According to a BankServ press release, Lending Club has implemented BankServ's payment platform, ACH reporting, and cash management solutions. This is the same platform that Zopa uses and is based on Magex Managed Payment Platform designed for person to person payments which BankServ acquired in 2006. Although this news is unimportant to most lenders, it will become significant if BankServ or any other payment system can manage lender's funds to pay interest on idle money. From the press release:
BankServ powers innovative Lending Club person-to-person lending and borrowing platform
SAN FRANCISCO, 7 August, 2007 — BankServ, worldwide experts in electronic payments, today announced its part in the successful launch of Lending Club's collaborative person-to-person (P2P) lending platform. Lending Club has implemented BankServ's Magex Payment Platform, ACH reporting and cash management solutions.
P2P banking and payments is set to be a major growth industry. The BankServ solutions have been deployed to support Lending Club's innovative, online facility that brings a new financial service to various online communities (including university alumni groups, social networks, and professional organizations). The Lending Club solution offers users the ability to get a loan, fully online, at a lower rate than from traditional sources. Lending Club manages user authentication, credit checks and loan processing, and, through its LendingMatch™ technology, matches up groups of compatible lenders and borrowers.
"We set out to find a company that could support our P2P service and provide us with ACH reporting and cash management facilities that would seamlessly integrate with the other components of Lending Club's technology, namely credit analytics, portfolio recommendation, profile matching, authentication and collections. We recognized that BankServ's Magex Payment Platform has become the standard for any company that is serious about launching a P2P financial service," comments John Donovan, COO, Lending Club.
"Many payment industry experts are convinced that P2P lending will define a new era in electronic payments. There is a clear need for new solutions that improve service and convenience to consumers, and Lending Club has achieved this with its innovative LendingMatch™ technology," said Mary Ellen Putnam, Vice President of International Business, BankServ. "We are pleased that the BankServ technology offerings have been selected by Lending Club and look forward to working with this impressive team as they build on their success."
"We were looking for a partner that brings experience in P2P, the payments industry, and that also understands the need for speed and efficiency. BankServ has proven technology and services that made them an obvious choice for Lending Club," concludes Donovan.
For over a year, Zopa has advertised that they are moving beyond the UK and will offer peer to peer lending in the U.S. Their website header contains an email form if you want to be notified of developments. For months there have been no emails. Until today.
In today's email Zopa announced, "We are in high gear on launching Zopa in the US" and are looking to hire great people. Specifically they are looking for a web developer, financial systems developer and an account manager. Here are the job descriptions:
Web Developer - We need somebody to own, design, and build the presentation layer of the Zopa website in the U.S. So you'll need to be a sharp--even a C#--developer (and able to appreciate the odd bad joke). You'll need to be a great person in general, of course. But you'll also need to be a master of ASP.net, a core technology for us...
Financial Systems Developer - We need a crack developer to work on the financial engine underneath our peer-to-peer lending system. This job is literally at the heart of everything we do, and you'll need to be a great person to wear the role well.
Account Manager - Zopa is a financial service, and so we need some crack accounting folks. This position is a general accounting position with emphasis on reconciling our bank statements with our internal system of record.
Those interested in applying can send a resume to Zopa at jobs@zopa.com.
While competition seems to be heating up, Lending Club CEO Renaud Laplanche does not feel threatened by the other companies. In an interview with CenterNetworks yesterday he said, "Prosper is really the only other person-to-person lending marketplace available in the US at this point, but we do not feel competitive with them at all. Both Prosper and Lending Club can be very successful, and the success of both companies will be much more dependent on how fast we can grow the p2p lending space together rather than how well we compete against each other. With 2.4 trillion dollar in personal consumer debt (other than mortgages), it is a big market out there."
Eighteen-year-old Steve Dinelli has thrown his hat into the ring against rock stars and movie directors in an attempt to win $5,000 in Lending Club's video contest. Or, perhaps it's more appropriate to say rock stars and movie directors have thrown their hats into the ring to compete against this soon-to-be college freshman. Steve was one of the first to enter the contest and has nearly a two-week lead as others race to catch up. The winner will be the video with the most YouTube views on Friday. Steve's video is fascinating to watch and was created by carefully lacing together over 1,500 still pictures. Steve shared a few of his thoughts about marketing and peer to peer lending with Prosper Lending Review:
How did you hear about the Lending Club video contest?
I heard about the Lending Club contest while browsing Google. I'm always looking for new video contests. I didn't really know what to make for the contest so I figured just something fun with stop motion would be fun.
Tell us about how you made the video.
Making the video is a little harder then the 49 seconds looks, it's made completely with still photographs moving the objects slowly to create video when the pictures are played in rapid succession. It takes about 30 photos for every second of video, this video took about 1,500 photos to produce...I have the stop motion technique down pretty well and I made the entire video in less then 2 hours from the time I found out about the contest.
Have you made other videos using that technique?
The first film I made a 8 minute film using this technique titled "Nightmare On Gamer Street". It took 15,297 photographs to produce and I'm very proud of it. This is a one minute cut from the movie, which actually won 2nd place in the "askmrvideo your day in 60 seconds" contest. The entire film is not online yet because I'm entering it in a contest in a month or so, so keep a look out.
Have you used Lending Club or heard about it before this contest?
I have not heard about Lending Club before the contest. I think its a great concept and it will take some time for more people to feel safe lending and borrowing money not from a bank, but I'm sure this will become very popular within the next few years.
What do you plan to do with the $5,000 if you win?
If I win the contest I'm starting college next year and could use all the help I can.
Tell us about yourself (work/school).
I will be attending Robert Morris College in Chicago and will be on their bowling team. I also work at Classic Bowl in Morton Grove IL doing PR and Marketing. I'm a competitive bowler and have competed in bowling at the national level. Also my senior year I competed at the national DECA competition in business service marketing.
Good luck Steve and thanks for sharing your video with us!
Be sure to come back as we feature one of the top Lending Club videos each day this week. Vote for your favorite video here.
I've been wanting to write a post about this for awhile and an article in the Boston Globe yesterday further encouraged me. In Sharing the Wealth, the Boston Globe discusses how financial social networks may help people make better financial decisions. Here's an excerpt:
Social-investment sites take the sheen off "expert," allowing people to compare their investments or trade advice and opinions. Social-lending companies let people appeal to other people, rather than their banks, when they need a loan. And financial-advice sites that employ social-networking tools act like Weight Watchers for money: People choose goals, such as buying an iPhone or paying off a credit card, then move toward them while others with the same goals trade encouragement and strategies.
"I know a lot about the mistakes people make at a young age, and I think it's a great concept," said Cary Carbonaro, president of Family Financial, a traditional financial planning firm based in New York and Florida. "If I'm in debt, I can go talk to other people in debt or ask someone who is my peer and not embarrass myself."
But there are obvious questions, ranging from privacy and security risks to the dubious benefits of leveraging the financial "expertise" of the masses. The wisdom of the crowd may be a fine way to discover the most amusing YouTube video, but Wikipedia has been vilified for inaccuracies, and the online world hardly has a reputation as a trustworthy source. Start-ups need to gain the trust of users, assuring them that the software is hacker-proof and that their detailed financial information won't end up in the hands of marketers.
...Social finance should have 2 million users by the end of next year, and 16 million within 10 years, according to Online Banking Report, an industry newsletter.
In addition to Prosper, Zopa and Lending Club, some of the social finance sites that the Boston Glove features include:
Geezeo/Wesabe - similar to an online version of Quicken where expense information and advice is shared among users
Covestor - launched this summer, tracks its members' investment records, allowing people to judge their portfolio's performance against the crowd
Zecco - web brokerage with blog and social-sharing features that allow people to share tips and trades
Wikinvest - bills itself as a Wikipedia for investments, promising to be a constantly updated resource that reflects more than just a single expert's opinion of a certain company
Is the wisdom of the crowds really wise? Sometimes crowds can make very poor decisions because people tend to emulate others and conform. I've seen posts on the Prosper forums where people said they bid on loans simply because they were mostly funded using this reasoning, "how can 30-40 other investors be wrong?" Of course, maybe they just followed the same reasoning you did. Surowiecki argues the best groups have the following attributes:
Diversity of opinion - Each person should have private information even if it's just an eccentric interpretation of the known facts.
Independence - People's opinions aren't determined by the opinions of those around them.
Decentralization - People are able to specialize and draw on local knowledge.
Aggregation - Some mechanism exists for turning private judgments into a collective decision.
While group behavior may cause some poor decisions to be made on Prosper, I think there are plenty of examples in the forums where the collective intelligence of the group contributes to better decision making. What do you think? Would any changes in the website structure or technology help facilitate better decision making?
Share Ross, former bassist for the platinum-selling EMI recording artists Vixen and guitarist and singer for Bubble, has produced a video for Lending Club's video contest with her husband. She's a believer and says, "person to person lending is a wonderful example of anarchy in its finest form! It's grassroots and a simple concept." I think she's a great spokesperson. If her video doesn't win, Lending Club should consider hiring her to to make more videos and get the word out about person to person lending. The video, which is embedded at the end of this article or available on YouTube, is very professionally produced and has some great music and clipart. In an email exchange, Share told us about her video and how she feels about person to person lending.
How did you hear about the Lending Club video contest?
I heard about the contest through a friend of mine on Facebook. I was already familiar with Prosper but had never heard of Lending Club. They're a little bit different to Prosper and I like the Facebook connection, too.
Where did you get the idea to create this video?
My husband and I read the contest rules and thought the simplest way to make the video would be to treat it like a tv commercial. We talked about various ways to do it and decided the simplest approach was the best. Suddenly I was elected to be the spokesperson! ha! I don't know how actors remember all their lines because I sure had a tough time remembering the script that I wrote! ha!
Tell us about how you made the video.
First was the script. We rewrote a few times and went over what graphics to use and how they could fit in. Then we went online and purchased loads of images to use. After all that, we filmed it in our backyard and my husband edited it all together in about 3 or 4 hours. Oh, and he created the background music on his computer, too.
Have you used Lending Club or heard about it before this contest?
I have not used it before and hadn't heard of it prior to the contest. I hope the publicity helps more people find out about it!
What do you plan to do with the $5,000 if you win?
The competition is pretty tough so I haven't even given it a ton of thought. We entered to help get the word out there. But if we were to actually win? I would give 5% to charity, 10% to the IRS, 20% as loans on Lending Club and the rest...well, some of it would go towards saving for our first home and maybe 10% of would go towards something fun.... like a couple of days at the beach!
Tell us about yourself.
I'm a musician first and foremost but that has led to many other endeavors. I was known as the bassist in Vixen and later, the guitarist/singer in Bubble. Now I host an online video podcast called Rock n Roll TV which is produced by my husband and me. We also do some video editing work for record labels. Recently, I published a knitting book called Punk Knits, too!
Anything else you would like to add?
I believe that person to person lending is a wonderful example of anarchy in its finest form! It's grassroots and a simple concept. While I have not researched its benefits completely as an investment, the idea is pure and I respect that. There is something great about lending your money to actually help someone.
According to a Prosper press release published on Rateladder, Prosper has plans to expand operations to Japan and other Asian countries. Here's an excerpt from the press release:
Prosper and SBI Holdings to Establish Prosper in Japan and Other Asian Countries
San Francisco – August 6, 2007 – Prosper (www.prosper.com), America’s first people-to-people lending marketplace, and SBI Holdings, Inc., a holding company for SBI Group, the financial innovation leader of Japan, today announced an agreement to form a joint venture to facilitate the launch of Prosper in Japan and explore other Asian markets.
“As Prosper takes the first step toward expanding to Japan, we’re confident SBI is the optimal partner to navigate the regulatory landscape and successfully launch and operate the Prosper marketplace in the region,” said Chris Larsen, co-founder and Chief Executive Officer of Prosper.
“With over $78 million in funded loans and more than 360,000 members, Prosper is the leading person-to-person lending marketplace,” said Hayato Kameta, incoming Chief Executive Officer of the joint venture. “SBI Group’s experience and resources in both the Internet and financial sectors, combined with the vision and infrastructure of Prosper, makes this joint venture well positioned to develop and execute a business plan which meets the regulatory and business environment in Japan and other Asian countries.”
In June Prosper received $20 million in venture capital. It looks like international expansion is part of their plan. Due to all the regulatory requirements, expansion from one country to another has typically been very slow. Zopa, for example, announced over a year ago that they will come to the United States.
Update: TechCruch is reporting this development and makes an interesting point, "It’s ironic to see these peer to peer lending startups expanding at the same moment the collapse of the sub prime lending market sends waves through the mortgage market. Similarly, these startups will be sink or swim based on their ability to effectively manage risk." Here on Prosper Lending Review we have wondered the same thing on our articles about the sub-prime fallout and how Prosper would do in a recession.
There is one week left in Lending Club's $5,000 YouTube video contest. Nearly three weeks ago, Lending Club announced a contest "for the best video about Lending Club and person-to-person lending" as measured by total views on August 10th. So far there are a total of 13 contestants vying for the $5,000 prize. The top video has over 7,000 views. It is still possible that someone could enter the contest before the end of the week and take the prize. The most popular videos on YouTube gain tens of thousands of views in a single day.
After reviewing all the videos I think that five clearly stand out above the rest. These are not necessarily the videos with the most views. If I was a one-man judging panel and had to rank order the videos here is where they would stand:
#1 - Chris Barrett's Lending Club Commercial Submission - 1,496 views Funny video of a girl who is getting her Paris Hilton news through magazines instead of the internet since her laptop broke. She's so last week. Her friend suggests Lending Club to borrow the money and replace her computer. Professionally done. Great acting. It was directed by Chris Barrett and written by Elizabeth Licorish. Chris Barrett is a partner in Powerhouse Pictures Entertainment and is a documentary film director. He is currently shooting a documentary about teacher sex scandals called 'After School' which should be released this winter. Although this has less than 2,000 views it is the fastest climbing video and was featured on Elites TV. The video was just uploaded on August 3rd. Chris Barrett is an established YouTube video artist and has over 2,200 subscribers.
#2 - Lending Club Viral Video - 778 views This video was created by Share Ross, a self-employed freelance artist, and her husband. Share is well-known as the bassist in Vixen and the guitarist/singer in Bubble. In the one-minute video she does a great job of explaining how Lending Club works. I would give this video the award of most likely to appear on actual TV. Very well done; professional quality.
#3 - Lending Club Commercial - 5,705 views A guy attempts to clear a long set of stairs on his skateboard. Yes, you know how it ends. Captions read, "You can't erase the past. But with Lending Club, you can refinance old debt. To buy a new skateboard...or pay off medical bills." It's short (only 14 seconds), funny and very youtube-ish. It's the kind of video someone would email to a friend and say hey, check this out! It has received hundreds of views from MySpace embedded links and, in my opinion, is the most likely winner based on its MySpace popularity. It won a YouTube honor - #80 most linked to video in the sports category. It was created by Sean Orndorff from USC.
#4 - Battle at Kruger, Lending Club and You - 1,088 views Fascinating video of a young buffalo attacked by wild animals (banks and credit cards) and is rescued from certain death by a pack of brave buffalo (Lending Club lenders). Great storyline and the audio is well done. This video, created by David Baldwin from Texas, was featured on the Lending Club blog.
#5 - Lending Club Contest! - 7,202 views The first 15 seconds of the video is dedicated to explaining how Lending Club works - one of the few videos which does that well. The rest of the video shows various possible uses for a Lending Club loan. The biggest advantage this video has is that it was uploaded very early and has been collecting views for weeks longer than some other videos. It was created by Steve Dinelli who will be a freshman at Robert Morris College this fall.
Honorable mentions. The following videos stand out for one reason or another.
The Magic of Lending Club - 520 views Harry Potter borrows money (transported by owl) for new textbooks, socks, a faster racing broom and friendship. Creative.
Come on in! Get your feet wet! - 228 views A home video shot of a family playing in a water fountain while on vacation in Europe. Subtitles say things like "Cool down! Enjoy life! Lend and borrow with Lending Club!" If you hang on until the end of the two and a half minute video you will learn that the vacation was funded by eight members of Lending Club. This may be the only person who has personal experience with Lending Club to enter the contest.
Cat Lovers - 251 views This is part two of the get your feet wet video. Art Ture explains that he and his wife borrowed money from Lending Club and took a trip to Europe. There are four and a half minutes of video from their trip including lots of cats. Again, I like how this is a personal Lending Club story. It is, however, unlikely to gain many page views because few people are generally interested in vacation videos unless you are in them.
Raccoon in Da Club - 583 views Twenty-two second video of a raccoon. "Join raccoon-to-raccoon Lending Club. The CLUB not the tree." Nice play on LendingTree.com.
Microwaving My Credit Card - 33 views Thedebtkid cooks his credit card in the microwave. "There is an easier way to melt away your credit card debt...lendingclub.com."
Brilliant Viral Campaign - 892 views This was one of the first videos to enter the contest. It is a dubbed-over 1-minute clip from the Hound of the Baskervilles called The Hounds of Bad Credit. Someone wrote in the comments, "Perhaps if it was all redubbed, and the audio quality was better. As it is, it's just sort of bad. I'm giving it a 4 of 10. But the concept is a great idea! I'd just redo it." I'd agree. Creative idea but the audio quality actually makes it a little painful to watch.
The final two videos were difficult to understand. In Netbanker's review Jim Bruene said, "One is recorded so softly, you cannot understand a word of it, another features a guy reading website copy on his couch...I don't want to skew the results by linking to them. Trust me, you don't need to watch them." To be complete and fair I will link to them, but I agree with Netbanker's assessment.
LendingClub.com Contest Video - 1,249 views This was the first entrant uploaded July 23. Contains profanity. Not interesting enough to keep my attention for six minutes. It's the longest video in the competition.
Since some of you may disagree with my top video picks I threw together a quick poll so you can vote for your favorite. Which one do you think should win? Note, I was limited to 10 poll options so I combined the two entries that were made by the same person and excluded the last two videos.
Overall, some high quality videos have already been produced for Lending Club's contest. This week we will post interviews of several of the video producers. They have fascinating stories.
If you are interested in joining the contest in the final week you can get the details on our earlier post or, if you have a Facebook account, on the official contest site.
Credit scores are the most important indicator in determining what rate you will pay when you borrow money. The worse your credit score is, the more you will have to pay in interest on your loan. Your credit score is made up of a number of components including the length of your credit history, the amount of debt that you carry, recent credit inquiries by lending institutions, and the number of late payments or defaults that you have on current or prior debt. Sometimes this score is called a FICO score because it is generated with software from Fair Isaac and Company.
There are three credit reporting agencies that produce credit scores: Equifax, Experian, and TransUnion. Each of these collect information about borrowers independently and the accuracy and quantity of information on a borrower can vary among the credit agencies. Because of differences in the data collected, the score for a given borrower can also vary among these credit agencies. Some lending institutions partner with one of these credit agencies and use them as an exclusive provider of credit scores and content, while others obtain data from all of the credit agencies when making a loan decision. Prosper exclusively uses Experian while Lending Club exclusively uses TransUnion for their credit data.
According to MyFico.com the distribution of credit scores for the general population is heavily weighted to the higher end of the spectrum with most scores falling above 700.
Prosper uses credit grades rather than displaying the raw credit scores. The following is a chart that explains that correlation.
Grade
AA
A
B
C
D
E
HR
Score
760 and up
720-759
680-719
640-679
600-639
560-599
520-559
I must say that when I came across this data I was quite surprised by this distribution. Matching the two sets of data together, we realize that E and HR borrowers combined represent only about 11% or 12% of the population (people below 520 cannot currently borrow on Prosper). Nearly half of the population falls into the AA or A credit groups.
Okay, ready for some shocking statistics? Here is the current breakdown of active loan listings on Prosper as of the writing of this listing:
Grade
AA
A
B
C
D
E
HR
Number of Listings
54
56
113
230
382
500
1308
Roughly half (49.4%) of the current loan listings are for HR borrowers, with only 2% for AA borrowers, and 2% for A borrowers. This is shocking when you consider that combined A and AA borrowers make up half of the general population while HR borrowers account for less than 10% of the general population.
One effect this has is that when lenders see an A or AA listing they think they are lending to the cream of the crop - the top 4% of borrowers. While, when lending to Bs or Cs they may be thinking, "This isn't too bad, I am still in the top 15% of loans". In terms of the number of Prosper loan listings they would be correct. However, in terms of the general population, lending to AA and A borrowers just puts you in the top half of borrowers, while Cs could put you in the bottom 25%.
This also clearly demonstrates that many borrowers are using Prosper as a lender of last resort. People who are unable to obtain credit elsewhere because of their low credit scores are flocking to Prosper in an attempt to obtain financing on their loan. Anyone with a score below 620 is considered subprime, which is the middle of the D credit grades on Prosper. With scores below that, many of the Es and most of the HRs would find it difficult to obtain a loan at any rate from traditional financial institutions.
The distribution of loan requests on Prosper suggests that Prosper is having difficulty attracting mainstream borrowers in the higher credit grades. This makes it difficult for lenders that want to lend large sums of money to borrowers in the top credit grades. These lenders are forced to spread the money out over a long time period, or aggressively bid down the rates on the small number of loan requests in the high credit grades. (See my previous article for why someone with good credit would want to borrow from Prosper.)
This is part 1 of a 2 part article about credit grades. Watch for an upcoming post in which I will describe how you can obtain a free credit report, dispute inaccuracies on your report, and monitor your credit. In part 2 I will also discuss how much it can cost you to have a poor credit score.
Edit/Clarification: In this post I compared FICO scores in the top graph to Experian's ScoreX scores used by Prosper. FICO scores run from 300-850 while ScoreX are from 330-830. There is really no one in the 830-850 range anyway, so trimming that doesn't really have an effect (same onthe bottom end of the scale). Although Experian's ScoreX scores are mathmatically scaled to match FICO scores they are produced by a different algorithm and could result in slightly different data. The overall analysis in this post should hold but the percentages may vary. Here's a short explaination from Wikipedia on the difference betwen FICO scores and Experian's ScoreX score:
For easy use, most scores are mathematically scaled so that they fall in the general range used by prominent scoring model competitors. Since the Fair Isaac Corp. provides the dominant scoring method, non-Fair Isaac method-generated scores often mimic FICO scores, (they often are derisively called "FAKO" scores).[1] Although not as widely used, these scores (e.g. TransUnion's "TransRisk", Experian's "ScoreX", and "PLUS" scores), are less expensive for borrowers to buy than is the FICO score. The business cost savings of buying and using non-FICO scores is financially tempting to some banks and credit card companies to use, as they need accurate risk assessment of millions of accounts.
Update: Part 2 of this article, which covers free credit reports, claim disputes and the importance of good credit is here.
There are many different ways to measure an investment. We might ask questions like: What is the potential return? What is the risk? What about liquidity? What fees are involved? What are the tax consequences for the investment returns? Are there tax benefits to losses that might be incurred? How time intensive is the investment? Can it target specific objectives like saving for college or retirement? How is it treated when part of an estate if the account holder passes away? Can it be used as a hedge against events that negatively affect other investments? In general, how does it compare to other investments?
Lets take these questions one at a time to see how Prosper stacks up:
Q1: What is the potential return?
A1: Interest rates on loans on Prosper fall between 6% to 29%. Current performance indicators suggest that one can expect to earn between 8%-12% after defaults with a disciplined investment strategy. To obtain these rates investments should be made in higher grade loans for borrowers with good credit scores (preferably to borrowers with no delinquencies in their credit report).
Q2: What is the risk?
A2: The primary risk on Prosper is that loans will default, or will be late in making payments. Loans that default are sold off for between pennies on the dollar to as much as 30 cents on the dollar for homeowner loans in the higher credit grades. Late loans are turned over to a collection agency, and any recovered payments will be subject to recovery fees paid to the lending agency. Default rates increase as credit grade decreases. You can view default rates and expected rates of return for different types of loans at Prosper's Marketplace Performance page.
Q3: What about liquidity?
A3: Prosper has very little liquidity. The only way to pull money out of Prosper after it is invested is to wait for the borrower to make payments over three year term of the loan. Prosper has indicated that they are working on creating a secondary market that would increase the liquidity of the money invested.
Q4: What fees are involved?
A4: Lenders pay an annual loan servicing fee of between 0.5%-1% depending on the credit grade of the loan. Lenders are also responsible for collection agency recovery fees on any loans which go more than 1 month late. These fees range between 7.35% and 20% of the amount recovered by the collection agency.
Q5: What are the tax consequences for the investment returns?
A5: Any money earned on Prosper is taxed as ordinary income and subject to Federal income tax rates which can be as high as 35%, and state income tax rates which vary between 0% and 9.3%. Prosper is not a tax friendly investment.
Q6: Are there tax benefits to losses that might be incurred?
A6: With some assets, including stocks, it is possible to use losses to offset taxable gains from other investments. You can also decide when to sell a stock based on whether doing so would be advantageous for tax purposes. On Prosper it is not possible to use a loss to offset a taxable gain from another investment. Also, on Prosper is not possible to time the receipt of income to postpone any tax liabilities.
Q7: How time intensive is the investment?
A7: Much like researching out an individual stock before you purchase it, each Prosper loan requires a bit of research to determine whether it is a good investment. It is possible to set up standing orders that will auto bid based on a pre-selected set of criteria to reduce the amount of time required. Many investors, including me, enjoy the process of researching and selecting loans to bid on, but this should be considered a time intensive process.
Q8: Can it target specific objectives like saving for college or retirement?
A8: There are many investment programs that target a specific savings goal. There are a variety of state run 529 plans are setup for saving for college. 401Ks and IRAs are setup for retirement savings. Other investments are setup specifically as tax-friendly investments. Prosper is none of these. I guess there is no reason that you can't use Prosper for saving for retirement or college, it is just that you will not get the tax benefits or employer match benefits that can be available from some of those more targeted investment options.
Q9: How is it treated when part of an estate if the account holder passes away?
A9: Understanding how investments fit into an estate planning scenario can be very important. When properly structured, many investments can be passed on to heirs tax free and often taxes will not even need to be paid on unrealized gains from an investment. When not properly structured, estate taxes can significantly reduce a person's assets. Let's take an individual stock for example. Let's say you purchase 1000 shares at $5 per share, and over the years that stock increases to $80 per share. If you were to sell it, you pay taxes on the $75,000 in earnings at the capital gains tax rate (currently 15%). If you instead pass it on as part of an inheritance to your heirs, they can receive what is known as a step up in basis. That means that if they were to sell the stock they can list their cost as $80 (the value of the asset at the time they received the inheritance) and they do not pay any taxes on the $75,000 in profit. A similar tax savings can be realized if the stock is donated to charity - in that scenario the money can also be earned and donated without anyone paying taxes on the earnings. In Prosper, there is no way to avoid the taxes. As money is earned from Prosper loans it must be realized as income and the taxes must be paid.
Q10: Can it be used as a hedge against events that negatively affect other investments?
A10: Often investors will look for investments that will reduce their risk to negative events by diversifying in investments that move independent of each other. For example, airlines will invest in oil futures in such a way that if oil prices increase then they make money on their investment. If oil prices decrease then they lose money on the investment, but they realize an overall saving by having to pay less money to fuel their planes. This lowers their exposure to the risk of a sharp increase in oil prices. Prosper does not target a specific commodity or investment for hedge purposes, but it can be considered an independent asset class in much the same way that stocks and bonds are separate asset classes. As such, it does offer value as a means of diversifying an investment portfolio.
Q11: In general, how does it compare to other investments?
A11: I think the best use of Prosper is for diversifying an investment portfolio so that you don't have all of your investments in stocks and bonds. Adding some Prosper loans should increase the overall diversification of your portfolio. Combined with a conservative investment strategy I think it can provide better returns than bond funds. Prosper should not be considered a good place for money that might be needed for emergency purposes since there is very little liquidity in the investment. Also, it is probably not the best investment for retirement money unless you are already maxing out any 401K or IRA accounts that are available to you. If you are relatively new to saving and investing I would suggest starting with an emergency fund equal to about 3-6 months of your salary. This money can be kept in a money market or savings account. After that, if you have a 401K available at your work you should be saving at least enough to get you a full company match. Next, it is good to save additional money for retirement in a IRA. Additional medium to long-term savings accounts can then be setup with a mix of stocks, bonds, and Prosper loans. The allocation percentages should be determined by your tolerance for risk and your investment time horizon.
Last month has been a busy blogging month with lots of peer to peer lending news. We published 37 articles and had lots of user interaction. Here's a quick look at the July highlights. Posts marked with a double asterisk are my favorites.
According to a BankServ press release, Lending Club has implemented BankServ's payment platform, ACH reporting, and cash management solutions. This is the same platform that Zopa uses and is based on Magex Managed Payment Platform designed for person to person payments which BankServ acquired in 2006. Although this news is unimportant to most lenders, it will become significant if BankServ or any other payment system can manage lender's funds to pay interest on idle money. From the press release:
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