Tuesday, July 31, 2007

Are non-homeowners a safer lending risk in a declining house market?

With all the recent troubles in the housing market, some lenders are starting to ask whether homeowners are a higher risk than non-homeowners when lending on Prosper. In the housing market the biggest problem homeowners are facing is when ARM or adjustable rate mortgages reset at higher payments and higher interest rates after the initial one to seven-year fixed term. When combined with falling house prices, borrowers are sometimes unable to refinance their mortgage since they owe more on their house than it is worth. These borrowers are stuck with a house they cannot afford and cannot sell for the amount of their mortgage and are forced into foreclosure. Because of these deteriorating market conditions, some lenders have started asking borrowers whether they are in a fixed mortgage or whether they have adjustable rate mortgages (or ARMs). Others have taken to the forums to list the reasons they won't invest in loans related to real estate deals.

To get an idea of how the stats look in Prosper, I pulled one year of Prosper Marketplace data for loans from March 28, 2006 through March 28, 2007. Four months have passed since the end of the data range which gives all of the loans a chance at going late. Auto-fund loans were also excluded from this data. Here is a table that shows default rates for home owners vs default rates for non-homeowners for this one year time period.

Credit Grade
Homeowner Defaults
Non-Homeowner Defaults

What this data suggests is that homeowners in Prime or near-Prime credit grades have higher default rates than non-homeowners. In the sub-prime markets homeowners are actually a better risk than non-homeowners. This data came as a surprise to me. With all the news about problems in the sub-prime mortgage industry I had assumed that sub-prime homeowners would be at an increased risk for default.

Personally I don't pay too much attention to home ownership as a criteria when deciding whether or not to fund a loan. Without being able to see the terms of the mortgage or the borrower's equity position, it is difficult to gage what effect the mortgage will have on the ability to repay the Prosper loan. Some borrowers will include this information in the description of the loan or in answers to questions. However, there is no verification of the information in those sections, so I do not trust that it is accurate. It would be too easy for the borrowers to write what they thought the lenders want to hear - especially in answers to leading questions.

In the higher credit grades the higher default rate might be partially compensated for by the difference in the amount of money recovered in debt sales for defaulted loans. When these sales have occurred, loans for homeowners at higher credit grades have been sold for as much as 25 or 30 cents on the dollar compared to pennies on the dollar for non-homeowners. Also, with this data being from the very early stages of the house market decline it may be too soon to tell what the overall effect will be on the Prosper marketplace.

Asset diversification and P2P lending

I just came across an article written yesterday, Nervous Equity Investors Should Consider Zopa Lending, which argues that the time to invest in P2P lending is now based on market conditions. Personally, I'm not sure the P2P lending market is something you can time. However, the article does make a good point - P2P lending is a new asset class that does not move with the equity markets. Here are some excerpts from the article:

Wobbling stock markets and rising interest rates make now a perfect time for equity investors to reduce and spread their risks by investing in prime unsecured lending via Zopa.

Zopa (zopa.com) - the world’s first marketplace where people meet to lend and borrow money – says the current climate for private investors is creating the ideal time to consider lending on Zopa. As interest rates rise, markets are feeling a ‘credit crunch’ that is causing stock prices to fall – and investors to suffer. However, those same increasing interest rates have made lending on Zopa more attractive than ever, with recent rises helping the average return to lenders to pass the 7% p.a. mark. Some members lending to higher risk borrowers (but still very much prime market borrowers) are enjoying returns of more than 10% p.a.

....Giles Andrews, Managing Director of Zopa UK said, “Zopa lending has been attractive to private investors since we launched more than two years ago, offering far better returns than cash-based products but at only marginally more risk. With stock markets looking far from rosy currently and interest rates generally on the rise, Zopa lending has never been a more valuable alternative. Investors looking for safer and more secure returns on their money at rates well in excess of cash products should give Zopa a serious look right now.”

Others have made similar statements about how P2P lending is a whole different asset class. Prosper CTO John Witchel has said that Prosper is unique, "There is nothing like it in the marketplace and it is essentially a new asset class." Roger Steciak, who wrote Happy About People-to-People Lending With Prosper.com: How to Lend Money to Friends You've Never Met said, "I consider people-to-people lending to be a new asset class and I want to allocate a small portion of my net worth to it for diversification."

Matt, in his article about the effects of a recession on Prosper recommended, "...don't put all of your investment money into any one asset class. You should start with an emergency fund in something like a money market or savings account that can be easily accessed if needed for an emergency. Then any remaining money can be diversified among several different asset classes - stocks, bonds, real estate, foreign markets, and Prosper. The allocation percentages should be based on your risk tolerance and investment timeframe. The longer term (10+ year) money can have a higher percentage in stocks, the mid-term (5-10 year) money can have a higher percentage in Prosper, and the shorter term (<5 year) money should be mostly in cash accounts or bond funds."

What do you think? How much of your investment should be allocated to an asset class like Prosper? Should the amount allocated change based on market conditions?

Monday, July 30, 2007

Lending Club offers $5 referral bonus

Update (Oct 2008): Lending Club changed their referral program again.

Update (Jan 2008): Lending Club has improved their referral program. Sign up for Lending Club by following this link and get $25 or read more about it here.

Almost three weeks ago Lending Club quietly launched a referral program inside of Facebook. When logged into your account, there is “invite friends” text and a small cash graphic in the upper right corner on most pages. Clicking on this link sends you to a referral page which explains, “We will deposit $5 in your Lending Club account for each friend you invite who signs up for a basic Lending Club membership (basic memberships are free and there are no obligations).” You must be a Facebook member to join Lending Club and the referral form only permits you to invite your Facebook friends. To prevent spamming you are limited to inviting 10 friends per day. When you select one of your friends to invite they will be sent the following message from you through Facebook, “I found a site I thought would interest you. Lending Club is a p2p lending service: you can be a lender or a borrower, bypass the banks and get better rates.”

About a week after launching the referral program, Lending Club CEO Renaud Laplanche told me, “It seems to be working nicely: daily registered members increased 20% since then, although it’s not obvious how much should be attributed to the referral program.” Nearly 12,000 people have installed the Lending Club application in Facebook.

Lending Club and Prosper both have referral programs, but they are very different. Under the Prosper referral program, which ends August 31st, a borrower must receive a loan and a lender must fund a loan in order for the $25 referral bonus to be paid. This can be a long process and many potential borrowers or lenders will not complete the process even after creating an account. Only a small fraction of the 330,000 registered Prosper members are lenders or borrowers. Lending Club’s bonus, while only $5 instead of $25, is much easier to receive since the new member does not need to actually become a borrower or lender. Although you do not have to immediately commit to becoming an active borrower or lender, the referral program will be very beneficial to Lending Club because all referrals are from people that know each other as Facebook friends.

Of course, the Lending Club referral program would create even more growth if they expand outside of the Facebook social circles. I look forward to adding a referral link on this site, for example. Another way they could significantly increase sign-ups is by paying the person who just signed up. It would be nice if the referral emails said something like, “If you sign up now you will receive a free $5 in your Lending Club account since you were referred by [name].” Having the $5 in their Lending Club account would also provide an incentive for new lenders and borrowers to set up their bank account. PayPal can trace its explosive growth to a $5 referral program where each party received $5 when they signed up. These types of programs are especially popular on college campuses which seem to be the demographic which Lending Club is targeting.

To test drive the referral program, I had one of my Facebook friends sign up for Lending Club. He signed up three days ago. Unlike Prosper, there is no confirmation email that lets you know your friend signed up and they payment is not immediate. I will let you know how long the referral payment takes once I am paid.

Wiseclerk has some good information about referral programs for other peer to peer lending sites including Zopa, Smava and Boober.

Update (Jan 2008): Lending Club has improved their referral program. Sign up for Lending Club by following this link and get $25 or read more about it here.

Update (Oct 2008): Lending Club changed their referral program again.

Zopa makes top 10 UK startup list

The Guardian Unlimited announced the top 10 UK startups and Zopa, UK's peer to peer lending site, is number 9 on the list. According to the Guardian, "Driven by the surge of Web 2.0 sites and the widespread penetration of broadband, Britain's dot economy is growing fast and – for now at least – there are no real signs of a bust on the horizon." Zopa is among the companies leading this dotcom growth in the UK.

Although we have not written about Zopa much on Prosper Lending Review, we are watching them closely as they prepare to launch in the United States. On the main page they proudly announce, "Zopa is coming to the US: want a preview?" If you enter your email you will be notified when the preview is ready. Zopa also has a (somewhat quiet) discussion board for the U.S and they have published their first U.S. newsletter. Prospers.org has a much more active forum about Zopa. The provocative tagline: "Until we all defect to Zopa, one board should do it for now =)"

Awards like the one Zopa received from the Guardian are not unusual for peer to peer lending sites. Prosper was named Time Magazine's site of the year in 2006 and one of the top 50 sites of 2007.

Using Prosper for a small mortgage

Today there is all sorts of interesting news about unusual uses of peer to peer lending. The Wall Street Journal published an article about using P2P lending to fund a startup. I just came across an article on Mortgage 101 about using Prosper to fund small mortgages - Why mortgages under $50,000 are hard to find. The author, a professor of finance emeritus at the Wharton School of the University of Pennsylvania, explains that the minimum amount for mortgages is usually $50,000 to $75,000, but there are some communities where smaller loans are necessary.

"The town is Winters, Texas, population about 3,000, most of whom are retirees. There are no jobs there or anywhere very close. Houses in Winters sell for less than $60,000.

Mortgage loans are not available in Winters. In part, this is because the town is so isolated and the demand so small that it can't support a lending facility. There are no appraisers, for example; if one is needed the cost will be double the cost in a larger center because of the time it takes for the appraiser to get to Winters and back.

But the major problem is that the loans are too small to justify the cost of originating them. A mortgage origination cost of $5,000, which is a very modest number, is 10 percent of a $50,000 loan, though only 1.7 percent of a $300,000 loan."

In addition, some people have paid off most of their loan and would like to refinance a small amount (less than $50,000) to take advantage of lower interest rates. That is hard to do unless your new loan includes a cash-out. Due to the high fees refinancing a small loan is often not worth the cost even if it can be done.

"The great majority of loans for amounts of less than $50,000 are second mortgages or unsecured. The development of the Internet has widened borrower choice in the unsecured market enormously -- at least among those who use computers. (For the others, small-loan offices are still found in many shopping centers.) Residents of Winters, Texas, should forget about getting mortgages and shop for unsecured loans on the Internet."

Unfortunately the outlook for those living in Winters, TX may not be as promising as it first appears. Interest rates vary by state and Texas caps the maximum interest rate at 10% APR (business loans can be up to 18%). Lenders are unlikely to fund such a large loan at an interest rate that low. The average rate offered to $25,000 loans is 12.76% for lenders with the best credit.

From what I see on Prosper, loan listings for real estate are usually for investment purposes instead of personal mortgages. Here are two open listings where someone is trying to use Prosper to assist with a real estate deal:

Real estate bargain - currently 100% funded with 4 days left at 9.79%. The borrower is requesting $10,000 and says, "I've got a great chance to snap up a 3/2 condo with a 6% fixed rate assumable mortgage. The seller is willing to carry a 2nd on the property for a portion of the difference (I'll still be putting money down), but the rate he wants on the 2nd is a little high and I feel I can get a better rate here on Prosper."

Buying a rental house - currently 100% funded with 2 days left at 14.80%. The borrower is requesting $5,000 and says, "I need your help to put some of 20% of down payment on a mortgage loan for a rental property."

For more information, or to start borrowing on Prosper go here.

Sunday, July 29, 2007

Using P2P lending to fund a startup

Most agree that web has significantly reduced the cost to start a new business. Paul Graham has written a great series of essays on how to start a startup with great information on funding. In his essay How to Fund a Startup he said that he started his company, Viaweb, with $10,000 from a friend. Excite founders borrowed $15,000 from their parents. The more traditional route is to look for angel investors, seed funding firms, or venture capital funds.

One question you have to answer is how much money do you really need? Prosper has raised $40 million in venture capital but we see several possible competitors (1, 2, 3) attempting to build a "Prosper clone" for less than $5,000. One big disadvantage of seeking funding from outside is that it is very time consuming. This is time that you could be using to build the company. In the Hacker's Guide to Investors, Graham said, "Raising money is a huge time suck at just the point where startups can least afford it...Investors have no idea how much they damage the companies they invest in by taking so long to do it."

Seeking funding through a lending site like Prosper could be a great way to shortcut startup funding. Funding can be obtained in days while it might take weeks or months through more traditional means. Of course, you are limited to $25,000 but that is about what most web-based startups need.

Today's Wall Street Journal has an article about using peer to peer lending sites to fund startups - Making the Most of Online Matchmaking for Small Firms. The article is focused on Go Big, a site that launced last year, which is described as "a dating site for start-ups, where entrepreneurs can create profiles and post ads looking for investors and others to help start their businesses." Prosper is also mentioned, "Several lender-borrower matchmaking sites have popped up in recent months. Like Go Big, RaiseCapital.com and FundingUniverse.com are designed for small companies seeking a cash infusion. Prosper.com focuses on individuals looking for money." Wil Schroter, who founded Go Big says, on his site "there are 99 companies looking for funding for every investor."

While borrowing on Prosper can reduce the time required to get funding, it is a loan which you have to pay back. The benefit is that you retain full ownership of the company. You will, however, have to start monthly payments right away. A $25,000 loan at 12.76% interest (average interest rate for AA credit grade for a loan that size), for example, will have payments of $839/month. If you have no positive cash flow or means to repay the loan you risk defaulting. Also, if you do not have good personal credit it is very difficult to get a large loan on Prosper.

One advantage of funding a loan through traditional means is that the investor may be well connected and can assist in other ways besides just the funding. The same may be true on Prosper on a smaller scale. It is possible that some of the lenders on your loan will take a personal interest in helping you succeed and may offer advice.

Borrow funds on Prosper here.

Thursday, July 26, 2007

Man receives 2,000 credit cards

So this post isn't exactly about P2P lending, but it is finance-related and funny so I thought I'd share. NYC resident Frank Van Buren was flooded in plastic when he received 2,000 credit cards in the mail. He has had an Citibank ExxonMobil account for years and ordered two copies of the card because they were expiring. "How could you send me 2,000 cards by mistake?" Van Buren said he asked customer-service representatives after spending hours shredding them. None of the 2,000 cards had activation stickers which help prevent identity theft and Citibank refused to take them back. Wow, and I thought the occasional credit card junk mail was bad enough. Looks like another reason to cut up the credit card and turn to P2P lending.

In other crazy credit card news, 9-year-old Kyle Shoemaker has two credit cards and an $18,000 line of credit. No, he didn't order them. He's the unfortunate victim of identity theft. Credit cards are just too easy to get.

Third mystery Prosper competitor project emerges

Earlier this month we reported that someone was advertising on various websites in an attempt to find a programmer to build a competitor to Prosper. The first advertisement was in late June on Rent a Coder. The winning bid was Hiren Kotadiya from India who agreed to build a Prosper clone for $250. Next we found an ad on iFreelance.com from someone looking for help building a peer-to-peer lending site. Although the bidding on iFreelance ended nearly two weeks ago with 12 bidders it appears that a bid was not awarded. A third ad was just posted - this time on ScriptLance. According to the project description:

"We are building a site similiar [sic] to prosper.com. It is a peer to peer lending website -- where a person can register as either a lender or borrower. A borrower can post a request for a loan, and the rate they are willing to negotiate as far as interest/repayment. A borrower can bid an amount to loan. There can be as many lenders as the borrower wishes to accept. The most difficult thing about the site -- is it will need to call to a credit agency to pull a credit report/score (the API will be provided for that later on)"

Bidding ends on July 31st and the established budget is $100-1000. There are already six bids. Prosper's only true competitor in the United States right now is Lending Club. Loanio is expected to launch later this year.

Wednesday, July 25, 2007

Borrowing money to lend on Prosper: Wise or Foolish?

Frequently you will see listings on Prosper where someone plans to take out a loan for the purpose of reinvesting the money back into Prosper at a higher interest rate. The idea is that you borrow money at a low interest rate and then reinvest it at a higher rate to make money on the carry, or price differential.

The concept is simple, and it is how banks earn much of their money. If they can pay less than 1% on money deposited in a checking account and then lend out the money at 8% then they are making money on the difference. This is also the idea behind the Yen carry trade, a popular investment technique where money is borrowed in Japan at very low interest rates and then reinvested in developing markets that have much higher interest rates. The risk, of course, is that currency fluctuations could wipe out any gains that you make.

At Prosper there is also a significant risk to this borrow-to-lend strategy. Before we look at the risk though, lets look at a wildly optimistic scenario:

Suppose you were a AA borrower with perfect credit. You take out a $10,000 loan at 8% (this is a below average interest rate for a AA loan of this size, but we are being optimistic). Then, lets assume you get really lucky and avoid defaults and late loans while lending at an average of 19% interest. Now you are probably thinking, wow I just made 11% on the carry. A cool $1100 of free money! Lets take a closer look to see if that is the case.

When you initially take out the loan you have to pay 1% in loan closing fees ($100 in this case). Then, if you are lending at 19%, you are in the B-HR credit grades on your loans so you will have to pay a 1% servicing fee on those loans (there goes another $100). Also, you have to wait for the money to transfer out and back in to Prosper. Then, once you bid on loans you have to wait for them to close. During this time, which will probably be about 30 days, you are not earning any interest on your money. That reduces the rate of return for the first year from 19% to 17.4% (11 months at 19% and one month at 0%).

So, instead of making 11% you are now at 7.4% in earned interest (we subtracted 1% for the loan closing fee, 1% for lender loan servicing fees, and 1.6% for idle money). Well, that's not too bad you think, it is still $740 in free money, right? Not so fast...

There is one more thing to consider: taxes. Prosper is not a tax friendly investment. Interest paid on money borrowed from Prosper is not tax deductible. To make things worse, money earned on Prosper is taxable as ordinary income. Lets assume you are in a 25% federal bracket and 7% state bracket. The federal government sees that you earned $1740 on Prosper (they are looking at just the lender side). In this case, your taxes eat up $556.80 of your earnings. Now you are down to $183.20 in first year earnings, and remember this is the optimistic scenario.

Now, lets look at a more likely scenario using the same methods and example as above. Only this time we will assume that you have a 12% default rate (this is a better than average default rate for loans at a 19% interest rate). Now, instead of earning money you post a loss of a few hundred to as much as $1000 in your first year of investing depending on when the defaults occur.

The worst case scenario is that you don't diversify, overweight in HR loans, or are particularly unlucky on your default rates. Under this scenario it would be easy to see losses well in excess of $1000 during your first year.

Looking at the numbers, the potential gain is small, and the risks are too great to make Prosper a viable place for making money on the spread in interest rates by borrowing to re-lend the money. It is possible to earn a reasonable rate of return at Prosper, but borrowing at 8% to re-lend makes it unlikely to be a successful investment.

What really makes me cringe is when I see postings from people with poor credit scores who are trying to borrow at 12% or 14% to re-invest the money back into Prosper. They are almost sure to lose money on their investment.

I have loaned money to one person who was trying the borrow-to-lend reinvestment strategy on Prosper. I loaned him money at 8%, which he reinvested in loans that have an average interest rate of 16.28%. He re-invested the full amount of the loan ($3000), and a nearly a year has passed since he made the investment. He now has 4 late loans, and according to LendingStats his estimated ROI adjusted for late loans will be 7.30%. That means he will be lucky if he breaks even on his investment.

Monday, July 23, 2007

How does Prosper make money?

After understanding the concept behind Prosper and peer-to-peer lending, one of the questions people often have is: how does Prosper make money?

This is a very legitimate question. After all, if Prosper doesn't make money then it is a flawed business model and doomed to eventual failure. On the other hand, any money that Prosper does make is going to be coming out of the pockets of lenders or borrowers.

The fee structure at Prosper is pretty straightforward:

For borrowers there is a closing fee of 1% of the amount borrowed for AA-D credit grades, and 2% for E-HR credit grades. The minimum closing fee is set at $25. For non-electronic loan payments there is an additional 1% charge (this is an optional fee).

For lenders there is a 0.5% loan servicing fee for AA-A credit grades, and a 1% servicing fee for B-HR credit grades. These fees are deducted from each loan payment as they are received.

So, for an E or HR loan Prosper is earning a total of 3% of the loan amount, while for an A or AA loan Prosper's take is 1.5%.

The only additional fees are late payment fees (which are directly passed on to lenders), and a failed payment fee of $15 for cases where there are insufficient funds in the borrower's bank account.

I don't think these fees are unreasonable. The lender fees are similar to what you would see at a mutual fund, and less than you would pay for portfolio management at other financial institutions. For borrowers the fees are less than you would pay in closing costs for a loan at most banks. However, it is important that borrowers and lenders understand these fees. If you are a lender and want to make 10% on a B loan then you need to bid at least 11%, while on an A loan you could bid 10.5% to earn the same amount of interest. As a borrower you need to be aware that the amount requested is going to be reduced by the closing fee amount.

So, how much money does this earn for Prosper in aggregate? Here is a rough guesstimate:

Prosper has closed about 12,000 loans with a total dollar amount of $76 million. If Prosper earns between 1.5% and 3% per loan, that means they have grossed between $1.14 million and $2.28 million so far.

So, we have a rough idea of how much money Prosper makes in gross revenue. Since they are not a publicly traded company there is little information publicly available about their expenses. Many of their functions such as loan collections are outsourced. I would guess that the remaining major expenses are as follows:

  • Maintenance for keeping the site up and running.
  • Ongoing programming fees for new features and updates.
  • Marketing expenses including $25-$125 per new referral that joins Prosper.
  • Staff salaries (for verifications, customer service, management, IT, etc.)
  • My guess is that after factoring in these ongoing expenses, and the initial expenses for building the platform, Prosper has yet to earn a profit. However, this is often the case with young companies, and Prosper does have some strong venture capital backers that gave them some initial funding to work with. Also, Prosper has great growth potential as the leader in an industry that is expected to experience a lot of growth over the next few years.

    Prosper referral deadline nears

    Update (2/2008): Prosper continues to extend the deadline of the referral program and it appears that it will be an ongoing program. Lending Club also offers a $25 sign up bonus.

    Last month Prosper announced a great referral program. New lenders receive a free $25 when they sign up. If you sign up and then sign up your spouse (as Matt described in an earlier post) you effectively make an immediate $75 on a $100 investment. The referral program ends on August 31. Here's a referral link if you want to sign up now.

    If you are interested, here is some more information about the Prosper referral program in their own words:

    What is the referral program?

    Prosper's referral program was established to encourage our most ardent supporters (our members) to bring their friends and family to Prosper. In return for bringing active borrowers and lenders, Prosper pays cash awards to referrers.

    Here's how it works:
    1. You add a special link to Prosper on your web site, blog, discussion forum, MySpace page, Facebook page, in your email signature, and so forth. Create a referral link now.
    2. A friend clicks on your Prosper link.
    3. Your friend joins Prosper within 30 days of clicking on your link.
    4. Within 90 days of joining Prosper, your friend gets a funded loan (as a borrower) or funds a loan (as a lender).
    5. As soon as your friend's first monthly payment clears (as a borrower), or first loan originates (as a lender), you get cash in your Prosper account.
    What are the requirements for earning referral awards?

    To qualify for referral awards, you have to meet the following conditions:

    1. The invitee must have clicked on a link with a referral code.
    2. The invitee must come to Prosper directly from a link outside of Prosper.com or any other Prosper-owned domains.
    3. You can direct invitees to any part of the Prosper web site, excluding the Prosper discussion forums or the /prm directory.
    4. The invitee's Web browser must accept cookies.
    5. The invitee must be a new member, and must join Prosper within 30 days of clicking on your link.
    6. The invitee must take an action (borrow money or make a loan) within 90 days of joining Prosper.
    7. If the invitee is a borrower, he or she must make the first monthly payment successfully.
      You can only earn one borrower award and one lender award per new referred member.
    How will I know if one of my friends registered? Is there any way to test this system?

    When a friend you have referred joins Prosper, you will receive an email notifying you that your friend has joined. Keep in mind that you won't receive any awards until your friend has taken a loan and made a payment (as a borrower) or funded a loan (as a lender).

    Once your referred friend borrows or lends, you'll receive another email notifying you that the referral award has been paid.

    In my experience, when I refer someone there is immediate feedback when they signup. I received the following email.

    Thank you for referring a new member to Prosper. [name deleted] just joined Prosper, and if he or she becomes an active participant in the marketplace within the next 90 days, you will receive one of these awards:

    • Borrower: 0.50% of the loan amount when his or her first monthly payment clears.
    • Lender: $25.00 when his or her first loan is funded.
    Although the referrer gets immediate feedback, the new lender will not know he or she has signed up under the referral program until they complete the requirements and actually fund a loan. This has confused some new lenders. For example, after clicking on the link http://www.prosper.com/?referrer=Spider5 the user is redirected to http://www.prosper.com/Default.aspx. I had a friend call me back when he was trying to sign up saying he didn't think it was working. Don't worry. The referral will still go through. Prosper has been good about paying people promptly after the requirements have been met. If you are still on the fence about signing up for Prosper, you should at least start the process now in order to take advantage of the $25 referral bonus. You still have 90 days to fund a loan. Here's a referral link if you need one:

    Earn 8-12%. Great Returns. No Banks.

    Although borrowers do not receive a bonus when they sign up under the referral program, it is still advantageous for them to do so. If I have a borrower that signed up as my referral, for example, I would be interested in helping them get funded. I might help promote their listing among other lenders or bid on them myself. Since a large number of loans go unfunded, having a lender's assistance can be helpful.

    Saturday, July 21, 2007

    Lending Club borrowers "smart"

    When lending money on a peer to peer lending site such as Prosper or Lending Club you want to take every effort to mitigate risk while maximizing returns. One way to reduce risk is to lend to borrowers who are making smart financial decisions. Matt has discussed this issue several times on this blog. This is from his recent post about why a borrower with good credit might choose Prosper over a traditional bank:

    So, there are plenty of good situations where a borrower with good credit can save money by obtaining a loan on Prosper rather than going through a traditional bank. That does not mean that it is the best choice for all borrowers. I mentioned in an earlier post that it doesn't make sense for a borrower to re-finance a student loan on Prosper. This is also true for house purchases and new car purchases. When I come across a listing that doesn't make sense to me, I don't bid. It doesn't make sense to me for someone to borrow at 12% here to help them purchase a house or car. However, it does make sense to me if they are refinancing credit card debt or paying for a wedding. Matt's advice: if the why part of the listing doesn't make sense to you then don't bid on the listing.

    Lending Club has just released loan statistics from their first eight weeks in a post titled Facebook and Lending Club users are smart borrowers. A full 50% of borrowers are using Lending Club loans to refinance credit card loans or consolidate debt. This is good for borrowers and lenders. Borrowers who make smart financial decisions are less likely to default on their loans. Lending Club's blog has been focused on educating and attracting borrowers who are interested in improving their financial situation through smart choices.

    I took a quick look at the current open listings. Currently there are 27 open listings on Lending Club. Of those, 10 (37%) are to consolidate debt or refinance higher interest rate loans. Some of the loans are difficult to classify based on the limited description. For example, which catagory would you put this in? "Loan to pay off high interest student loan I have." Is it education or refinancing? This description also raises some concerns like Matt mentioned above. Even though debt consolidation would ordinarily be a wise financial decision, refinancing student loans could raise a red flag. As Matt mentioned on his article about avoiding bankruptcies, "thanks to the federal government, student debt usually has generous interest rates, and can be financed over a long period of time which allows for low monthly payments." Listings like this on Prosper would generally draw questions from skeptical lenders. On Lending Club there is not an option to ask the borrower a question directly. Lending Club, however, does not allow borrowers with a credit score below 640.

    Listings on Lending Club generally contain less information than Prosper. For example, one listing contains the title "education" but there is nothing additional offered in the loan description. It's 86% funded with 4 days remaining. While the loan descriptions on Lending Club and Prosper are interesting, lenders generally agree that risk is better assessed through verifiable statistics such as current delinquencies and credit grade. I'll quote Matt one last time, "Something in the listing could encourage me not to lend, but I don't think anything written in the listing could get me to fund a listing that I wouldn't fund based on the verified stats alone."

    Friday, July 20, 2007

    Why Facebook is NOT the next Microsoft: Lending Club example

    Duncan Riley presents the argument that Facebook could become the next Microsoft in a provoking story on TechCrunch. I disagree. I'll use Lending Club (which is available exclusively to Facebook users) as an example. Facebook provides a community of users and publicity to Lending Club, but Lending Club is not tied to the Facebook platform. First, excerpts from Duncan's argument:

    "Facebook is starting to become the one stop shop for content and interaction, be it through feeds, blog creation, image uploading and just plain ol’ social networking...In May 2007 Facebook launched F8, the Facebook Platform. In a market place that was rich with choice, Facebook offers a platform from which interactive applications can be run exclusively from Facebook itself. Although today it’s far from becoming a dominant platform, in little over 2 months 1000’s of new applications have been offered to Facebook users, with many, many more to come. The richness of the various applications on Facebook is driving user growth; simply people flock to where things are happening. In many ways the growth is similar to the growth rates in the early days of Microsoft Windows."

    "Although Web Operating Systems lack wide user uptake to date, the amount of venture capital flooding into Web OS startups is a clear indicator that smart people believe that Web Operating Systems will eventually be a huge hit."

    "Imagine that in 2-5 years time Facebook has become the No. 1 destination on the web. Facebook as a Web OS is the leader in online storage, online applications, email, blogging and of course social networking. How people interact with Facebook has changed; Facebook OS has absorbed Facebook F8, all previous Facebook applications work under Facebook OS, but they work more like Windows does today; Facebook has become your desktop and not just an internet site."

    "The difference with Facebook will be how the various applications are glued together, and this is where Facebook already has the advantage: Facebook’s origins as a social networking site means that everything they launch is linked in to that central core."

    "Yet Facebook is a closed shop; there’s no open source in Facebook and every app built for it will not work with other sites."

    Lending Club is only open to Facebook users. In my opinion, Facebook offers only two advantages to Lending Club - community and publicity. These are two significant advantages and they should not be downplayed, but Lending Club is in no way wedded to the Facebook platform. In fact, none of the lending or borrowing actually occurs in Facebook at all-it occurs on a normal web page just like Prosper. Although over 11,000 people have installed the Facebook application, it's almost silly to call it a Facebook application because really it's just a link to the Lending Club homepage. This a screenshot of the Lending Club application in Facebook. If you click on Start Borrowing or Start Lending you are directed to the Lending Club homepage. If you try to start lending or borrowing from the homepage you will be directed to Facebook. Once your account has been authenticated with Facebook there is no longer a need to return to Facebook for any borrowing or lending.

    Here's a look at the two advantages that Facebook does provide to Lending Club:

    Community. Facebook calls themselves a "social utility." The thousands of people who use Facebook share information in networks and groups. Some are established based on offline networks such as work or school and others are formed among strangers within Facebook. The theory is that loans to friends and groups within these Facebook communities are less likely to default due to established relationships of trust. This is somewhat mitigated by the fact that borrowers and lenders remain anonymous through screen names. Once you have authenticated your account, the only connection to Facebook is the affiliations column. The affiliations column will show two bubbles if the borrower is a member of any Facebook group and three bubbles if the borrower and the lender (you) have a group in common. You can also view the groups that the borrower belongs to. Although borrowers can maintain anonymity through screen names I imagine that through a little detective work someone could use the Facebook group information to identify some borrowers. Within Facebook there are discussion boards similar to the Prosper forums.

    Publicty. Facebook is growing rapidly and generating a great deal of buzz. The publicity benefits Lending Club because they are part of the story. For example, it generates articles like NetBanker's list of top Facebook money applications where Lending Club is #1. In addition to the on and offline media buzz surrounding Facebook, there are also features built into the "application" which make it viral within the Facebook community. When you install the application you are asked if you want to promote Lending Club by putting a box in your profile, placing a link in your left-hand navigation, publishing stories in your News Feed and Mini-Feed and placing a link below the picture on any profile. All these help promote Lending Club to the thousands of users inside of Facebook.

    Facebook is in no way tied to the Facebook platform. As with many Facebook applications, Facebook provides a community and publicity but does little else. It will be very easy for Lending Club to move off the Facebook platform. In this way, Facebook is not a data black hole and will not become the next Microsoft.

    Prosper has built its company primarily through traditional media public relations. The list of press coverage is impressive including this week's story in the Wall Street Journal. Lending Club is running a much more aggressive "web 2.0" advertising campaign by launching in Facebook, writing a blog, and sponsoring a YouTube video contest. Lending Club has plans to move off the Facebook platform in the near future. You can sign up for an email update on their homepage to be notified when they do. Of course, you can also sign up for our email updates as well (top right of page).

    Update: Lending Club CEO Renaud Laplanche added a very insightful comment. I've moved it here for those that subscribe via RSS or email: "Good analysis Tom. Lending Club's Facebook-only presence is more a matter of marketing positioning (helps convey the idea that person-to-person lending in general, and Lending Club in particular, will be more successful in an environment where people feel connected to each other, and where we can easily expose these connections) and product development (using Facebook as a public Beta to gain a lot more user feedback and filter traffic before we further open the gates) rather than technical constraints."

    Thursday, July 19, 2007

    Prosper refunds fees on 400 loans

    Prosper announced that they would be refunding failed payment fees to borrowers in about 400 loans. Borrowers pay their loans through automatic withdraws on their bank accounts. The transfer may fail if the account has insufficient funds or the bank account on file is out of date or incorrect. In either case, the borrower pays a failed payment fee and can fix the problem with no further penalty by making a manual payment and ensuring the bank account has sufficient funds. Failed payment fees vary by state but can be as high as $15.

    Failed payment fees are different from late fees which are charged when a loan payment is 15 days late. Late fees are the greater of $15 or 5% of the unpaid installment amount, also depending on state lending limits. Late fees are passed on to lenders and divided up proportionally according to the percentage of the loan that the lender owns while failed payment fees go to Prosper.

    Here's the full text of the failed payment fee adjustment announcement:

    "I wanted to let you know that over the past two days, we have been adjusting failed payment fees for about 400 loans in which we had overcharged the borrower for failed payment fees. As a result of overcharging the borrower, lenders received less than their share of loan payments since those loans were brought current.

    As a result, lenders who are participating in these loans will see line items in their account history with purposes of "Principal adjustment", "Interest adjustment", and "Service fee adjustment". Because the fee discrepancies were small, the adjustments will probably also be small."

    Fed Chief estimates subprime fallout at $100,000,000,000

    In comments to congress today, Federal Reserve Chief Ben Bernanke said the subprime fallout could result in as much as $100,000,000,000.00 in losses for lenders. That is a lot of zeros.

    During the hearing, Ben Bernake said the "Federal Reserve is taking measures to protect borrowers." Then congressmen aggressively questioned him about whether the measures to protect the borrowers were being taken quickly enough.

    The question I have is:

    Why isn't anyone talking about what can be done to help the lenders?

    It is, after all, the lenders that will be incurring the $100 billion dollars in losses. I know there are some predatory lenders out there and I don't have a ton of sympathy for some of them. But, I also find it hard to sympathize with borrowers who got into more debt than they could afford at terms they didn't bother to read. In the end, some borrowers will end up having to find a more affordable place to live, but a lot of lenders and investors will be left holding an empty bag.

    It will be interesting to watch and see whether any of the subprime loan fallout spills over into higher defaults on subprime loans on Prosper. If so, should we be asking what we can do to help those HR borrowers that can't make the payments on those loans?

    Wednesday, July 18, 2007

    Lending Club announces $5000 video contest

    How do you earn money through peer to peer lending networks? Interest on your investments or referral cash? Now there is another way. Lending Club is giving away a cool $5,000 in a video contest. You do not have to be a Lending Club member, but you do at least have to have a Facebook account to view and enter the contest. Here's the announcement for those that do not have an account:

    Lending Club is a person-to-person lending application available exclusively to Facebook users. Hundreds of Facebook lenders have already extended more than $300,000 in loans to Facebook borrowers since May 24. Users borrow and lend money among each other, bypass the banks and get better rates.

    Now here's what we're thinking: person-to-person is a strange idea at first. When you think about it, it makes a lot of sense: users cuts the banks out and they all get better rates.

    So in order to help explain the benefits of p2p lending, we are hosting a contest starting July 17 until August 10 for the best video about Lending Club and person-to-person lending. The best video wins $5,000.

    The winner will be the video that has the most views on YouTube by August 10, 2007. The video must explain how Lending Club can help you refinance your debt at better rates, buy something you (really) need or just make money by lending to other users. Your video must be posted in this group's wall and in YouTube and contain the YouTube tags "Lending Club" and "person-to-person lending". See full contest rules in the "Rules" section below.

    There is no obligation to join Lending Club to participate (although membership is free and you're welcome to check out our application at http://apps.facebook.com/lending-club )!

    A search on YouTube for Lending Club right now turns up no results. A search for person to person lending shows two videos - one of Zopa's crop circles and a video introducting Prosper to sub-prime borrowers. Both those videos were posted in late 2006 and have approximately 2,000 views.

    This seems like a great marketing strategy for Lending Club. They will likely get several very creative advertisements and in the process create fans and gain visibility. It targets their younger Facebook demographic as well.

    My biggest worry is that YouTube view counts are easy to game. For a Mashable article, Gaming YouTube for Fun and Profit, Pete Cashmore showed how easy it is to build thousands of views overnight. It would be difficult for Lending Club to detect someone gaming the system since they do not have access to the YouTube platform. The potential penalties for falsely inflating view counts, however, are very strict. According to the official rules, "Any attempt by an entrant or any other individual to deliberately damage any online service or web site, tamper with the judging process, or otherwise undermine the legitimate operation of the Contest is a violation of criminal and civil laws and should such an attempt be made, Sponsor reserves the right to seek damages and/or other remedies from any such person to the fullest extent permitted by law."

    I find it interesting that Lending Club did not make an announcement about the contest on their official blog. It was only advertised inside Facebook. More and more it looks like they want to focus their blog solely on finance education. Rex Dixon, Lending Club's director of social media content, did announce the contest on his personal blog.

    Our previous coverage of Lending Club is here. If you create a video, please post a link in the comments.

    Update (July 19): Lending Club CEO Renaud Laplanche announced the contest on their official blog.

    What is Loanio?

    Yesterday my interest was piqued when the Wall Street Journal mentioned Loanio, a new peer to peer lending service. As far as I know, this is the first time the mainstream press has mentioned Loanio. There is very little information on Loanio's website - just a logo, the subtext People Lending to People, and an email sign up box to get more information. Oh yea, and a picture of a stack of cash.

    Information is scarce. In May WiseClerk noted that Loanio was advertising and asked, "What is the deal with Loanio?" The banner ads, which were running on Lending Stats, are no longer displayed. The ads generated some discussion about Loanio in the Prosper forums and traveler505 noted that Loanio's website was registered to Michael Solomon, a lawyer in New York. Michael Solomon currently runs a fiancée visa attorney and marriage visa practice in New York City. He has a Law Degree from Brooklyn Law School and a Bachelor of Arts Degree from Washington University in St. Louis. According to his LinkedIn page, Michael Solomon is the president of Loanio and has been since November 2006. Last month Netbanker reported, "The founder is revealing little about the new company at this point."

    As we have reported over the last few weeks, according to listings on Rent a Coder and iFreelance someone is looking for programmers to create a "working, stripped-down version of prosper.com." Lending Club just entered the peer to peer market with Prosper. Zopa plans to launch in the U.S. by the end of the year and it looks like there may be more competitors soon.

    Do any of our readers have any more information about Loanio?

    Update: Loanio CEO Michael Solomon provided some information about Loanio in an interview with us.

    Update (9/10/2008): Loanio screenshots

    Tuesday, July 17, 2007

    Wall Street Journal: Options grow for investors to lend online

    Today's Wall Street Journal has an article about Prosper, Options Grow For Investors To Lend Online, which features several lenders and third party sites. Despite the headline and teaser "more sites join prosper.com in luring the risk-tolerant" the article is mostly about Prosper. Here are a few quotes from the article along with my comments:

    The peer to peer lending market. "The market is tiny, but it appears to be growing. Prosper, a unit of Prosper Marketplace Inc., says its loans outstanding have more than doubled so far this year to $60 million currently. More firms, with names like Lending Club Corp., Loanio Inc. and Zopa Ltd. are jumping in. And in a related move, Virgin USA, the North American arm of Sir Richard Branson's Virgin Group PLC, recently bought a majority stake in CircleLending Inc., which coordinates loans and payment plans between friends and family members. About $100 million in new person-to-person loans will be issued this year, and that will increase to as much as $1 billion in new loans in 2010, according to a recent study by Online Banking Report, a research firm. "

    Loanio? The Loanio website reads COMING SOON and is collecting email addresses of interested parties. I have been very curious about new Prosper competitors, especially after seeing advertisements in Rent a Coder and iFreelance for programmers to create a "working, stripped-down version of prosper.com." We will keep our eye on Loanio for you. [Update: Just wrote a post about Loanio.]

    Lender featured - Andrew Balto. Andrew Balto Jr. of Churchville, Md., says he pulled some money out of certificates of deposits and money-market accounts last year to put into Prosper loans, where he is now earning returns equivalent to an average annual interest rate in the midteens. "What really attracted me were the rates people were paying for the loans," says the 39-year-old small-business owner, who has about $30,000 spread out over 350 Prosper loans. He says those loans make up only a small part of his total investment portfolio.

    Lender featured - Dan Foster. Dan Foster of Mountain View, Calif., says as much as 17% of his Prosper loans -- which had been returning on average about 20% -- got "hammered" last fall with late payments and defaults. Mr. Foster has since tightened up his lending criteria and is taking a harder look at borrowers' credit histories. "Over time, I started relying less on the sob stories and relying more on the hard data," says the 31-year-old financial analyst for an Internet firm. Now, out of the 60 new loans that he's made since last fall, which are on average returning 15% to 18%, only two or three loans are late, he says.

    This lending pattern fits the description Matt wrote about in his article about risk management.

    Lender featured - Tim Rohner. Tim Rohner of San Diego views as a test the $15,000 that he has invested across three different portfolios at LendingClub.com, which are posting average annual returns ranging from 8% to 12%. "If it all disappears, it will be a lesson," says the 45-year-old small-business owner. "If it does what it's supposed to be doing, I'll double it."

    Third party tools (ProProsper, Wiseclerk, Eric's CC) featured. Over a dozen independent Web sites, mostly geared to Prosper lenders, have emerged in recent months to help lenders make better investing decisions. ProProsper.com, for example, helps lenders determine what the market rate would be for a particular loan, while Wiseclerk.com provides a "loan aging" tool that tracks historical default rates of Prosper loans. Eric's Credit Community (www.ericscc.com) maintains a list of the 10 largest lenders on Prosper (some of whom have close to $700,000 invested) and offers tools that can help users track the moves of other lenders.

    Read the full WSJ article here.

    Stop credit card junk mail

    As I mentioned a couple days ago, Lending Club does a great job educating readers through their blog about basic finances. Most of their material is not technical and seems to be geared to someone getting their first credit card. Today they had a post on how to stop credit card junk mail.

    I didn't know it, but since December 2004 all the major credit reporting agencies (Equifax, Experian, Innovis and TransUnion) have hosted optoutprescreen.com, a website which will allow you to stop the credit card junk mail. Credit reporting agencies make money by selling your information to credit card companies through a process called prescreening. If you meet certain requirements (usually credit score) then you are pre-approved for various credit card offers. This is where all the credit card junk mail comes from. This is the purpose of the opt-out website:

    "Under the Fair Credit Reporting Act (FCRA), the Consumer Credit Reporting Companies are permitted to include your name on lists used by creditors or insurers to make firm offers of credit or insurance that are not initiated by you ("Firm Offers"). The FCRA also provides you the right to "Opt-Out", which prevents Consumer Credit Reporting Companies from providing your credit file information for Firm Offers."

    Opting-out of credit card offers will not help your credit score because "firm offers" made through the prescreening process are not used in calculating scores. It may indirectly help your score if you have a tendency to apply for every new credit card offer that comes in. Removing your name from the list will also not affect your ability to apply for credit. Are there any advantages to receiving prescreened offers? The credit reporting agencies put their positive spin on the credit card junk mail:
    • Consumers are provided with product choices
    • Consumers learn about and have an opportunity to take advantage of offers that may not be available to the general public
    • Firm offers help consumers to “comparison shop”, which may increase a consumer’s buying power.

    If you are interested in opting out of these prescreened offers you can do so here:

    Opt Out of Credit Card Junk Mail

    Thanks for the tip Lending Club. Has anyone used this website to stop credit card junk mail? Does anyone prefer to continue to receive these offers?

    Monday, July 16, 2007

    Update on Prosper's referral program

    Earlier we wrote a post about Prosper's referral program. It has been more than a month since the launch of this program.

    To test this program I referred my wife to Prosper. She opened an account, transferred in $50, and funded a loan. Immediately after the loan was funded I got the following email from Prosper:

    Thank you for referring [name deleted] to Prosper. He or she funded a loan today. As a result, we have deposited a referral award of $25 into your Prosper account.

    My wife also got a corresponding email from Prosper. It read:

    Congratulations on funding your first Prosper loan! Because you were referred by Mateo, we have deposited an invitation award of $25 into your Prosper account. View your account now.

    The member who referred you, Mateo, also received a referral award for referring you to Prosper.

    You, too, can earn money by referring friends to Prosper. Learn more about Prosper's referral program.

    Corresponding messages also showed up under the messages tab in our Prosper accounts. The next business day after the loan had funded, $25 had been transferred into my Prosper account, and $25 had also been transferred by Prosper into my wife's account. It looks like Prosper is quickly paying out the referral award money as soon as the requirements of funding a loan are met.

    Some lenders are trying all kinds of creative ways to earn money from the Prosper referral program including Google Adwords, links in online forums, submitting articles to Digg, and posting referral award ads on their personal websites. A quick Google search returns 47,000 search results related to the Prosper referral program.

    Equity sharing - Prosper for real estate

    SFgate.com published an interesting article today about how home buyers are using equity sharing to purchase homes. The model has been compared to Prosper - borrowing and lending among people to meet financial goals. In fact, Prosper CTO John Witchel is quoted extensively in the article.

    First, what is equity sharing? Home ownership is split between the resident of the house and an investor. The investor typically makes all or part of the down payment and the resident makes the mortgage payments. By some pre-determined termination date (usually 3-10 years) the parties sell the house and split the profits or the resident refinances the property and buys out the investor's portion. This helps potential home buyers purchase a home even when they do not have the money to make a large down payment.

    Jeff Langholz created a site, homeequityshare.com, to match buyers and investors. According to the article, "Langholz compares his Web site to Prosper, the person-to-person lending Web site that started in February 2006. It allows people, regardless of credit rating, to post the amount they'd like to borrow so lenders can bid on it, eBay-style."

    The article goes on to compare home equity sharing with Prosper:

    Prosper co-founder and Chief Technical Officer John Witchel says these community-based models of doing business have important implications for the economy.

    "The thing we talk about internally, it's kind of schlocky, but we talk about that great scene in "It's a Wonderful Life" where Jimmy Stewart is at the teller window and there's a run on the bank, and he's saying, 'The money's not in a safe or in a vault or in the basement, it's in your neighbor's house, it's in the farm down the road, and we all have to work together to make it work. And if not, Mr. Potter's coming to town.'

    "We'd like to see a return to a way of life where people are standing up for each other," Witchel says, "and they're not naïve about it and they're not idealistic about it. We believe people are good."

    Are there any readers who have invested money in borrowers on homeequityshare.com or otherwise participated in equity sharing programs?

    Sunday, July 15, 2007

    Prosper Lending Review - the first month

    This site, Prosper Lending Review, is one month old today. In June my brother Matt told me about Prosper, a P2P lending site, that he had been funding loans on for about a year. I was immediately intrigued. On June 15th we launched Prosper Lending Review – a blog about the P2P lending marketplace with a focus on Prosper lenders.

    This has been a fun project for us. We both enjoy reading and writing about Prosper and our readers have been great. This has been a true learning experience.

    We have written 36 posts during our fist month so the odds are very good that there is new content everyday. Here are a few of our most popular articles. I've placed a double asterisk next to my favorite.

    Lending on Prosper
    **Prosper: A hands-on education in risk management - I recommend all new lenders read this before placing their first bid. Addresses diversification and the risk of low credit grades. It opened my eyes.
    Prosper lending - How to avoid bankruptcies
    **When to bid on Prosper loans - another must read article for new lenders written by Matt
    Most Prosper lenders do not diversify their portfolio
    Prosper Lending 101 - a review of Prosper's lending webinar including FAQ from new lenders
    Analyzing Prosper data - a quick look at some of the third party tools
    Prosper lenders avoid high risk loans - the marketplace has changed
    Build your own fantasy Prosper loan portfolio
    **Are all Prosper loans within a credit grade created equal? - the results of this analysis surprised me
    An analysis of pre-payment risk on Prosper loans
    What effect would a recession have on the Prosper marketplace - I don't think many lenders are thinking about this yet

    Borrowing on Prosper
    **Why would a borrower use Prosper instead of a traditional bank? - Matt provides a solid answer to a common question
    Loan money to family and friends through Prosper

    Prosper news and information
    A Prosper scam: The story of Jessica Wolcott - This is by far our most popular story with twice as many views as any other single post. It is also the most popular topic in the forums.
    **Review: Top Prosper Blogs - our review of Prosper blogs
    Do Prosper lenders discriminate? - this article provoked a very spirited discussion on the forums
    Prosper secures an additional $20 million in capital
    TechCrunch's bias - Prosper versus Lending Club - my initial thoughts to the heavy media coverage Lending Club is receiving
    eBay + MySpace + ? = Peer to peer lending
    50 best websites of 2007 - Prosper scores again - Prosper makes Time's list for the second year in a row
    Rent A Coder: Prosper clone for $250
    Prosper referral program

    News about Prosper competitors - While this has been a fun area for me to read and write about, our coverage of Prosper competitors have been the least viewed articles. I have a couple Lending Club articles in the queue which I will go ahead and publish. Based on reader reaction we may limit our coverage of Prosper competitors and focus more on the Prosper niche. What do you think? I'm of the opinion the competition is good and will only make Prosper better.
    Facebook's Lending Club passes $100,000 mark
    Peer to peer lending in Canada - CommunityLend
    eHub interviews Lending Club CEO
    Lending Club's Blog educates readers
    Lending Club hits quarter million dollar milestone
    Boston Globe features Prosper and competitors - Prosper Andrew added a great comment to this post

    I'd like to thank all our readers who really make this fun. The comments we have received are often from deeply experienced lenders with great insight. Like most people on Prosper, we are learning as we go along. By sharing our experiences we all learn - so thanks for sharing!

    Announcing guest posts - If there is anyone interested in writing a guest post, please let us know. We allow you to use your own referral links to Prosper and link to your group if you are a group leader. The posts must be honest and be useful to lenders or borrowers. (We will not publish any posts that talk about how Prosper is an easy way to get a 29% return on your money.) If interested, please email me at prosperlending@gmail.com.

    I invite you to subscribe to our updates by entering your email in the box on the top right. You will get the blog delivered to your inbox. If there is no daily update, there will be no email. Or if you use Google Reader or another reader, please subscribe. You have lots of options:

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    Friday, July 13, 2007

    Loan money to family and friends through Prosper

    In my opinion, Get Rich Slowly is the best finance blog on the net. Today JD Roth, the author, posted a question from a reader. Tim's brother-in-law is in college and is having trouble making ends meet. Tim wants to help him out but is "not keen on the idea of just loaning him money directly." The brother-in-law just lost his job and is asking for about $10,000 to pay for his car, rent, and food. In my opinion, Prosper is a great solution. Here are some of the advantages:
    • Tim does not need to loan the full amount. He could potentially lend as little as $50.
    • Tim could endorse his brother-in-law which could help the loan get funded.
    • Tim's brother-in-law would get the help he needs but would be forced to be financially responsible and pay the loan back.
    • Tim has reduced his overall financial liability on the loan but is still fully supporting his brother-in-law.
    • If the loan listing attracts enough attention, Tim could eventually get bid out of the loan reducing his financial liability to zero.
    • Tim can earn a modest return on the money he lends to his brother-in-law, while the brother-in-law can get an interest rate as low as 6% depending on his credit.
    • The loan listing preparation would force Tim's brother-in-law to think through how he currently spends his money, how he plans to use the loan, and how he plans to pay it back.
    • The brother-in-law would learn the importance of maintaining a good credit score.
    • This is better than co-signing for a loan which could have a significant negative to Tim's credit score if his brother-in-law missed payments.
    Are there other advantages I've missed? What are the disadvantages? I know that many Prosper lenders read this blog - has anyone loaned money to family through Prosper or funded part of a loan where this was the situation? What would you do if you were in Tim's situation?

    If you are new to Prosper, start borrowing here.

    Wednesday, July 11, 2007

    Build your own fantasy Prosper loan portfolio

    So, you want to lend at Prosper, and you think you can beat the market averages, but you aren't ready to invest real money? Well, you are in luck. Gavin Tools has created a Fantasy Lending Tool that allow you to pretend to invest money on Prosper loan picks and see how your portfolio does over time.

    This has been something that has been available in other markets for a long time. I remember creating imaginary stock portfolios with eTrade more than 5 years ago. Even before the internet, economics classes would have students create imaginary stock portfolios and track them with paper and pencil (it was easier for people to cheat on their imaginary portfolios back in those days).

    With Gavin Tools, the way it works is that you create an account, and then you enter the Prosper listing number for any loan that you want to bid on. It works similar to Prosper in that you have to bid at least $50 and then you can get outbid or the loan can end up not funding. The one cheat that it does allow is that you can bid on a loan after it has closed as long as it has not yet made the first loan payment. You can't browse the listing information at the Gavin Tools website, so you have to hop back and forth between Prosper and Gavin Tools copying and pasting loan numbers. The one shortcut is that you can add FantasyLend to your favorites which allows you to get a popup window at Prosper for adding listings to your fantasy portfolio. In either case, it is a bit clumsier than placing a bid at Prosper, but is still functional.

    There is a top ten list of fantasy portfolios with the top performer earning 25.26% on a portfolio of 8 loans. The worst portfolio belongs to freedomseeker who is earning -29.47% on his portfolio of 27 HR loans all of which are at a 29% interest rate. Interestingly a RandomBot that randomly picks one listing in each credit grade each day is in the top ten list with an interest rate of 14.8%. It will be very interesting to see if the random robot continues to outperform lenders that are carefully screening loans.

    My recommendation has always been to diversify in quality loans in the higher credit grades (preferably As and AAs). If you are a risk taker and think you can beat the odds and make money investing in Es and HR loans then I would encourage you to first try it out first with a fantasy portfolio to see if you are really as good as you think you are. Chances are you may learn some valuable lessons on investing without loosing any real money.

    If you are a serious long term investor, I encourage you to create a good portfolio and try it out for 6 months or so. Don't shoot for being on the top ten list. Just see if you can consistently make about 8-12% on a diversified low risk portfolio. Once you can do that I think you will see how Prosper can be a good alternative to putting the money in a CD at a bank.

    Tuesday, July 10, 2007

    50 best websites of 2007 - Prosper scores again

    Last year, Time Magazine named Prosper Marketplace the #1 website of the year. Not in the top 25, or the top 50 but the #1 website of the year. This was a remarkable accomplishment. It beat out heavyweights like Google Calendar and Newsvine. This was Time's brief description of Prosper last year:

    "The idea behind Prosper is a bit unusual today, but, as the site reminds readers, person-to-person lending—loans without a financial intermediary—has been around since 300 A.D. For those more used to the Internet age, think of it as eBay meets your neighborhood bank. Prosper is an online marketplace that allows lenders and borrowers to bid for loans—with fees and rates than can be much lower than those of a lending institution. Prosper uses credit scores to help its users gauge the risks of their deals, and easy-to-follow instructions on the site help clarify the details."

    Time just released their list of the 50 best websites of 2007 which represent their choice of "the best examples of what's new and exciting about the Web right now...sites with exceptional style and smarts, sites that offer new and improved ways to access and share content, generate our own and otherwise enrich the online (and off-line) experience." Prosper was named one of the 50 best websites of 2007. Here is Time's review this year:

    "Prosper is a community of lenders and borrowers—or social lending network—operates outside of any bank, so the rates are better. Post a request for a loan, including desired amount and the maximum interest rate you'd be willing to pay; potential lenders place bids for the amount they are willing to lend, and at what rate. Prosper combines the best offers and puts together a loan plan (multiple lenders, lower risk) and manages the repayment over three years (the standard term). The site also does credit checks, and charges transaction fees and servicing fees.

    Prosper loans are not secured by collateral, but the loan agreements are legally binding. You can join a group to get the benefit of that group's positive payment history; as a member of a group, your timely payments help improve the group's overall rep, and that can lead to lower rates for everybody. There are loads of rules for borrowers and lenders—members are forbidden to arrange loans outside the Prosper marketplace, for example—and violations can get you booted.
    Zopa based in the U.K., operates along similar lines (and its site has prettier graphics) but its network is not as big as Prosper's, which boasts more than 300,000 members and nearly $66 million in active loans. Also worth noting: CircleLending which helps manage private loans between relatives and friends."

    In addition, I was surprised to find online banking company ING Direct on the list. Here is Time's description:

    "The best bank accounts these days are online, according to the personal finance gurus. And ING Direct's no-fee, no-minimum deposit, federally-insured accounts are a snap to set up; it took us about eight minutes to complete the online forms, then another five to set up the security tools. (Under the privacy policy, the default setting directs ING not to share personal information with marketers—nice.) The basic Orange savings account pays 4.5% interest (better than most offers you'll find at traditional banks) and you can transfer money back and forth from any other checking account at any other bank at no charge. An ING paperless checking account also pays interest—4%—which is practically unheard for an account that requires no minimum balance. It sure beats the .8% we're getting at Citibank."

    Prosper has experienced incredible growth over the last year. They have over $70 million in loans. Few competitors have emerged. Lending Club just barely launched a few weeks ago and Zopa has yet to move to the United States. CircleLending targets a different demographic - loans between people who actually know each other. Prosper is growing but will it catch on? I find it somewhat surprising that ING Direct, an online bank, would be considered "new and exciting" but I guess there is a real dissatisfaction with the current banking system. A bank that is easy to use and provides high interest rates on checking and savings accounts is very refreshing to consumers.

    Prosper is successful because they match borrowers who want to pay less than bank or credit card interest rates on loans with lenders who want to earn more than bank savings account or CD interest rates on their investments. Through greater efficiency, will online banks such as ING reduce the spread between the two and shrink the market for Prosper?

    Edit: Originally I did not see Prosper on the list and wrote this post as 50 best websites of 2007 - ING replaces Prosper. Thankfully an observant reader quickly corrected me. I've edited this post to reflect the accolade. Only the title and about three sentences were edited to make the post correct and I added the Time's review of Prosper. Congratulations Prosper!