Loan Review – Person to Person Lending is a service that allows people to lend money – with interest – to other people, and thus turns everyone into a bank. I’ve put off writing this review for a while because I wanted to make sure this service was legitimate before endorsing it. It is, and I’ll explain why below.

Here is how the site works: Borrowers sign up with the site, then run their credit score through the site (Prosper currently uses Experian for this). Prosper converts the borrower’s credit score into a letter grade to simply things. For example, a 700 credit score would translate into a B rating on a scale with the following grades: AA-A-B-C-D-E-HR (HR = high risk).

The borrower then tells Prosper how much they’d like to borrow and Prosper gives the borrow a feel for what they can expect to pay interest-wise on their loan. A borrower with a B rating who’s looking for $1000-5000 is currently able to borrow money at 13.95%.

Next step: The borrower then starts a week-long auction for their loan. Sticking with the B rating borrower example, the borrower would probably want to start their auction at a higher rate – say, 18%. Once that goes live, people on the lending side of Prosper (including me) will bid on the borrower’s loan in increments of $50 up to the full value of the loan. Before long, a group of dozens (if not hundreds) of lenders will, together, fulfill the loan. But there will still be plenty of time on the clock. At that point, lenders will start outbidding each other and start driving down the rate of the loan do something below 18% and probably in the 14% range based on historical patterns.

When the week is up, the borrow has the option on whether to take the lender’s offer or skip it.

If accepted, the lender’s money is transfered to the borrower, who repays the loan in fixed payments over three years (36 monthly payments).

My Experience

I’ve only used the service on the lending side, and I can tell you that it works very well. In fact, it works better than expected, but I imagine that’s because it’s still early and an imperfect market. I believe the balance of borrowers to lenders favors lenders right now, so lenders are getting surprisingly high returns on the money they lend.

My current rate of return on money I’ve lent is 13.59%. Yes, that’s correct. And none of the borrowers I’ve lent money to haven’t fallen even one day behind on their payments.

My Lending Strategy

When I first started using the site, I reviewed borrower’s stories and checked out their reasons for borrowing money. I would then bid on the cases that seemed like a fair risk. However, I was often bumped out by other lenders who came later to the same auction which led to more time than I wanted to invest. So I switched over to using Prosper’s portfolio management plan. With this, I simply tell Prosper what my risk tolerance is, and they’ll auto-bid on loans in dollar increments that I set.

This is also nice because Prosper will auto-fulfill loans whenever my account accrues $50 in repayments from other borrowers. Get that money back to work, pronto.

Common Questions

I’ve talked about this with a lot of friends, and here are the common questions I am asked.

Is this secured debt? No. There is nothing to repossess if the borrower doesn’t pay. However, lenders are required to choose a collections agency to work with on their behalf, assuming a borrower falls behind. Prosper has a separate market to help you determine which collections agency has had the best results collecting on overdue debt payments. There is a small fee for this.

How can I tell whether a borrower is legitimate? Proper publishes a ton of data about a person’s financial history after running the borrower’s credit score. This will give you a feel for how much debt they already have, how much they make, etc. You can also ask borrowers questions (and read questions and answers from other prospective lenders). Over time, the site also keeps a history of borrowers so people can build credibility up within the site similar to Ebay’s rating system.

Who started Prosper? The folks who founded e-Loan, so they have serious experience with online lending.

How do I get started?

I am definitely NOT a financial adviser, but if you want to give it a try, here is what I recommend: Sign up with the site as a lender. Go through the verification process, then fund your account with $75. Once the money hits your Prosper account, lend someone $50 to get a feel for how the system works. Once you’ve successfully done that, Prosper will give you a new-lender $25 bonus. Then lend out the remaining $50 in your account. You’re up 33% at that point and have a much better feel for whether this is something worth pursuing.

9 thoughts on “ Loan Review – Person to Person Lending”

  1. I’ve been lending on Prosper for 2 years, I don’t think it’s a good place for most people to invest their money.

    Currently, 20% of loans are on track to default. Collections are broken. Prosper lacks the ability to track bankrupt borrowers.

    Prosper is not growing fast enough to become sustainable. They have about 3 years of VC money in the bank, but at their current rate of growth, they won’t be profitable in 3 years.

    See these links for additional information:

  2. An additional comment:

    You wrote:
    My current rate of return on money I’ve lent is 13.59%. Yes, that’s correct. And none of the borrowers I’ve lent money to haven’t fallen even one day behind on their payments.

    What’s your lending ID? I’d love to look up your stats on Eric’s or Lendingstats. How long have you been lending? When did you make your first loan? It took about 6 months for my first late to show up.

    I still have a positive ROI, but barely.

    Also check out the forums at

  3. Looks like your first comment was held up for a bit due to the links. Thanks for sharing your experiences. It looks like you’ve been a pretty heavy user of the site.

    I wonder about the site-wide default rate stats. Personally, I have a hard time finding value in that data since I haven’t considered investing in loans with the highest default rates (although, as credit card companies have taught us, borrowers don’t necessarily have to pay off a loan to be profitable. ) Same with collections. Trying to collect from someone with D or HR credit must be nearly impossible since their voicemail is probably already full. I would love to see stats breaking that data down by credit scores. That’s data I could use.

    A 3-year burn rate for a company this young doesn’t phase me. The founders have access to plenty of money. It’s a network effect business, like Ebay, so economies of scale are definitely in play and being a first-mover has huge advantages.

  4. Cosmos, stpman24 is my ID. My first loan was in Jan. Thanks for pointing out LendingStats. Cool site. It goes to show that results may vary (especially based on risk), such as this portfolio.

    What kind of portfolio distribution have you been running?

  5. This is one of the worst portfolios on Prosper.

    Muleshoes was active in the first round of Prosper forums, and he didn’t listen to anybody. You can find an archive of the original official Prosper forums here:

    The portfolio that you linked to, Pensioner, is a sad story. I met him at both Prosper Days, in 07 and 08. He was interviewed in a magazine, and admitted to using several hundred thousand from a home equity loan to get in early because such high interest rates were too good to be true. He’s a really nice guy.

    In November 2007 Prosper took down the official forums and replaced them with heavily moderated forums. Prosper was unhappy with the tone and lack of control of the forums. When the archive was made available, Prosper accused of cybersquatting and threatened to sue. Funny how that was the only cybersquatting action they took, even though several other sites used Prosper in their names.

    The front page of Prosperreports has links to a fraudster that used Prosper, and an extortionist. The Jessica Wolcott story is nearly unbelievable. The Victoria Crawford fraud was uncovered by active Prosper lenders.

    Rateladder, aka Kevin Gillette, who know works for Prosper, does a monthly chart showing lates by credit grade.

    The cure rate for anything 30+ days late is so low that most people (other than Prosper in their official speeches, et al) consider it defaulted.

    Prosper makes an API download available for developers, that’s what LendingStats, Eric and Rateladder use for their data. You could download it and play around it with, too.

    You can also obtain a lot of data by using the performance data available on Prosper’s website. It’s under Bid on Loans, then Performance. Keep in mind that a loan is not eligible to be 30 days late until 30 days after the first payment is due. So if you wanted to look at all loans with a credit grade of B, the best representation would be use 2/1/06 (or was it 4/1/06 it become public—anything from 11/05 through 2/1 or 3/1/06 was test/internal use) through 4/1/08.

    Regarding collections, I’ve had 2 B loans go bad. It doesn’t appear that collections are more successful with prime/near prime borrowers than sub-prime borrowers. Across the board collections are broken. PMI hired a ops guy to handle collections, Doug Fuller, last year. He’s trying, but it hasn’t improved too much.

  6. As a former banker here in town, i will tell you that on average, loans start to go “bad” at about the 2 year mark. That was with secured loans. unsecured loans like these, i would expect some turmoil between the 8-14 month mark.

    I understand that you are getting some satisfaction from the lending that needs to be added to the equation but from a purely matematical standpoint, you are not getting enough of a return to justify the risk you are taking.

    Finally, have you tried kiva?

  7. Moraco, thanks for sharing. Based on your experience, what types of investments would you recommend instead?

    Yes, I’m a Kiva lender. Awesome service. I’ve written about it on here before. A quick search should pull that up.

  8. I was a commercial banker, not one of those personal investment types. Can’t help you there. Now, if you ask me where my personal money is right now, i will tell you: brazilian stocks and commodities. It is all about getting in front of the next bubble.

  9. Moroco Topo – You must’ve gotten killed. The Brazilian stock market has gone down almost 50% from when you posted

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