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Social Lending Matches Lenders and Borrowers Online

May 21, 2008

By MoneyRates Team | Money Rates Columnist

Social lending sites have taken off in 2008 with Prosper, Zopa, and Lending Club already in operation and several new startups expected to be online by the end of the summer. Prosper is the highest profile peer-to-peer lending site in operation today and provides an online bidding system for borrowers to reduce their lending rates on small (less than $25,000) unsecured loans. Loans originated on Prosper have 3-year terms with monthly payments debited from the borrower's checking accounts. Lenders determine themselves which loans to enter bids on and can set up interactive portfolios to manage their loans and filters to find the type of loans which are most appealing to them.


Average Interest Rate Range for Prosper Loans for the Last 30 Days

Loan Grade AA (Borrowers with Experian Credit Scores +760)

7.57% - 12.67%

Loan Grade A (Borrowers with Experian Credit Scores +760)

10.60% - 16.17%

Loan Grade B (Borrowers with Experian Credit Scores 720-759)

14.21% - 18.92% (Borrowers with Experian Credit Scores 680-719)

Loan Grade C (Borrowers with Experian Credit Scores 640-679)

18.14% - 22.65%

Fees are not included in the above averages.

Prosper makes it easy to analyze historical lending returns by posting average returns on all loan grades and all loan sizes. For the most part, the returns have been solid with loans graded between AA and C averaging less than 3% defaults and loans in the same credit categories averaging less than 2% on 60-day delinquencies - marking portfolio lending returns which many banks might be satisfied with. Here are some frequently asked questions about Prosper posted on their site:

Who can lend money on Prosper?

A Prosper lender is any person who is a U.S. resident with a bank account and a social security number. After passing Prosper's identity verification and anti-fraud checks, lenders offer money to borrowers at a rate they select, often earning a much better interest rate than putting their funds in a money-market account or CD.

How much money can someone lend?

Because Prosper allows lenders to bid on all or parts of loans, lenders can fund as little as $50 and as much as $25,000 on any particular loan listing.
How should people that lend evaluate loan listings? Prosper allows lenders to select listings based on their own criteria. Lenders can evaluate listings by a borrower's credit grade, debt profile, or other factors. For example, a successful filmmaker may want to lend money specifically to independent filmmakers by browsing individual listings. Alternately, a lender may create a portfolio plan to fund any loan listings with specific credit criteria.

If I make a loan through Prosper, what guarantees do I have that the loan will get repaid?

There are no guarantees that your loan will be repaid. We try to give lenders as much information as possible about the credit worthiness (or "credit grade") of the borrowers on the site, their debt burden (known as the "debt to income ratio"), and the expected default rate of a borrower with their credit grade, which is based on historical data from Experian, one of the three major credit reporting agencies. The way to ensure a good return on your investment is to diversify your lending—use portfolio plans to place bids on many listings, and spread your risk across many borrowers. Even if one of your borrowers defaults, the return from your other borrowers should make up for the loss.

How should people who lend spread their risk?

Because Prosper allows lenders to bid small amounts on all or part of loans, it is easy for lenders to create well-diversified portfolios. Using Prosper's portfolio plans feature, lenders can efficiently diversify their portfolio by automatically funding listings that reflect their pre-defined criteria. For example, a lender can bid as little as $50 on any loan listing. To diversify their portfolio, a lender might want to spread an overall investment amount of $10,000 among several loans.

What happens if a borrower does not repay their loan?

Borrowers who miss payments on Prosper face the same consequences as they would if they miss a payment with any form of bank credit including the reporting of late payments to the credit bureaus. Borrowers also incur late fees, which are collected by Prosper and passed onto the people that loaned the money. When a borrower's payment is late, Prosper communicates directly with the borrower to encourage repayment. After 15 days, Prosper notifies the borrower's friends and group leader of the late payment. After 30 days, Prosper engages a nationally-licensed collection agency, giving borrowers 90 days to bring the account to current. At more than 120 days past due, the loans are sold to a debt buyer. At that point, the borrower's credit report is negatively impacted with a default and they are banned from borrowing on Prosper ever again.

Can I collect on late payments myself?

Under no circumstances should you attempt collection on a late payment yourself. Compliance with all state and federal laws while attempting to collect a delinquent loan is not trivial. When necessary, Prosper ensures all collection activity is performed by licensed and professional collection agencies. Lenders who undertake debt collection (even if they are a debt collector by trade) are in violation of Prosper legal agreements and will undermine the collection agency's ability to do their job. Moreover, in doing so you run the real risk of creating a legal liability for yourself.

Will borrowers know their lenders' identity?

No. Everything on Prosper is done anonymously, and there is never a need for lender and borrower to contact each other. If a lender and a borrower do communicate through the Prosper web site, it is entirely up to each person to choose how much information they wish to share with the other.

Are lenders' deposits insured?

Prosper is not directly insured by the FDIC, but lenders' deposits are covered up to $100,000 by FDIC pass-through insurance provided by our banking partner, Wells Fargo Banks.
Do lenders earn interest on deposits?Lenders do not currently earn interest on deposits to their Prosper account. Because of rules associated with pooled accounts (such as the ones that we use to hold your money), we are not allowed to earn interest on those accounts. Prosper encourages lenders to transfer money to Prosper as needed to fund loans, while leaving a modest amount available for immediate bidding on interesting opportunities. How much cash you keep in your Prosper account will depend on how frequently, and in what amounts, you bid. Additionally, using portfolio plans can significantly improve the pace at which you acquire loans and will allow you to move more money faster. Because portfolio plans are automated, they can minimize the amount of time your money sits idle and therefore improve your internal rate of return (IRR).

Find out more about Prosper.

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