Prosper (1 of 3)

Astute readers will notice that I added buttons for borrowing and lending at prosper.com. I do this with some slight hesitation, because Prosper can be dangerous, and should be treated as such, but I also feel it can be a powerful tool if used correctly.

The premise, for those unfamiliar, is that borrowers on the site put up an application for a loan, along with a story about the circumstances and some financial information. Then lenders, average people like you and I, bid to fill part or (rarely) all of the loan value. The minimum bid is $50, but I think the maximum is based on how much money is in your account and nothing else. When a lender bids, they not only big an amount, but an interest rate. In this way, the lenders can get the best rate they want on their investment, and the borrowers can get the lowest rate possible on their loan, often far lower then a bank’s rate on a comparable loan. All the loans take three years (at most) to pay off, all though borrowers can pay them off sooner.

I said that I felt this site could be helpful but also dangerous, and here is why. When you search the site as a lender, the temptation to zero in on the highest interest rates is huge. After all, how many other places could you expect to make 20% or 30% on your investment, right? Wrong. Prosper works a lot like the stock market (and, really, any investment) in that the higher the possible returns are, the more risky the return in. These loans can default, and if they do you will be lucky to receive even a tiny fraction of your investment back. Really, this is more dangerous then the stock market. You can, at least, always sell your shares at a loss. Here you may just get nothing.

But you can protect yourself. Defaulted loans happen most often among the borrowers with the lowest credit scores. So if you avoid the high-risk (and high-payoff) loans, you can still make a lot of money. I currently have six loans out, ranging from a credit score of AA (7%), and C (11.8%). My total investment is garnering 10.2%, and yet I feel like the loans I selected are very safe and so far the borrowers have rewarded my faith.

I should point out, too, that it is possible to operate exactly as a bank does, and balance many low-interest loans with almost no chance of failing against one or two high-interest loans. Done correctly, one could use the income from the low interest loans to cover the principle for the high interest, so that even if that loan defaults, you break even. I can’t stress enough though, even that is not a sure thing. Even the safest loan can default. 

So, if you were looking for a new way to invest some money, I can give my recommendation (with my warnings) to sign up for Prosper. Right now, they are also offering a $25 sign-up bonus, which is pretty cool. It gets you halfway to your first loan, and, for me anyway, is fully half of what I will be making from interest this year.

In the coming days I’ll post two more articles on Prosper, one examining the benefits and pitfalls of using it to borrow money, and another on the obvious but sometimes difficult social implications of investing this way.

All for now!

P.S. If you use the banner at right to sign up as a lender, I’ll receive $25 dollars to. I’m not asking anyone to sign up for me, but if you choose to sign up, please say thanks by using me as your referrer.

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