Top 3 Reasons Prosper Might Not Be For You
Prosper, along with a few other websites (Learn more about Person to Person Lending) are advertising the ability to do people-to-people lending in order to make it better for the lender in terms of making the money and the borrower in terms of getting a lower rate. It is an amazing concept to me really. It removes the banks from the equation and although the loans are generally small (under 10K) there are a few that are large amounts.
How It Works
Understanding how prosper works will make several of these reasons much clearer. Prosper generally allows people to sign up and submit requests for funding their loan. When someone signs up, they often have applied and been accepted to a group. This group will help them get the best rates and also provides some real-person kind of reliablity to the borrower so that the lenders feel more comfortable.
All loans have a three year repayment period and if a loan defaults, a collection agency attempts to collect the loan. In the case that there are more lenders who want to lend for a loan than there are borrowers, there will be a bidding war where the rate of the loan is bid down and the lender willing to take the lowest rate wins.
Reasons Why It Might Not Be For You
In order to bid on loans, you must have a funded prosper account. This money is sent via ACH transfer from your bank account to your prosper account. However, the transfer for my funds too several days longer than other services. This might be a turn off for you.
Its risky. The bottom line is that this “feels” riskier than a somewhat diversified stock index or mutual fund. I feel like the chances are higher for a default on an individual loan than on a whole stock. Are stocks prone to movements up and down, yes. However, do I think that a stock will usually lose 100% of its value or even 50%? No. If I felt that way, I wouldn’t be buying the inevestment.
Loans are always three years long and there is no way to accelerate. In most cases, you can just sell your stocks and you will usually get significant amount of your investment back. However, in the case of loans, you will likely only get 1, 2, or 3, dollars at a time unless you invest a large sum in a single loan.
On a competetitive loan, rates may go as low as 9%. When compared with the historic average of the stock market at 10% and FDIC insured savings accounts at 4.35-5%, Prosper might not be worth it to you.You have to ask yourself if a 2-3% gain is worth the time. Or if a large percentage gain is worth the time to search for it.
Experience So Far
Personally, to get 2 loans done, I’ve spent more than an hour. For each loan I bid 50 dollars because that was all I felt comfortable with. But for a 4% return on 50 dollars where I have to keep my money tied up for 3 years and cannot get it, it is nothing. And, there is a fee which eats another half a percent in maintenance etc. So, all told, I am only really earning between 1-3 percent more by using prosper.
Given all these reasons, as much as I hate to admit it, I don’t think that Prosper is a very good tool until there are other sources of income and assets before prosper; if not for the risk, then for the opportunity cost of searching on loans and bidding on them.
Summary Of Reasons:
1. The time to fund Prosper Account is long
2. As an investment it seems quite risky
3. Loans are repaid over 3 years, keeping capital tied up
4. Rates are not competitive with the stock market average return
5. Time is wasted to search for, and bid on loans when you could probably be working and make more money at a job than by searching the internet for loans to bid on.
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Written by Jed Pittman on November 2nd, 2006 with
3 comments.
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November 2nd, 2006 at 4:30 pm
You make two key assertions:
(a) Rate of return not significant… Disagree
(b) Opportunity cost… Agree
On rate of return, I’m consistently getting a 17% + return. Only 3-4% of AA, A, B, C and D loans on prosper are late in making payments. That’s very little risk for me. So long as you cherry pick your loans well, you can book good returns.
I would argue that everybody shouldn’t expect to get the historical returns from the stock market (11-13%) going forward b/c they are just that, historical, and based on a past averages. Some people coming into the market may buy in at a peak or valley in the market thereby greatly affect their results. I chosen to add prosper to a pre-existing bond and stock portfolio to greater diversify my investments.
Very good point on opportunity costs. I’m losing money making $50 bids. I view it as purely a hobby to supplement my income. Something that I can do concurrent w/ other things like watching the TV, etc. If somebody wanted to live off of prosper, they would have to first have the capital to invest and then have to figure a suitable bid where the net present value (NPV) represented a suitable reward for 20 to 80 minutes worth of searching and lender-borrower correspondence per loan.
November 2nd, 2006 at 4:58 pm
Opportunity cost, I think, can be managed. Like Finance Junkie, I can bid on loans while I’m doing other things that I would normally be do. Or, I could take another plan and set some standing orders (bids that will be placed without me reviewing). That would bring my opportunity costs to almost nothing.
As Finance Junkie showed, the default rates are not bad. This may be a small sample size, I’m not sure. Even so I think it’s less risky than investing in some small stocks. How many of those companies go out of business? There are surely quite a few and I’d venture more than 3-4%. It may “feel” risky, but is it really more risky? I’m not so sure.
Really, I only see the time to fund an account and the 3 year loan as the only thing I agree with. Still, funding an account can be managed - I put in some money a week in advance of when I want to put it in play, knowing that it may take that long to happen. I’m okay with the 3 year time span, because I want to keep a steady stream of money in there. At some of the rates I’m getting I’d rather have it be 10 years :). Still, I think I read in a FAQ that at some point you’d be able to sell your loan to someone else. I know it’s not there now and you can’t count it, but knowing that’s possible, it might be worth keeping an Prosper if you like everything else.
November 28th, 2006 at 2:57 pm
I agree with lazy man and money. The oppurtunity cost can be managed to some extent. I usually bid on loan when i’m watching TV or doing some other research on the internet. Time is presious, and if we plan it well we can multitask even beyond our imagination. I’m an investment freak and i like to try things because its my fervent believe that 10 years from now all these small small investment will add up to an amazing portfolio. The only thing i dislike about prosper so far is the amount of time it takes for the fund to get to your prosper account. I really think prosper should look into making it a bit faster.