Tips for Successful Lending on Prosper.com
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Introduction to Peer-to-Peer Lending and Prosper.com
Many of you have already heard about peer-to-peer lending through Prosper.com. The online marketplace began in late 2005 and has already attracted well over half a million users. Borrowers use the site to refinance high-interest credit card debt, remodel their homes, or expand their businesses. Lenders are attracted to the higher yields than typically available in CDs or money market accounts. They also enjoy helping worthy individuals who are trying to re-establish their credit. I started lending on Prosper.com in late 2006 and offer the following advice based upon my own experience to anyone who is considering peer-to-peer lending as an investment opportunity.
1. Don't Invest too Much in Prosper.com
2. Establish an Investment Policy
Prosper.com reports numerous metrics for loans that can be incorporated into your investment policy. Using the advanced search feature, you can filter the total universe of loan requests down to just those matching your lending criteria. You can also save searches, which I find to be a great time saver.
Without a well-defined investment policy, the tendency for lenders is to chase the highest rates in each credit grade without considering the underlying credit worthiness of the borrower. These lenders typically have higher-than-average default rates and lower-than-average investment returns.
3. Build a Diversified Loan Portfolio
4. Start with Small Manual Loans
5. Develop a Bidding Model
I'm not going to lay out my bidding system for you in detail, since there is no one right way to do this. However, I will give you some clues to use as a starting point for creating your own.
Start with the three-year U.S. Treasury rate, which stands at 5.1% at the time of this writing. (You can view current Treasury rates here.) U.S. Treasury obligations are backed by the full faith and credit of the U.S. government and are considered among the safest investments available, so much so that the corresponding Treasury rate is often called the "risk-free rate" in finance theory.
In addition to the risk-free rate, we must also take into account several other factors, including:
- Prosper.com annual loan fees
- Call premium
- Default risk
Prosper.com charges an annual fee to service each loan. Currently, this fee ranges from 0.5% to 1% of the loan amount, depending on the borrower's credit grade. As a lender, you will want to pass this cost along to the borrower.
Loans on Prosper.com are callable, meaning that the borrower can prepay the loan without penalty. Obviously, it makes sense for the borrower to do this if interest rates fall. In that event, the lender would be forced to reinvest at a lower rate of return. To compensate, the lender may tack on a call premium when bidding for the loan.
Finally, since these loans are unsecured, the risk of borrower default should be a major part of your bidding model. The site provides tools and statistics you can use to gauge the risk premium for different credit grades.
Useful Web Sites for Prosper.com Lenders
- Eric's Credit Community
- Prosper.com loan data and statistics.
- Welcome to www.p2ploananalytics.com
- www.p2ploananalytics.com
- Prosper Marketplace Analytics
- Prosper Marketplace Analytics
- LendingStats
- Statistics & Tools for Prosper Investors - Prosper Loan Performance
- Wiseclerk.com
- Your tool for statistic information on loans
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Share Your Thoughts!
I love to get your feedback...
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efarmiga
May 6, 2010 @ 12:45 pm | delete
- Well done lens! Why do you recommend selecting loans manually instead of auto-bid for people who have no lending experience? Auto-bid seems to take care of figuring out what rate to bid, and spreads the risk across a pool of borrowers. Selecting manually may make it feel like lower risk, but what does an inexperienced lender really know about borrower default risk and what rates to bid? I've been struggling with this question and welcome advice.
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Einsteinium Apr 19, 2010 @ 8:50 am | delete
- Really great site - I'm a lender too.
Just a note - you should update the "Useful" module - not all of those sites are still running. Also, the new minimum loan amount is now $25.
And Tammy - I wouldn't say that "most" don't pay. It depends a lot on the type of lenders you give money, too. The better the credit grade, the better the chance that someone is going to pay you back. (But the lower their rate is probably going to be.)
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Adamophoto Aug 22, 2009 @ 12:01 pm | delete
- Makes money for me, better than any CD rate.
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Tammy
May 1, 2009 @ 10:24 am | delete
- Dont loan money to prosper people . They normally dont pay them back. I got stiffed 450.00 dollars.
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rydigga
Mar 31, 2009 @ 9:29 am | delete
- Hi,
Very informative lens. Thanks for sharing your insight :)
Ryan
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