Cutting out the 'middle man' (banks, the stock market) and manage your investments directly with borrowers
Lack of action over defaulting borrowers, inflexible terms
Small returns for early adopters, interesting idea though, worth watching
Will Your Investments "Prosper" with Prosper?
With widespread scandal and disillusion surrounding banking and the banking system, it is no surprise that other forms of lending and borrowing are appearing. The majority of these are internet based, peer to peer (P2P) systems which (as Prosper say) ‘connect people who want to invest money with people who want to borrow’. Prosper ‘cut out the middle man… so that everyone prospers’ and claim that investors get better returns and borrowers get better rates.
It is perhaps unfortunate that Prosper was launched in 2006 prior to the current banking crisis and decline in the economy. Prosper’s loans are fixed for a duration of three years and complaints of poor returns from early adopters have been countered with the assertion that it’s not bad considering ‘the context of the largest recession in generations.’
However many people see peer-to-peer lending as a fresh, alternative way to invest funds, particularly those disillusioned with the stock market who want to ‘invest on their own terms’ to ‘individuals with faces and stories.’
It works like this: once a lender is approved (which can take a few days), they then make bids on available loans, in a process similar to an eBay auction. If there is a lot of interest, then (of course) there will be many lenders bidding, and the idea is for the borrower to get funding at the lowest interest rate possible.
The biggest risk is that borrowers default on the loan. Lenders minimize this risk by spreading out their loans across many borrowers and by checking credit ratings, which are provided in some detail. However it should be emphasized that there is a risk, and this is by no means a ‘get rich quick’ enterprise. It perhaps should be viewed in terms of microcredit, a growing and potentially important concept that is best viewed as a cross between an investment and a charitable contribution.
To some this makes Prosper more interesting, an ‘opportunity to reduce poverty in our own back yards’, but to others this is a problem: with borrowers asking for money for cars, vacations or even paying off credit card bills (transferring debt around) rather than the microcredit model which is generally for financing (very) small businesses.
So will your investments with Prosper enable you to prosper? Not on current figures. Experienced lenders report funding high-risk loans and then rolling the return and interest into safer loans. This requires a certain type of nerve reminiscent of the stock market. It may be fun, though. Prosper provides great detail on borrowers’ financials situation and this reveals useful information on interest rates and their relationship to debt and income. Amateur investors love this stuff.
On the downside Prosper have been accused of paying insufficient attention to defaulting borrowers, and the terms of the loans are undoubtedly inflexible. People with an inclination toward ‘social’ loans maybe better off investigating one of the microlenders, which, interestingly, report very high repayment rates (98.4%), and can genuinely claim to alleviate poverty by loaning money to small scale third-world entrepreneurs. But only you can truly find out how Prosper will work for you.
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