Borrowing on Prosper
I've written a lot about my experience as a lender on Prosper. Since I first started, Prosper has made huge improvements in their interface and their ability to properly vet potential borrowers. Default rates have dropped and current investors in low risk loans seem pleased with their returns in the high single digits (Interested in becoming an investor?)
But what about the borrower side? Let me tell you a story.
Back in mid 2008 I had a friend who was working on his post-doc. Through the years of his education, he had supplemented his student loans with credit card debt. Now that he was out of school and working, he realized that over half of his salary was going to service his debt! He found this demoralizing and came to me for advice…and money.
I've never been one who liked to mix friends and money. All of my psych training makes me keenly aware of creating power differentials and maintaining appropriate boundaries (part of why I blog anonymously). Still, his story was compelling and his need was great AND I believed in his future job prospects. Unfortunately, he needed far more money ($9,500) than I could give him at the time as I was saving for an upcoming down payment on my current home.
I explained my own financial constraints and suggested Prosper as a potential alternative. He looked at it and went through Prosper's relatively easy sign up process. I then helped him construct his listing to post on the website. There's lots of tricks to entice investors. Some of these are emotional (e.g. pictures of kids, pets, or hot chicks). Others are far more rational like a listing of your monthly budget. He found a cute picture from his childhood and provided a great deal of detail on his finances. We also listed at a very attractive 20% in hopes that the loan would be bid down due to a lot of investor interest (Note: Prosper no longer allows reverse auctions). Finally, I wrote a nice endorsement for his loan. And, we posted it to Prosper.
It all worked well. I was able to scrape together $1,031.50 to bid on the loan. With my endorsement and high bid, the investors piled on. Eventually, the loan ended up fully funded at a 15% rate which was far superior to the rates on most of his credit cards at that time. My friend used the money to knock a huge chunk out of his credit card debt, and about 6 months later took a faculty position at a tier 1 research university. He dutifully paid down this loan and the rest of this debts to the degree that he was able to qualify for a mortgage too!
It was a happy ending for me as well. My final profit on the loan was ($1,259.67-$1,031.50) $228.51 over 3 years.
So, the takeaway here is that Prosper is a viable alternative to a conventional bank loan if you find their terms unacceptable. If I were ever in a situation like my friend's I would be thankful to have an option like Prosper. Here's a link if you're interested in becoming a borrower on Prosper.
I would love to hear the experiences of other borrowers in the comments section below!