Newsweek tips hat to Prosper

Newsweek considers Prosper, Lending Club and Circle Lending on their smart strategies money tip sheet today. The post is very brief but here's a portion of what they have to say:

"But are these sensible places to borrow or lend money? The interest rates on these unsecured loans tend to be high, so borrowers with good credit scores could get better rates on most mainstream credit cards. Lenders—anyone willing to put up money in the hopes of earning better rates than they would at a bank—might find more to like. Prosper and Lending Club both check borrowers' credit records and are aggressive about collecting on payments, and lenders can make up to 13 percent on their loans."

I find it interesting that peer to peer loans are compared against credit cards instead of banks or home equity loans. Matt wrote a good article back in July about when it makes sense to borrow from Prosper - Why would a borrower use Prosper instead of a traditional bank? He did not consider credit cards in his analysis but my gut tells me that credit cards are only going to beat banks or Prosper if you have a promotional rate. Generally credit cards are not a good place to carry a large balance. In fact, my personal recommendation is to never carry a balance on credit cards.

Also, can lenders earn up to 13%? Yes, it is possible. Unlikely though. Too many borrowers jump in quickly without considering all the risks. In order to earn higher interest rates you must loan to riskier borrowers. The default rates are so high on the riskiest credit grades that the overall return has been negative. Before lending I would consider reading a couple articles:

Prosper: A hands on education in risk management - Matt introduces diversity and talks about the default rates for different credit grades.

How does Prosper compare to other investments?
- Matt answers 11 common questions new Prosper lenders have.

Of course, there are plenty of other articles and websites. The article mentions which has a great collection of resources.