Prosper Peer to Peer Lending as a method of boosting returns beyond money markets or should I be cashing out

I have been a lender on Prosper since June 2006. Prosper itself has been around since about October of 2005. When I started, there were about 48,000 members. Today, there are almost 700,000. I think my joining when I did would probably qualify me as an early adopter. During this time, there were few accurate methods to gauge the appropriate default rates of borrowers (reminds me of a certain subprime fiasco) and so many folks who bid on so-called high risk loans found themselves with almost a total loss on many of their loans (default risk turned out to be much higher than many estimated). I joined Prosper strictly on a speculative nature and put in $1000 (of play money) to see if I could help some folks out and get an out-sized return on my cash.

$1000 essentially lets you bid on 20 loans as the minimum bid is $50, and I decided that diversification would help me limit my losses. My results to date:

35 loans funded
9 loans defaulted due to delinquency or bankruptcy
3 loans paid off in full
22 loans current
1 late loan clearly headed for default

That means that over a quarter of the time that I’ve loaned out money, I’ve lost almost all of it except for a few payments receive for each prior to default. This is clearly not for the faint of heart!

However, my stats are pretty misleading (intentionally – I’m telling a story here 🙂 The average rate on my defaulted loans is over 26%. By way of comparison the average rate on my current loans is about 18%. Any borrower desperate enough to take on that kind of rate (26%) should give the little voice inside your head a lot to scream about. But, this was play money, and I accepted the risk. For a time. About the beginning of 2007, I realized many of my loans were tanking, and I vowed to rein in my wild west lending habits by utilizing newly provided Prosper information on the background and behavior of borrowers to dictate my lending. I began bidding on AA and A rated loans. Since the beginning of 2007 I’ve funded 12 loans. 10 of these are A or AA rated (and 2 are already paid off). The other 2 are D rated (I slipped), and 1 of those has already defaulted.

So, here’s what I’ve found out in my year and a half journey on Prosper… You can make out-sized returns on the equivalent of a 3 year CD, but you must be willing to take on risk (and sometimes lots of it). Currently, I’m still down about $177 from my original investment. However, I’m still funding loans with the principal, interest, and late fees. And, if I had $1000 of play money now, I would certainly consider dropping it into Prosper for some AA and A rated loans. By the way, for other Prosper lenders, my search strategy demands the following:

AA rating with at least 10.2% interest or A rating with at least 10.9% interest, no DQ’s and no PR’s, DTI below 20% and verified bank account.

I also run a screen on loans with over 30% interest that are over 50% funded for when I’m feeling naughty.

NOTE: Because it is a painful topic I did not discuss the Prosper discussion forums in which I was an active member for many months only to see it totally decimated by the powers that be within Prosper. Many folks gave countless hours towards providing incredible information for both lenders and borrowers, and I’ll simply say I’m sorry to see it go.

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