I decided to ask another prosper lender a few questions about their social lending experience with Prosper. If you visit Spotsearch’s Prosper lending and borrowing tips, and start reading, you will discover that he is one of the lenders on my Prosper loan. He actually has a very interesting way of lending on Prosper. Instead of making small $50 loans to many people, he is choosing to lend larger amounts, as you will read more about below.
Without further ado, here’s the interview…
What was it about Prosper that made it appealing to you as a Lender?
I’m probably one of the few bold people that have made Prosper a key portion of their investment portfolio. In the past, my fixed income assets (cash, CDs, bonds) have been lacking. The popular rule of thumb is stocks in your investment portfolio should make up 120%-your age; and fixed income investments would be the remainder. In my case, that comes out to 82% stocks, 18% fixed income. Currently, about 8% of my investment portfolio is invested in Prosper loans, and in the future I expect to allocate around 12% or more. Why would I put such a large stake in such a potentially risky investment? There are a number of reasons.
1. The main reason is it’s fun and rewarding. I like reading peoples’ different loan requests and like feeling like I am making a difference, helping someone out. For the first time, fixed income investments are fun and interesting. Also, as an open marketplace, I feel that the rates set are usually good for both the lender AND the borrower.
2. Second, the potential rates of return on Prosper are fantastic. Typically the stock market returns average between 10-11% a year over long periods of time. With Prosper loans, you can get returns just as high or higher, which is absolutely amazing compared to CDs, bonds, or money market accounts. My current Prosper portfolio is estimated to have a 13.80% interest rate (assuming no defaults and no early paybacks). Depending on your tolerance for risk, you can have lower or higher rates of return. You can manage the risk by choosing borrowers with good credit ratings and by spreading your money over a large number of borrowers. For instance, my loans are spread across the following credit grades: AA=26%, A=45%, B=16%, C=13%
3. Finally, I feel very comfortable lending on Prosper. It is a very well-designed system. For instance, loan payments are reported back to credit reporting agencies so borrowers have an incentive to pay on time or risk ruining their credit ratings. Also, the system does a great job of tracking loans and payments and key statistics.
How “personal” are you with Borrowers? Do you contact them to ask additional questions?
I like the human aspect of Prosper. I personally contact about 75% of the borrowers that I lend to. I like to follow up on the details of their listing because usually something they write might spark a question, or they might leave out details that I’m interested in seeing. I tend to make fairly large loans so I like to personally hear from the borrower. After about 6 months of using Prosper.com, so far I have had 0 defaults and 0 late payments on 11 loans, which, though a fairly short history so far, is quite encouraging.
Do you feel that a Borrower needs to join a group within Prosper?
I think that if a borrower has a good credit rating (AA, A, B, and possibly C if the record is clean) and does a good job of writing up their loan description, there is no need to join a group. The group system in Prosper really has little benefit for those people and can even hurt them if they join a bad group. For people with worse than C grade credit, it might be good for them to join a reputable, group with a good track record. Joining a bad group, however can really hurt you in many ways such as getting a worse interest rate or getting fewer bids. The worst groups I see are ones that charge a huge fee (Prosper calls them “rewards” to the group leader), which can be as much as 4% of your loan amount, depending on your credit rating. This is absolutely outrageous. Look for groups that have a good track record of getting loans funded, of groups where the members and leaders bid on the loans, and where the group leader goes through extra verification work, if you even decide to join a group.
What one piece of advice would you give someone that is thinking of borrowing money with Prosper?
Only join groups that do 100% reward sharing (no group leader rewards). Do your homework on groups to join. Write up a good loan which tells your story, lays out your financial situation in detail in terms of your income and expenses, explains why you need the money, and your plans and ability to pay the loan back. Make sure to ask for a fair to slightly higher interest rate for your credit rating to start out with (you will likely get a lot more bids, which many times creates a competitive situation that drives down your rates in the end). Getting a loan from Prosper can be easy, painless, rewarding, and maybe even a little bit fun!
Thanks Spotsearch for the interview 🙂
Great interview and insight! Thanks Tricia!
I haven’t sunk my savings into Prosper because I like the ability to yank my money out of a CD in an emergency. Liquidity is a major reason why I don’t put more into Prosper. However, perhaps in the future I will.
Nice interview. I agree with everything said. I run a blog on Prosper from a Lender’s perspective: http://rateladder.com
I may not be bold enough to have a significant portion of my wealth in prosper, but I am getting there. ~$3,600 and climbing.