First Fundings on Prosper.com

As I mentioned earlier, my lending philosophy on Prosper is to give to people that I believe in. I'm not just out to make a quick buck- I like the social aspect of lending to help out someone and seeing them succeed at their goals. I just funded two loans on Prosper.com (Technically, I repurchased fractions of loans from Prosper, as lenders on Prosper are actually loan repurchasers). My first two loans, I believe, are great ones, and I am quite positive about them, and feel great about helping out these people.

The first is a loan to BloggingAwayDebt, a blogger who has put her financial life online for everyone to read. She is writing about tackling her large amount of credit card debt and gives interesting tips along the way. It's fun just reading her blog- check it out. If you're interested in reading about the borrower's perspective on Prosper, read her posts here.

The second loan was to the owner of Barking Dog Coffee, a (soon-to-be-started) dog-friendly Coffee House located inside The Book Worm Book Store. There's a yard area too, where dogs can be tied, and walked around. They'll have not only coffee, but smoothies, milkshakes, baked goods, and doggy treats. This is such a great idea, and, I believe the owner has the experience and enthusiasm to make it a success.

Both borrowers had great credit grades (A and AA), both are married with dual incomes (usually helps in that it's less likely both people in the couple would end up being unemployed at the same time), and both exhibited great enthusiasm for reaching their goals.

Looking to Lend on Prosper.com

As a lender, you have a choice of a range of borrowers based on credit ratings, from AA through HR (High Risk). The rate you get goes correspondingly higher the more risk the loan.

Here's an example of the Credit ratings and default rates that Prosper cites from historical Experian data.

Rating Avg. Default 
  AA     0.20%
  A      0.90%
  B      1.80%
  C      3.30% 
  D      6.20%
  E      10.40%
  HR     19.10%
NC Cannot estimate (no credit history)

Reasons borrowers request a loan are interesting and varied. There are some downright bad borrower ideas- for instance, borrowing money (at rates around 10% or more) to invest in the stock market. This is just plain dumb because you are starting off with a 10% handicap, and over long periods of time, the U.S. stock market (S&P 500 Index) returns around 10.2% so you are unlikely to make much money borrowing at 10% interest. The fact is, most PROFESSIONAL mutual fund managers are unable to consistently beat the S&P 500 Index.

Another often-seen borrower on Prosper is someone looking into borrowing money to lend to more risky borrowers on Prosper. Borrowing (even at reasonable 7% rates) to lend to riskier borrowers is a rather risky proposition. You're starting with a 7% or more rate handicap due to your loan interest, and you're exposing yourself to a huge amount of risk as a borrower lending to even more risky borrowers.

So, should a lender part a fool from his/her money? Or should a lender try and educate them on their folly? Or just avoid these loans altogether? Hard to say. My inclination is to find loans that are for a good purpose, loans that will help someone, make a difference in their lives in a positive way, while earning a fair return.

Is EBay Inflation-Proof?

With all this talk about rising inflation, stocks for the past few weeks have taken a big dive down. The general theory is that as interest rates and inflation rises, stocks go down because higher interest rates mean more money will shift to safer investments, because returns there are more attractive.

However, we can't indiscriminately assume that all companies are equally hurt by inflation. After all, there might be some companies that are "inflation-proof". I wonder if EBay is one of them. Let's think about the factors:

* Ebay has pricing power. Since it's a near monopoly in several markets, in those markets, it has the ability to raise prices if needed.
* Inflation causes the price of goods to rise. Since Ebay takes a percentage of the price of the transaction, on this front, Ebay should do fine.
* Inflation may reduce consumer spending. It's highly possible that consumers will turn towards secondhand and used goods, which can benefit Ebay.

My guess is, over the long run, Ebay should weather rises in inflation pretty well, even though in the short term, people may indiscriminately drive the price down.

Disclosure: At the time of this writing I own stock or options in Ebay.

Prosper - Getting Started - the Lender's Perspective

It's kind of addictive browsing listings on Prosper.com. For investors that like to take personal control of their finances, it gives you a whole new class of fixed income investment options. Deciding who to fund can be rewarding in multiple ways- the prospetcts of helping out others, and earning a higher rate of return than most fixed income investments. Risks abound, of course. People often put up their sometimes sad stories of misfortune, and your heart goes out to them. Yet, at the same time, it's a question of trust, as they are difficult to verify. Some have poor credit records, and are on the brink of financial disaster. Although Prosper does credit checks to try and prevent fraud and verify identities, Prosper doesn't seem to have any fraud protection guarantees. Paypal for instance, provides at least some guarantees against fraud and partially reimburses those who were defrauded. One mitigating factor however, is that you can select a collection agency so that if a loan goes into default, the agency will try and collect for you (while taking a HUGE cut of what they are able to get).

Well, despite the risks, I decided to jump right in as a lender. Unfortunately, the way Prosper handles new accounts, it takes quite a while for you to get rolling. First, you apply for an account, which gets approved fairly quickly - it takes about 15 minutes. Then, you have to verify your bank account- they make a deposit and withdrawal that you need to enter to verify your account- this took 3 days for me (I signed up on a Saturday). Then, you need to wire transfer money to your account which takes another 2 to 4 days. This is in sharp contrast to the speed and efficiency of doing the same thing with my ETrade account. ETrade has "instant" wire transfers- talk about great customer service and instant gratification! ETrade probably does this by doing a quick balance check, and initiating the transfer from your bank, but then they actually temporarily put up their own money in your account while the transfer is happening so you can start investing immediately. Prosper needs to learn a few tricks in improving their operations and customer experience here.


(Disclosure: I own stock or options in ETrade at the time of this writing)

The Next BIG Thing - Prosper.com (P2P Lending)

I just came across a new site, Prosper.com. Prosper is a fusion of Ebay+P2P+Lending. It's a site where people can post their loan requests, and then lenders (individuals like yourself) can then bid on them to lend them the money. It's a fantastic idea, with the power to transform a whole industry, similar to what EBay did with product auctions.

I just signed up for it as a lender.... we'll see how it goes. Signing up is straightforward but you need a bit of information, such as your drivers license, a bank account routing number, and information from your credit report (it asks you questions based on the report it pulls from you to verify your identity, such as the servicer of your last auto loan, or a previous employer name).

The attraction to borrowers is that they can try and get loans at lower rates than would otherwise be possible, since people are bidding and competing to get their loan. Also, some people in difficult situations (poor credit) might be unable to get loans otherwise. People with good credit may be just looking to get a better deal or pay off some debt. The lender is there to get a better deal than their traditional fixed income investments. In addition, it's actually gratifying to help someone out of a difficult situation. Risks abound for the lender. But it's a bold and interesting experiment.