Peer to Peer Lending

[tulog]

I believe this whole operation is extremely unattractive from the perspective of being an investor for the following reasons:


1. No guarantees on return of capital. If a loan defaults, it is probable that no collection can be made.

2. No ability to enforce a defaulted loan through the legal system. In the real world, if you make a private loan to an individual and they default, you can take them to court, show evidence of the contractual debt, and get a judgment that is good for 10 years and can be renewed. (In California for example, you can renew a judgment after 5-10 years, each time you can add the accumulated interest at a 10% annual rate, plus any costs of collection to the judgment balance. The new judgment balances then accrues interest on this higher balance). This is a very strong incentive for a debtor to pay the judgment in full before interest accrues.

At some point you will collect the amount owed you. Prosper forbids you from having any contact whatsoever with a defaulted debtor. This is a huge red flag, and a very big investment risk.

3. The market return is going to be 1% lower than private market lending for the same risk borrowers. This is because Prosper takes an entire 1% as a fee.

I would stay far far away from this type of investment.

[tulog]

I was waiting for you to respond, slug. Your sentiment is basically how I feel about most P2Ps. At least with stocks and bonds, you can look a company's financials and get an idea of whether they are liquid enough to pay you. True that such numbers can also be massaged into the best light possible, but that I think that's still better than only seeing a borrower's credit rating.

Also, "diversifying" your funds with several borrowers does not exactly mitigate risk any more than CDOs and SIVs have mitigated risk in subprime mortgages. If your pool of borrowers have a low collective rating, then it's still risky as a whole. This isn't how diversification is suppose to work, but many still buy into this line of thinking.

Agree entirely. This is extremely risky. In my opinion, even the borrower's credit data is not a useful statistic. This is because you do not know the name of the borrower, where they live, or how they obtained the credit rating that they supposedly have. You have no evidence, other than the rating was calculated in some unknown, proprietary method by Prosper. Since you do not know who the borrower is, what their name is, or their financial condition, you will not even know if their financial circumstances change during the 36 month loan period - for example, if they declare bankruptcy you would not even know!

[tulog]

...You have basically no recourse on bad loans. Prosper forbids you from contacting delinquent borrowers and will ban you if you do it and they report you...

Even if you wanted to contact a delinquent borrower, how would you accomplish that? You don't have their name or address, or any other means of identifying them. Unless you already knew them before you made the loan, which is unlikely.

Even if you knew who they were, you would have no legal resource or leverage with a delinquent borrower, since your note is made only between you and Prosper's intermediary bank.

[gambler2075]

I think it is completely insane to loan money to some unknown person on the internet who may not even be who they say... and to have no recourse to collect on the debt? wow, I guess there is a sucker born every minute.

Here's who you could be lending to...

Prosper Lending Review: A Prosper scam: The story of Jessica Wolcott

g

[ea1776]

How does Prosper get compensated?

Good question. I'm not sure but my guess would be one or both of the following:

1. Borrower and/or lender pay a small fee for each loan.
2. Borrower pays a slightly higher rate than the return the lender gets, and Prosper takes the "juice".