Update: from prosper.com “We are not accepting new lender registrations or new commitments from existing lenders at this time”. Not at all surprising to me.
Some people seem to love lending and borrowing money on Prosper.com. The only problem is, a lot of people don’t get around to paying back the money they borrowed.
I like to follow Fred 93’s blog to get a good look at what is happening with bad loans at Prosper. The most recent post tells us that Prosper is finally filing lawsuits against some of the borrowers who aren’t paying back their loans.
Prosper.com – the lawsuits begin
The good news is that legal action is finally happening. We’ve waited a long long time for this, and its good to finally see some serious action against deadbeats who have stiffed us. Prosper’s collection activity up to this point has consisted of phone calls, with the recently added modern technological innovation of a letter asking deadbeats to repay.
The bad news is that the legal test project is very small, and is moving at a snail’s pace. Lets review the schedule, so you can see what I mean.
Second problem is that Prosper is only suing 66 nonpaying borrowers in this project. They think of it as a test. If it goes well, maybe they’ll do more someday. Today there are 1187 more Prosper loans that are more than 4 months past due (not counting the 66 in this test). These loans are on a fast track to nowheresville. If Prosper follows its standard procedure, these 1187 loans will be auctioned off for pennies on the dollar. This could happen to the majority of them within days.
If you use Prosper, be sure to read the whole post for more informative details.
This highlights nicely one reason I never wanted to risk my money with Prosper- It’s far too easy for borrowers to simply not pay back their loans and there is almost nothing Prosper can do about it.
My question for anyone lending money on Prosper or considering it- why would you want to get involved in such a mess when you have proven investments available such as stocks and bonds?
By Eden, Wed 7 May 2008, 8 Comments, Categories: Investing
May 8th, 2008 at 3:35 am | Industry and Frugality said:
I originally tried Prosper just to see what it was all about. That was over a year ago. I’ve never added to the $200 I originally put in, but I do continue to reinvest that original amount. I’ve earned over 12.5% on average and have never had any loans default (knock on wood). I think some people are just making bad decisions in regards to the loans they choose to fund; however, prosper should definitely be aggressive about getting on those who are not making their payments.
May 8th, 2008 at 7:08 am | Eric said:
I love the stock market, but when you say “proven investments available such as stocks and bonds” – I am aghast. For every nonperforming loan on Prosper, I can point you to 10 stocks that have lost people money. It is all about balancing risks and if you don’t that that properly on Prosper, then you will lose money. If you don’t do that with stocks or bonds – you will lose money.
May 8th, 2008 at 7:41 am | Eden said:
@Industry – sounds live you’ve done well so far. I’m sure that making wise choices helps, but really how much do you know about the loans you are funding? A credit score attached to a profile someone filled out on the Internet? Not that everyone there is trying to get fraudulent loans, but the risk seems very high to me.
May 8th, 2008 at 7:46 am | Eden said:
@Eric – You’re aghast? Lets be real here. We have hundreds of years of investments in stocks and bonds behind us. Those are proven investments. Of course you can make bad choices there too and the sheer number of available stocks and bonds means that you can name 10 losers for every bad loan on Prosper, but I could probably find an equal number of diversified investments (index funds or mutual funds) that would outperform Prosper with much less risk.
Anyway, I never meant to imply that was an apples to apples comparison. I think Prosper is legitimate for speculative dollars, but I worry about all of the websites I see pushing Prosper as an ‘investment’. I don’t think people really understand the risk.
May 8th, 2008 at 4:04 pm | Industry and Frugality said:
Eden, I agree that prosper loans are a risky investment. However, the risk-reward rules still apply. You can get some great interest rates on prosper loans and I feel like you can reduce the risk below that of an average Joe buying individual stocks. However, I still rely primarily on index-based stocks/bonds for my investments. Anyway, your questions gave me the idea to write a post titled How I Minimize Risk on Prosper. Let me know what you think.
May 8th, 2008 at 4:15 pm | Mrs. Micah said:
Since we don’t have the money for speculative investing, it’s been interesting to watch how Prosper and Lending Club fare without having my money there.
I’m not against potentially investing in them someday…just not yet. I’ve been waiting to see how they handle people who don’t pay and how easy it is to get out (you can sell stocks, but not loans).
May 8th, 2008 at 9:14 pm | Lazy Man and Money said:
People have been lending other money for thousands of years… by that measure peer-to-peer lending is more proven.
Prosper loans are very much stocks. They can either go up or down. Some go to zero, others perform well. If you diversify across a broad basket you limit your risk. With stocks we might call the basket a mutual fund. With the Prosper loans, you might call it a portfolio plan.
As for borrowers not having to pay their loans back, realize that this is also true of your credit cards. You don’t have to pay those either. Yet I see credit card companies doing quite well.
December 16th, 2008 at 10:03 am | Shannon Brown said:
Really these are tough economic times, I would be reluctant to loan out my personal money right now. It has to be tough to repay these loans so I would not count on getting it back. Even once the lawsuits are filed the chance of getting the funds right now are slim.