Internet Loans during a credit crunch?
September 25, 2008 7:25 PM Subscribe
How is the credit crisis affecting places like prosper.com? Would it be smart to borrow/loan money there in an environment like this?
With banks seizing up and me having some extra cash, would it be a smart investment to loan money to individuals directly? What about people having a hard time getting a loan from a bank? Is anyone out there using it right now?
Best answer: I loaned out some money at Prosper a few months ago. I put in a small amount of money spread out amongst a large number of loans -- And so far, so good...
I was very careful who I picked for an investment. Nearly all of the ones I chose were auto-rated by Prosper as high quality (AA or A, and only one rated C), but you really have to go way beyond the letter grades to determine creditworthiness. I took a good look at the borrowers' debt to income ratios (under 20% is ideal, but hard to find), and the kind of work they did (service industry is bad, computer tech or someone who has worked at the same job a long time and has seniority is good). No blemishes or delinquencies on their credit, no high rotating balance on their cards.
I also tended to pick people who had a specific fixed item they needed money to purchase, especially if it was a hard asset that would be beneficial to the borrower over time (a new efficient AC, a new roof, a repaired fence, etc.). In some cases, it was a fixed one-time expense (an immigration lawyer bill for a new citizen). I definitely did not lend to anyone who needed a car loan or who wanted to pay down credit card debt or "fix up my house so I can sell it" or "1) re-invest in Prosper! 2) ??? 3) Profit!" (ugh!).
If none of the loans defaults -- and I realize that's a big if -- then I should make about 12% on my initial investment. It's money I can afford to lose, and hey, I was curious.
I would check out the Prosper forums if I were you, and see what other users have reported. Also, check out LendingStats.com, which pulls data from Prosper's API and shows how various people are doing with various strategies, which kinds of loans are more likely to default (or conversely, which loans tend to pay off early, thus denying the lender the full potential gain on their investment). Some people have put in a truly ridiculous amount of money to Prosper, which is kind of scary to see.
Finally, Prosper mentioned on its blog recently that they tried to securitize and sell off their loans a while back -- just like mortgage companies did with their loans, which you may have heard has gotten all the banks in trouble lately -- but no one would buy the loans, for obvious reasons. Talk about lousy timing for a new debt offering!
posted by Asparagirl at 9:34 PM on September 25, 2008
I was very careful who I picked for an investment. Nearly all of the ones I chose were auto-rated by Prosper as high quality (AA or A, and only one rated C), but you really have to go way beyond the letter grades to determine creditworthiness. I took a good look at the borrowers' debt to income ratios (under 20% is ideal, but hard to find), and the kind of work they did (service industry is bad, computer tech or someone who has worked at the same job a long time and has seniority is good). No blemishes or delinquencies on their credit, no high rotating balance on their cards.
I also tended to pick people who had a specific fixed item they needed money to purchase, especially if it was a hard asset that would be beneficial to the borrower over time (a new efficient AC, a new roof, a repaired fence, etc.). In some cases, it was a fixed one-time expense (an immigration lawyer bill for a new citizen). I definitely did not lend to anyone who needed a car loan or who wanted to pay down credit card debt or "fix up my house so I can sell it" or "1) re-invest in Prosper! 2) ??? 3) Profit!" (ugh!).
If none of the loans defaults -- and I realize that's a big if -- then I should make about 12% on my initial investment. It's money I can afford to lose, and hey, I was curious.
I would check out the Prosper forums if I were you, and see what other users have reported. Also, check out LendingStats.com, which pulls data from Prosper's API and shows how various people are doing with various strategies, which kinds of loans are more likely to default (or conversely, which loans tend to pay off early, thus denying the lender the full potential gain on their investment). Some people have put in a truly ridiculous amount of money to Prosper, which is kind of scary to see.
Finally, Prosper mentioned on its blog recently that they tried to securitize and sell off their loans a while back -- just like mortgage companies did with their loans, which you may have heard has gotten all the banks in trouble lately -- but no one would buy the loans, for obvious reasons. Talk about lousy timing for a new debt offering!
posted by Asparagirl at 9:34 PM on September 25, 2008
Prosper publishes performance data on their website.
You can play with the dates, but be careful when you're looking at more recent months as loans need to season for a bit to show comparable trends. And what you really need is static pool curves by origination vintage, which don't seem to be available. But based on my quick scan (and some experience looking at similar data for various consumer finance companies), I don't think these look very attractive. Even if you liked these numbers, you'd have to commit a good deal of money to build an acceptably diverse pool of borrowers*. In my opinion, there are better high-risk/high-yield assets out there for the intrepid investor.
*Though it does look like they have some portfolio options, but I haven't gone into the details of those.
posted by mullacc at 9:37 PM on September 25, 2008
You can play with the dates, but be careful when you're looking at more recent months as loans need to season for a bit to show comparable trends. And what you really need is static pool curves by origination vintage, which don't seem to be available. But based on my quick scan (and some experience looking at similar data for various consumer finance companies), I don't think these look very attractive. Even if you liked these numbers, you'd have to commit a good deal of money to build an acceptably diverse pool of borrowers*. In my opinion, there are better high-risk/high-yield assets out there for the intrepid investor.
*Though it does look like they have some portfolio options, but I haven't gone into the details of those.
posted by mullacc at 9:37 PM on September 25, 2008
Best answer: I've been a prosper lender for... 2.5 years now? I decide about a year and a half ago to stop, and now I'm just waiting for my loans to mature. I put in about $1500, and my performance to date is about -3%.
Here are the lessons you can learn from my mistakes:
1. Due diligence. No one on Prosper does this. I didn't. It's like ebay, in all the bad ways.
2. The people looking for money on Prosper are there because they CAN NOT get loans through traditional means.
3. Prosper, at least when I was actively bidding on loans, was a deadbeat haven. A borrower could default on their loan, challenge the resulting negative on their credit report, and when the agencies called up Prosper, they wouldn't answer because they were overwhelmed. This removed the negative. Many people knew Prosper as the place to get FREE MONEY. I don't know if that has changed.
4. Rate of defaults did not conform to risk ratings. (Duh.) It was the A's and the AA's just as often as the C's and D's that were defaulting.
All this when credit was free like a bird. My guess? Current economic conditions will increase the size and lower the quality in the pool of borrowers. I gave up a long time ago because it wasn't worth my time to find and bid against everyone else for the few good loans. I can't imagine what it will be like shortly.
posted by danny the boy at 11:43 PM on September 25, 2008
Here are the lessons you can learn from my mistakes:
1. Due diligence. No one on Prosper does this. I didn't. It's like ebay, in all the bad ways.
2. The people looking for money on Prosper are there because they CAN NOT get loans through traditional means.
3. Prosper, at least when I was actively bidding on loans, was a deadbeat haven. A borrower could default on their loan, challenge the resulting negative on their credit report, and when the agencies called up Prosper, they wouldn't answer because they were overwhelmed. This removed the negative. Many people knew Prosper as the place to get FREE MONEY. I don't know if that has changed.
4. Rate of defaults did not conform to risk ratings. (Duh.) It was the A's and the AA's just as often as the C's and D's that were defaulting.
All this when credit was free like a bird. My guess? Current economic conditions will increase the size and lower the quality in the pool of borrowers. I gave up a long time ago because it wasn't worth my time to find and bid against everyone else for the few good loans. I can't imagine what it will be like shortly.
posted by danny the boy at 11:43 PM on September 25, 2008
Best answer: With banks seizing up and me having some extra cash, would it be a smart investment to loan money to individuals directly?
No. I lent some money on Prosper about a year and a half ago to try it out, and my conclusion was that Prosper is a poor way to invest. Here are some of the major problems:
1. Loan interest rates are determined by a bidding process, and most of the people who determine the rates (lenders like you and me) have no clue how much interest they should be charging. Many of the people who borrow on Prosper couldn't even get a credit card if they applied for one from a major bank, but on Prosper a good listing can get them a loan with a good rate. This means that if you want to invest on Prosper, you have to lend at the market's rates, and the market's rates highly benefit the borrower.
2. All Prosper loans are 3 year loans, and many of them default in that period of time. The oldest loans are just now hitting the 3 year mark, and the default rates are very ugly. For older loans, LendingStats shows that around 30% of all loans are delinquent. This severely cuts into the profits of good loans, and most of the lenders that chased high interest rates by borrowing to high risk people are losing large amounts of money. The average return for old loans is still positive, but you could get similar returns with no risk by just buying a CD from your bank or putting your money in a high-yield savings account.
3. Prosper itself contracts out collections, and does a terrible job of it. I've heard reports of borrowers who go delinquent on $10,000 loans and are never contacted about it at all, when the same people would get hounded with phone calls if they borrowed $20 worth of DVDs from BlockBuster and didn't return them. The reason for this is pretty simple: In nearly all other cases outside of Prsoper, the lenders themselves pay for collections. If a bank loan someone $10,000 and they stop paying after $2,000, then it makes sense to spend $1,000 to pay a collections agent to get some or all of the remaining $7,000 from the borrower. Prosper doesn't own any of the loan though, so they would only gain the 1% fee that they place on payments if the borrower continued paying. This means that if Prosper spends more than $80 trying to get your $8,000 back, they are going to lose money in the long run. The last I had heard (which was close to a year ago), the net result of this was that the entire collections for Prosper (which included millions of dollars of loans) was handled by one part-time employee at the collections agency.
If any of this sounds familiar, with untrained people making bad loans to unqualified borrowers through third parties who purposely removed any risk for themselves, it should, these are exactly the same problems that led to the current mortgage crisis. The main difference is that the government isn't going to bail out Prosper lenders by buying back all of the bad loans. Given the current conditions and the clear indications that lending standards need to tighten in order for lending to be profitable, lending on Prosper is probably a bad idea.
posted by burnmp3s at 4:45 AM on September 26, 2008 [3 favorites]
No. I lent some money on Prosper about a year and a half ago to try it out, and my conclusion was that Prosper is a poor way to invest. Here are some of the major problems:
1. Loan interest rates are determined by a bidding process, and most of the people who determine the rates (lenders like you and me) have no clue how much interest they should be charging. Many of the people who borrow on Prosper couldn't even get a credit card if they applied for one from a major bank, but on Prosper a good listing can get them a loan with a good rate. This means that if you want to invest on Prosper, you have to lend at the market's rates, and the market's rates highly benefit the borrower.
2. All Prosper loans are 3 year loans, and many of them default in that period of time. The oldest loans are just now hitting the 3 year mark, and the default rates are very ugly. For older loans, LendingStats shows that around 30% of all loans are delinquent. This severely cuts into the profits of good loans, and most of the lenders that chased high interest rates by borrowing to high risk people are losing large amounts of money. The average return for old loans is still positive, but you could get similar returns with no risk by just buying a CD from your bank or putting your money in a high-yield savings account.
3. Prosper itself contracts out collections, and does a terrible job of it. I've heard reports of borrowers who go delinquent on $10,000 loans and are never contacted about it at all, when the same people would get hounded with phone calls if they borrowed $20 worth of DVDs from BlockBuster and didn't return them. The reason for this is pretty simple: In nearly all other cases outside of Prsoper, the lenders themselves pay for collections. If a bank loan someone $10,000 and they stop paying after $2,000, then it makes sense to spend $1,000 to pay a collections agent to get some or all of the remaining $7,000 from the borrower. Prosper doesn't own any of the loan though, so they would only gain the 1% fee that they place on payments if the borrower continued paying. This means that if Prosper spends more than $80 trying to get your $8,000 back, they are going to lose money in the long run. The last I had heard (which was close to a year ago), the net result of this was that the entire collections for Prosper (which included millions of dollars of loans) was handled by one part-time employee at the collections agency.
If any of this sounds familiar, with untrained people making bad loans to unqualified borrowers through third parties who purposely removed any risk for themselves, it should, these are exactly the same problems that led to the current mortgage crisis. The main difference is that the government isn't going to bail out Prosper lenders by buying back all of the bad loans. Given the current conditions and the clear indications that lending standards need to tighten in order for lending to be profitable, lending on Prosper is probably a bad idea.
posted by burnmp3s at 4:45 AM on September 26, 2008 [3 favorites]
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But after a week of searching for good loan candidates, I gave up and transferred it back. Investors on Prosper.com seemed to be making the same mistakes the banks did, not getting enough return for their risk.
On the borrowing side, if you have somewhat tarnished credit but have basic writing skills, you will probably be able to get a loan.
posted by justkevin at 7:57 PM on September 25, 2008