Prosper.com

February 6, 2010 by banker
Filed under: Book's, Rambling's

Let me start by saying that Prosper did not pay me for this post. Prosper is a peer to peer lending site. Investors can open an account and place funds into it. People looking to borrow money can open an account and place an ad requesting a loan. Prosper does the due diligence and grades the prospective borrower. The borrowers set the maximum rate they are willing to pay and then wait for the offers to come rolling in. If more people want to lend money to the borrower then they need a “bidding war” ensues and the rate could fall. I opened an account a few years ago because I was fascinated by the process but never funded it. When the market crashed in 2007-08 I was quite glad that I didn’t. In November 2009 as my optimism grew about the economy I placed a small amount of money into the account and evenly split it among the three auto investment category’s, Aggressive, Moderate and Balanced. I then allowed Prosper to bid on loans within those category’s. The amount per loan was extremely small as to allow for greater diversification. After two months 100% of my money has been lent out. The theory behind the site is solid (I think). People in debt or looking to borrow some money can get a better rate by not going to a bank. Instead go to individuals with some extra cash, looking to get a better return on their money and it is a win/win for everyone. In these difficult economic times, good people looking to cut down on interest payments can consolidate loans at a lower rate by taking advantage of this program.

Back to my story, of the 60 active notes that I have (again I lent a tiny amount to each borrower) 42 have come up for their initial interest/principal payment. To my surprise 2 have already failed. Clearly the theory behind the process is to lend to a broad base of people at varying rates. Some will pay off in full, some will pay for a time before failing and some will never pay. Back in the Early 1990’s I read a book called Den of Thieves. The book talked about Michael Milken and how he created his Junk Bond empire. He felt (this is my interpretation of his initial actions) that if you bought a highly diversified portfolio of high yielding debt then, although some will not pay, the high yield earned on the balance should compensate for the failures. This made a lot of sense to me and is where I initially developed my Triad Theory. Why am I surprised that two have failed? I guess that I expected people to at least try. Sure these are difficult times, but did something happen to their personal situation from the time Prosper sent them a check and the first payment was due. I do not know. Where they never going to pay? Or are they going to pay, but just a little late?

I guess time will tell if this account and the strategy that I am using will work (I will keep you updated) but I also think it could give me a good read on the economy. We all lose perspective on how life is across the country and this could give me a “read” on that.

DISCLAIMER, I in no way am endorsing Prosper. I am not paid by them (they do have an affiliate program that I am not a part of) and am just writing about the site to describe a personal situation. Invest at your own risk and never by what I say. I am not an expert but rather a guy with a lot of opinions! I do however recommend Den of Thieves it is a very enjoyable book. I read it in the early 90’s and have re-read it twice since then.

Good Luck and Good Forex Trading.

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