Wednesday, March 21, 2007 funding

I got a loan funded through yesterday. It was my third attempt and I think I have gained a little insight into the Prosper market.

  • The first loan I attempted was for $20k. I had read that you will be more likely to succeed if you join a group. So I joined a real estate group. Unfortunately, the group leader wanted a 1% commission, so the interest rate that I felt I could afford was reduced. I put in a max rate of 9.5%. The group leader did not really supply much support and only bid $50, so I don't think that this was really worth much. The loan did not get funded.
  • The second attempt was for $25k. I did not join a group but got dozens of emails from group leaders explaining why I needed to join their group. I also had a lively discussion in the forums section with other members on why my loan would not get funded. I had bumped up the loan interest rate to 10.5% thinking that this would be more likely to get funded than the 9.5% I had previously requested, but in the end got even fewer bidders.
  • My third and successful attempt was for a loan of $6500. I wasn't sure if this would get funded either, but the bidding was similar to that on EBay - nearly all at the end. Over 240 people ended up bidding on the loan and although I started at 10% interest rate, I ended up at 8.5% as the lenders bid the rate down.

My credit rating is AA, so I don't think in the end that joining a group had anything to do with the funding of the loan. Some observations and opinions I have about Prosper:

  • the lenders seem much more comfortable bidding on loans under $10k
  • this is an emotional market place and it seems that most lenders will bid more based on emotions than rational data. I saw plenty of comments from bidders talking about how low credit grade people "deserved" the loan - this is not based on rational thinking. Also, the furious bidding as the loan listing came to the end also screamed of emotion.
  • It didn't seem to matter the purpose of the loan as to whether it would get funded. People who had screwed up their finances were just as likely to get a loan as people looking to use a loan for business.
  • this is pure anecdotal, but it seemed to me, having a picture of your wife and kids helped get funding.
  • I'm not sure why people will fund loans for poor credit borrowers. Is it pure greed or "bleeding hearts"? See MyMoneyBlog's analysis of default rates. The default rates for the risky loans make them extremely poor investments from a lender perspective, yet I did not see a pattern where these loans were ignored - it seems to me a $20k loan from an AA borrower was a better bet than a $5k loan from a low credit borrower, but this is not true to prosper lenders.

It is an interesting concept and I am pleased with the results of the loan I got, but I don't think that I would ever bid on a loan as an investment.


Seth said...

Thanks for posting your experience (and for the link to the analysis at MyMoneyBlog), as I've been tempted to give prosper a whirl as a lender.

I keep not pulling the trigger and plunking any money into the system as it seems like the work involved in properly screening abd money loaned out would eat away at any extra profit you might make, as opposed to the risk-free alternative of just plunking the money into a CD or savings account with a decent return.

LuckyLily said...

I loaned $200 (four, $50 loans) back in July, before the WSJ article and ensuing publicity. 2 B loans, a D and a E. Happily, no defaults, but I understand this is a small sample set.