Friday, July 4, 2008

Movie director promotes Lending Club (again)

Chris Barrett, film director and award winning movie producer, just published a book called Direct Your Own Lifewhere he promotes Lending Club as one way to finance your dreams.

Last year Chris Barrett won $3,000 in Lending Club's video contest. Chris Barrett's video, complete with an actual script and actors, shows a girl who is getting her Paris Hilton news through magazines instead of the internet since her laptop broke. "I can't believe their putting Paris Hilton in jail," she exclaims to her friend who can't believe she's so behind the news. The friend suggests Lending Club to borrow the money and replace her computer.

Here is a short excerpt from the book where Barrett discusses Lending Club:

Still can't find anyone to invest in your project? Look online. Today, a new way to finance just about any dream you have is peer-to-peer lending. One company at the forefront of this innovation is called Instead of maxing out a credit card to start a new business, you can take out a loan from a group of people at a lower interest rate than you would pay to a credit card company or bank. All you need to do is post your loan request on the site so that potential investors can get an idea of what your project is. This arrangement is a win-win for investors and borrowers, because investors split up the investment so that any losses they might suffer will be small, which in turn causes the borrower's interest rates to be small as well. For example, right now, on, a member needs $25,000 to start a DVD vending machine rental company. He has already had $24,300 invested, so he only needs $700 more before his loan is filled and he will be able to launch his company.

Thursday, July 3, 2008

Academic article on Prosper published - Dynamic Learning and Selection

Seth Freedman and Ginger Zhe Jin from the University of Maryland have published an academic article on Prosper called Dynamic Learning and Selection: the Early Years of

Freedman considers the article a preliminary draft. Since first publishing the article they have already made a couple minor changes to the abstract and the introduction with an effort to to stress that the rate of return they calculate is the expected rate of return as opposed to the realized rate of return.

Abstract - Dynamic Learning and Selection: the Early Years of

This paper studies a new business model on the Internet., the first peer-to-
peer lending website in the US, matches individual lenders and borrowers for unsecured consumer loans. Since its inception in February 2006, Prosper has attracted over 500,000 members and has originated loans of over $100 millions. How do individual borrowers and lenders behave in this new marketplace? On what ground can Prosper survive the competition with traditional banks? Is Prosper positioned to replace the traditional lending market or serve a market that the banks have missed? We attempt to address these questions using the full transaction history since the birth of

Compared to the traditional market, Prosper decreases operation and search costs, but may face information costs associated with anonymous online interaction. To overcome the information problem, Prosper has implemented a number of policies over the past two years. Our primary goal is to document the dynamics on both sides of the Prosper market, while accounting for changing Prosper policies and the macro environment.

We have several findings. On the borrower side, we find that the overall observable risks have worsened over time for the pool of listings. While part of this change is driven by the macro environment, Prosper policies are effective in countering this trend, especially for the sub-prime credit grades. On the lender side, we find that the risk perception that lenders apply to key borrower attributes is by and large consistent with how these attributes correlate with the loan’s ex-post performance, but there are significant exceptions. Over time, lenders exhibit significant selection and learning. This learning includes better understanding of the risk of low credit grades and group member loans.

Overall, we conclude that Prosper is evolving from a comprehensive market toward a market that primarily serves borrowers who have access to traditional credit. Using the estimated relationship between loan attributes and loan performance, we estimate the rate of return that a fully rational lender could expect if he can perfectly predict the probabilistic distribution of loan performance conditional on these attributes. If Prosper loans continue to perform according to what we have predicted from their existing performance, this average annual expected return on the funded loans will be approximately 6%. This return has varied by time and has been increasing as the composition of the funded listings shifts toward better credit risks.

Please see details about the empirical methods and assumptions in the full paper. Freedman said they will update the article with more current information later in the summer. The current data set used runs through the end of 2007.

Wednesday, July 2, 2008

Prosper Lending Review - the year in review

Happy birthday to Prosper Lending Review! We have been blogging for over a year now. In June 2007 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 15, 2006 we launched Prosper Lending Review – a blog about the P2P lending marketplace with a focus on Prosper lenders.

Since then we have watched Lending Club grow, GlobeFunder launch, Virgin Money purchase Circle Lending, Zopa move to the U.S. and Fynanz launch. We expect to see Loanio launch soon and keep watching Canada to see if CommunityLend or IOU Central will open their doors. It's an exciting time for P2P lending and we are happy to be part of it.

Here's a look back at the past year. These are the most popular articles on the site as measured by the number of unique visitors.

These are the top 10 referring blogs and forums over the past year.

What are people looking for when they come to Prosper Lending Review from Google? Here are the top 10 search terms driving traffic from search engines:

Again, it's an exciting time for P2P lending. Stay with us over the coming weeks and months as we continue to follow the P2P lending marketplace.

Prosper referral program ends

Since announcing their referral program one year ago, Prosper has grown from about 300,000 members to nearly 800,000. Under the bonus program, both the referring lender and the new lender received $25. Over the last year the program has been modified several times. In addition, the program has been extended past several deadlines. According to Brad Prescott, Prosper's Director of Marketing, existing referral links will not generate referral payments for referrals that occur after 11:59PM PST on June 30, 2008.

Those that signed up prior to June 30th will still receive the $25 bonus when they fund their first loan. Prosper is expected to announce a new referral program this month with the goal of working directly with a few dozen, quality referral partners as opposed to hundreds of partners operating under a "one size fits all" approach.

Referral programs have been used by most peer to peer lending companies to grow their user base.
Although Prosper has announced that their referral program ended on June 30th, I received an email confirmation for a new referral generated on July 1st. This is no different than email confirmations generated prior to the end of the program and confirms a bonus will be generated if the new user becomes an active participant in the marketplace within the next 90 days. The Prosper referral page is unchanged and still allows you to invite friends with the same wording indicating a bonus will be awarded. Despite the deadline, perhaps it is not too late to sign up for the bonus. Prosper would be unwise to terminate awards until they make clear changes on their website, stop sending bonus confirmation emails and stop serving $25 bonus advertisements.

Why should I turn to peer to peer lending?

There has been so much talk in the past two or three years about peer to peer lending and its advantages and disadvantages. We’ve talked to countless people on both ends of the equation and have found the advantages overwhelmingly outweigh the disadvantages. There has been chatter that this is going to be the next big movement in the world of finance and a great way to help someone out and make a bit of cash on your own. Here are a few reasons why you should consider this emerging financial resource:

  1. The lenders have great flexibility. As a lender you’re not making the loan, rather you are purchasing a part of the loan. You can get into a loan for as low as $25-$50. Accordingly, you can limit your risk by creating diversity through the purchase of many different loans. Prosper will put the loan out for bid and when there are enough lenders the loan is granted.
  2. It’s a win-win situation all around. Everyone makes out in the peer to peer loan experience. The lender can sometimes see a turnaround of up to 15% on their investment. The borrower is granted the loan they were seeking and usually pays smaller interest than on a loan from bank because there is less overhead involved. A company like Prosper makes money as it takes a small percentage of the loan cost. Doesn’t this sound refreshing compared to the sour taste left in people’s mouths when dealing with the banks?
  3. Lending is making you the bank. As the lender you are the bank and you get paid for taking the risk of lending money to a borrower. As you begin to get paid back you can choose to spread your money to new loans or you can simply withdraw your money. There is more risk involved in peer to peer lending than a guaranteed investment like a CD, but you can diversify your loan across risk classes and have a better chance at seeing a greater return.
  4. Peer to peer lending is here to stay. This emerging market has enticed investors from all different walks of life and financial backgrounds. As we’ve already discussed there is risk involved, slightly more than stable money markets but you can also see your small investment grow. Prosper has been advertising that the average return is between 8 and 12 %.
This guest post was contributed by Heather Johnson, who writes on the subject of amex canada.