Prosper.com idea

Posted on October 25, 2007 - Filed Under Business |

Legal Stuff:  I am in no way advocating the use of this program
as an investment nor a way to make money.  The information below is
just for you to read, digest, contemplate.  If you take action based on
this information, you do so at your own risk.

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Prosper.com made it’s debut.
Most financial blogs have talked it to death.  But there’s875564_fishing_for_money_2
something I
saw the other day which I found worthy of sharing with the class.

For those that don’t know, Prosper.com is where people go to either
lend or borrow money.  Based on the need or the reason, lenders can
chose how much to loan out and at what interest rate.  I’ve seen interest rates as high as 29% and as low as 7%.  The repayment period is three years (36 months).

The borrowers are ranked by credit score, which Prosper.com actually runs.  Based on your credit score, you’re assigned a credit grade.
“A” if you’re really good, “E” if you’re dangerous and don’t play nice
with other kids.  When you take out a loan from Prosper it appears just
like any other loan.  If you’re late or default, it shows up on your
credit report.

While pursuing the website this caught my eye:

Lending purpose:  Re-invest in Prosper.

There’s this group of people who borrow money in Prosper and then
turn around and lend it out . . . in Prosper.  These people are usually
in the “A” or “AA” category of credit and are asking for loans at 8 or
9%.

Let’s run some numbers.  We’ll pretend Bunny is looking to try this.

Bunny is lent $5,000 at 9%.  Her monthly repayment is $159 with a total repayment of $5724.

Bunny turns around and loans the money out averaging 15%.  She needs
to take higher risk if she’s going to make any money.  So at 15%, her
monthly income is $173 with a total repayment of $6,228.

Each month Bunny makes $14 and over three years she’s made $504.

That in itself may not be very impressive.  But she made $504 without spending a dime of her own money.

I realized after I ran the numbers that this would benefit the first
lender more than it would benefit Bunny.  To get the 15% return, Bunny
has to loan to those with “B”, “C” or even “D” credit crowd.  These are
the ones who have the track record of either paying late or going into
default.

So as the lender to Bunny, will you get stiffed?

Bunny has “A” or “AA” credit for a reason.  She manages debt.  If
Bunny gets stiff by some guy in the "D" or "C" group, Bunny is not
going to stiff on her loan.  People with good credit scores typically
fight to keep them.  In a way, Bunny is personally guaranteeing the
loan. 

Interesting how that works.

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Comments

3 Responses to “Prosper.com idea”

  1. Tom on October 26th, 2007 1:04 am

    I’m a Prosper lender and blogger. We wrote about this a couple months ago.

    Borrowing money to lend on Prosper: Wise or Foolish?
    http://prosperlending.blogspot.com/2007/07/borrowing-money-to-lend-on-prosper-wise.html

    Basically we found that it is almost always a bad idea to borrow money on Prosper to lend it out again.

  2. Clifford on October 26th, 2007 3:51 pm

    Tom, thanks for the link. Actually I spent a lot of time reading your blog today. A few stories scared me enough to realize the Prosper.com model still has some glaring holes in it.

  3. Tom on October 30th, 2007 11:58 pm

    Clifford, I’m glad you like the blog. We try to provide useful information. I find the P2P lending industry fascinating.

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