“Prosper Has It All”
Very good article here on the shortcomings of Prosper.com:
To look at the results of Prosper’s loan marketplace, though, is to see not a solution to the credit crisis, but a microcosm of it. Loans to unqualified borrowers; reliance on mathematical models that turn out to be a lot less useful than they seemed; failed hopes that high interest rates could make subprime loans profitable; sky high default rates—Prosper has it all. Prosper’s Web site advertises returns of 6 percent to 14 percent for lenders. But the reality is that the lenders who loaned $188 million through Prosper have not earned anything like these returns. On the contrary, the majority of them have lost money, as they’ve watched their loans go bad at shockingly high rates.
Much like the loans made by banks during the mortgage boom, Prosper’s loans have gone into default at rates much worse than predicted by historical credit data. In November, 2007, Larsen told the Associated Press that Prosper’s default rate “hovered at around 2.7%.” That, however, included many new loans that simply hadn’t had time to go bad. Larsen refers to this obliquely in the AP story, noting that as more loans matured the rate would rise, but there’s no hint of just how steep that rise would be. Prosper’s data now shows that now shows that close to 36% of the loans made before Nov. 27, 2007—the date of the AP story—have ended in default, roughly thirteen times what a casual reader would have thought from Larsen’s comments. That is close, coincidentally, to the total 39% (or roughly two in five) default for the Prosper loans that have reached the end of their three year term.
What the article doesn’t cover is not only that Prosper borrowers are horrific deadbeats (you know who you are) but that Prosper does nothing, nada, nichevo, not one single thing to help lenders get their money back through collection agencies. Not that I ever had that much money invested, mind you, but it would have been nice to get some of it back, just a little. I haven’t gotten a cent back on any of my bad loans, which makes me think that the collection agencies are either asleep or dead.
I think I broke even on Prosper (I haven’t bothered running the numbers, it’s too depressing). But it certainly wasn’t a huge moneymaker. It could have been – would have been, I think – if there weren’t just so many damned deadbeats out there who borrow money without thinking how to pay it back.