and see all these people asking for loan funding and decide, "gee, this guy sounds like a good risk and a decent fellow - I'll 'bid' $100 towards his loan at an X% rate". Then someone else might do the same for his loan. Someone else might offer $500. A few more people might offer $50 each. You get the idea. When the loan had enough people offering to fund portions of it totalling up to the requested amount, the loan was written (by Prosper or whomever they were using as an underwriter) and the loan recipient would pay it back - the individual people "funding" the loan would then be paid back their prorated shares plus interest.

I invested about $5,000 in this way, spread out over a bunch of different people - $200 here, $500 there, etc. Most were intermediate risk and I only had one default. But (like banks are supposed to do) my "hedged" risk more than offset the loss on the one defaulted loan (I think it was $200). Obviously people can (and sometimes do) default, but these are real loans and the penalties are real for default - their credit suffers and the loans can eventually be sent to collections (although as a "funder" you don't get anything back on this I don't think - at least I never did).

By spreading the risk around, you minimize your exposure and can make a decent profit. I think I made something like 13% on average return on my $5k, less the $200 I lost, not bad for a year or so's work - enough to buy some 911 parts (I think I netted 500-something when all was said and done).

Anyway supposedly there are a ton of these kinds of P2P lending setups - many are used in emerging markets to fund startup businesses in poor countries, etc. I'm wondering if anyone knows of one other than Prosper (since they're in government license limbo right now or whatever) that I can use? Maybe we should set one up?

[Christien]

Unsecured simply means there's no collateral put up to secure the loan. For a secured loan, one would usually put something like their car or house up for collateral, and the lender would place a lien/mortgage on it. That way the lender is secured if the loan goes into default.

[Christien]

Sounds like a good way to invest some money, with low risk. I like the idea of being able to invest large sums, but spreading it around to minimize risk. Will they provide you with data such as historical default rates? If you could find an average default rate of xx% over a few years, you'd have a pretty safe bet as to how much of your investment will go into default.

I'm surprised they wouldn't split collection proceeds with the lenders, assuming collection action was even partly successful.

How does the site make money? Do they take a percentage of the return? Or is it just ad revenue based?

[Porsche-O-Phile]

Yes they give you the creditworthiness of the loan asker expressed as a letter grade, "AA", "A", "B", etc. along with historical default rates. It's pretty slick (or was, when it was working way back when). I think the site made money on fees the loan recipient paid to get the loan processed. Can't remember if they took a cut of the interest. I think they tacked a couple percent onto what the loan recipient ended up paying, but it wasn't something you as a lender would ever see or care about. You're just making money off your money by lending it out.

[Christien]

Originally Posted by Porsche-O-Phile

I think they tacked a couple percent onto what the loan recipient ended up paying, but it wasn't something you as a lender would ever see or care about. You're just making money off your money by lending it out.

As a lender, you must care about every single aspect of the deal. Adding "a couple percent" to a loan, or charging the borrower a fee, makes paying the loan back that much more difficult and increases the chance of default. I'm not suggesting their cut WILL do so, but every bit counts.

[Porsche-O-Phile]

Yes, but they still report to you (or did, as I recall) the % of defaults based on the APR% you were charging - adjusted per their "final terms" to the borrower. So at the end of it all, it was a wash.

I get what you're saying (higher rate = higher likelihood of default), but they did account for this. I imagine other P2P sites do similar.

[Christien]

I just spent a few minutes looking at the site, and it looks really slick (I mean that in a good way, not bad). It looks like a fairly solid, well thought out program that works for everyone. Too bad they're not still accepting lenders - I'd probably get in on it for a few thousand.

[Porsche-O-Phile]

Same here - now of all times would be a GREAT time for them to be up and running. Bugs me that they're not. No idea how long this delay will be.

[911Rob]

I'm thinking about expanding my peer lending program, but it won't be for a couple months now; who knows maybe sooner.

What interest rate would really get an investor excited?
All my loans are highly secured RE commission loans. "AA"

[motion]

Updated: I was able to jump in and become a lender. Any more input on people using the site? Looks like a nice way to get a modest increase on your investment, while helping someone out.

[motion]

Digging around a bit, it seems like LendingClub.com is now the leader in this space.

[Porsche-O-Phile]

I haven't been on in a while - Prosper went through a long period of down-time related to some kind of legal trouble... I know they're back up now and aggressively courting new clients and lenders, but I've not jumped back in yet. I did have reasonably good luck with them back in the day when I actually had some extra money to play with.

[red-beard]

What is the rate of return?

[71T Targa]

Interesting, anyone want to lend me 5k?

[Porsche-O-Phile]

ROR is proportional to risk. You can choose who you want to lend to, what kind of credit they have, how much of a risk they are, etc. The higher the risk, the higher the potential gain but obviously the higher potential of default. There are good FAQs on the site that explain how it all works.

[red-beard]

Wow! The interest rates seem very high for someone with a 700+ credit score.

[Vipergrün]

Originally Posted by red-beard

Wow! The interest rates seem very high for someone with a 700+ credit score.

Even paying 13% it's probably cheaper than racking up credit card debt.

Just a thought.

[TheMentat]

Cool idea...

It seems that the down time was due to an SEC crackdown. They are now registered, but have had to change the business model somewhat.