Saturday, September 15, 2007

Newsweek tips hat to Prosper

Newsweek considers Prosper, Lending Club and Circle Lending on their smart strategies money tip sheet today. The post is very brief but here's a portion of what they have to say:

"But are these sensible places to borrow or lend money? The interest rates on these unsecured loans tend to be high, so borrowers with good credit scores could get better rates on most mainstream credit cards. Lenders—anyone willing to put up money in the hopes of earning better rates than they would at a bank—might find more to like. Prosper and Lending Club both check borrowers' credit records and are aggressive about collecting on payments, and lenders can make up to 13 percent on their loans."

I find it interesting that peer to peer loans are compared against credit cards instead of banks or home equity loans. Matt wrote a good article back in July about when it makes sense to borrow from Prosper - Why would a borrower use Prosper instead of a traditional bank? He did not consider credit cards in his analysis but my gut tells me that credit cards are only going to beat banks or Prosper if you have a promotional rate. Generally credit cards are not a good place to carry a large balance. In fact, my personal recommendation is to never carry a balance on credit cards.

Also, can lenders earn up to 13%? Yes, it is possible. Unlikely though. Too many borrowers jump in quickly without considering all the risks. In order to earn higher interest rates you must loan to riskier borrowers. The default rates are so high on the riskiest credit grades that the overall return has been negative. Before lending I would consider reading a couple articles:

Prosper: A hands on education in risk management - Matt introduces diversity and talks about the default rates for different credit grades.

How does Prosper compare to other investments?
- Matt answers 11 common questions new Prosper lenders have.

Of course, there are plenty of other articles and websites. The article mentions which has a great collection of resources.


Mike said...

Also, can borrowers earn up to 13%.

I think you meant to say "can lenders earn up to 13%"? The answer is yes, but it isn't easy or likely.

Tom said...

Good catch Mike. I corrected the article.

And, I'd have to add that plenty of borrows are making more than 13%. Much more. :)

Tom said...

Mike, I just followed your link to LendingStats. Wow - there are only 3 people that have an estimated return above 13% (according to the LendingStats equation). I see you restricted the population to those with more than $5,000 in loans, more than 20 loans, and an average loan age of 9 months.

Like you said, possible but not easy or likely.

J.D. said...

At LendingClub the average ROI is about 11.51%. Check out the top performers:

-- CTO, LendingCLub

Tom said...

JD, thanks for stopping by. Your ROI looks great. I'm sure some will argue that it's not really quite fair to compare it to Prosper yet due to the average loan age. More loans will default over time. Of course Lending Club is going to have fewer defaults due to the stricter credit score requirments for borrowers.

Andrew said...

Tom, you're probably a financially responsible guy, and don't carry a balance on your credit card, but unfortunately the average family owes about $8,000 on their credit card (Source: Frontline - they also have a great online episode about the credit card industry). Bank loans are becoming more and more scarce, and unless you own a home, a HELOC is not an option. So increasingly, credit card loans are becoming the only option for average Americans. Prosper, LendingClub, and future entrants will focus primarily on the credit card market, since they are such easy targets with their high and adjustable rates, dishonest marketing tactics, and absurd policies.

Tom said...

Andrew, I agree with you 100%. The Newsweek article says, "The interest rates on these unsecured loans tend to be high, so borrowers with good credit scores could get better rates on most mainstream credit cards."

How can you get better rates on mainstream credit cards than Prosper or Lending Club?

By the way, I bid on your loan. I was outbid but I'm glad to see you got a great rate.