The Walrus.biz

Making money through Social lending sites

I opened an account with Prosper.com in an attempt to start a new passive income campaign. The idea that I could become a “lender” through an established lending site made me ambitious enough to transfer a few hundred dollars to start. However, I happened to have read most of the positive reviews before I transferred some money and more of the critical reviews after the transfer; now I am second-guessing my decision.

Prosper.com description
One of the descriptions used for Prosper is “eBay + PayPal + Match.com”. Lenders find bidders based on credit score, personal story, history, and motives. They bid on interest rates and get paid a premium at the end of the terms (typically three years).

Borrowers
People looking for cash sign up for Prosper and a profile is automatically created. Their personal credit history is for everyone to see: Approximate credit score, debt to income ratio, history of delinquencies, amount of revolving credit, etc. Using this data, Prosper assigns borrowers a letter Grade. AA, A, B, C, D, E, and HR (huge risk). The grade has an impact on the interest rate that is expected to pay.

This is a breakdown of Grade based on Credit Score

AA- 760+
A- 720-759
B- 680-719
C- 640-679
D- 600-639
E- 560-599
HR- 520-559

Lenders
Prosper let’s you purchase a portion of a loan by funding it with a minimum of $50. The idea is that instead of lending a single person $1,000, you can lend 20 people $50. This type of diversification let’s you minimize the risk of non-payment, more common with users on the lower end of the credit ranking.

Take a look at this sample listing for an idea as to what to expect when checking out a listing. “Borrowers” are completely anonymous, referred to using their screen name, and each has a story to tell and a reason for borrowing. In addition to credit data, lenders also see the borrower’s group membership, if any, friendships with other Prosper members, endorsement from those friends, past listings and prior Prosper loans.

Average results

Using the Prosper.com data, annual Return on Investment goes as following:

Lending to AA borrowers: 8.48%
Lending to A borrowers: 6.78%
Lending to B borrowers: 5.85%
Lending to C borrowers: 7.03%

However, I saw this statistic on Wikipedia: As of November 8, 2007, the median estimated return on investment (”ROI”) for Prosper lenders with more than 20 loans and an average loan age greater than 6 months is 4.89%.^[13] — after taking into account Prosper’s servicing fee charged to lenders (1% annual fee on A-HR loans).^[14]

A return on investment of 5%, on average? That’s comparable to a savings account at ING. Is Prosper.com really worth it, and is money really to be made? I’m not so sure. It’s an illiquid investment. You need to wait 3 years before you get your money back, if the borrower doesn’t default, and that leaves you with your hands tied if the money is needed in the future. It might be worth it if you could guarantee rates of 9-12%, but not 5%. I think a careful study of the borrowers and some investigation of their credit history is important. Mostly importantly, I think their personal stories leave us with a good idea as to how risky they are. Some people are borrowing to fund real estate properties, businesses, and college education. Some are looking to pay off large amounts of credit card debt. Who would YOU trust with your money?

Right now I am contemplating whether or not to transfer my money back into my bank account and focus on something a little more worthy of my greenbacks.