Tuesday, April 22, 2008

Prospering Or Not?

So recently I started taking a closer look at peer-to-peer lending, specifically Prosper. I decided to become a lender as an investment, and also a borrower one time as a learning experience. I've been studying the dynamics of the site for about ten days now, poring over statistics, the ebb and flow of bids, and being conscious of what I myself looked for in a potential borrower. I have learned a lot already I think. First, I have found that there is a great deal of power in falling into categories that are a favorite of "portfolio investors". If your risk is low enough, lenders with sizeable chunks of money in Prosper will automatically bid on your listing as a borrower. My listing was funded within a couple minutes, just as much time as it took for all of the portfolio algorithms to hit, and my interest rate was immediately down to 8.50% from an 11.46% starting bid. Then, some lenders put follow-on capital into it because they saw that the loan will be funded and they won't be wasting their bid money on something that will not be funded. People who have canned searches looking for loans that are already funded will then hit, and even more bids will come in. It all cascades from there. I also noticed that the loan amount will make a huge difference in funding. The lender to borrower ratio is about 3 to 1 according to a site dedicated to stats on Prosper loans. With an average bid being probably less than $100 and the average loan amount being many thousands of dollars, you really have to stand out in order to get enough bids for your loan to be funded. High loan amounts are also seen as a risk factor, so the higher the loan, the more automatic investors you lose, and the harder it is to scrape up the total you need for the loan to fund. If you want a large amount, I would say that if you broke it up into smaller loan amounts, one following the next by as little time as the site will allow, that will be your best bet because then you'll get some of the same investors putting bids on both of your loans!

It is also clear by looking at the lending stats site that there are risks to being a lender, especially those who are not very smart about what they are bidding on. Also, there are tax implications. The interest you earn from the site as a lender is counted as regular income, unlike earnings from long-term stock investment. In my bracket, I would need a few percent more return on interest to get the same real earnings as I would for stocks. Anyway, it has been very interesting so far, and I'll post more on the subject once I get the first payments on loans I fund, or start making payments on my own loan!