Much to my surprise today in the mail I received a thank-you card from Prosper thanking me for referring a friend. Along with the card there was a free t-shirt. Looks like this might be one of Prosper's new marketing campaigns.
"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 ProsperLenders.com which has a great collection of resources.
Lending Club just recently received $10 million in venture capital and ran a very popular video contest on YouTube. I've previously written about how Lending Club does not need Facebook.
Update: Lending Club has formally announced their new website and move beyond Facebook - active immediately. Rex Dixon, Lending Club's Director of Social Media Content, reveals that Center Networks accidentally stumbled upon the story last night as they were testing the website changes. Here's Rex Dixon's talks about the transition from the old blog/Facebook-focused site to the new open site:
"The story broke by accident last night. Why is that? Well what happened is the IT guru’s at LC decided to just do the simple DNS switch and stop forwarding the “www” address to the “blog.” address.
This was found out and the story broke on one of my favorite blogs last evening. Allen was doing his job and reading blogs, catching up on news, and he was there to see the switch. Great blogging man, and kudos to you. I’m sorry I had to be vague in our chat last night. He also updated the news, as any great blog should, this morning!"
Prosper has just introduced this first monthly market survey which provides "key statistics including: membership and loan volume statistics; marketplace returns; borrower rates; mix of prime, near prime and sub-prime loans; and noteworthy marketplace statistics and trends" and analysis from Prosper's CEO Chris Larsen. Here is the full text of Larsen's announcement about the current market situation for Prosper:
"The market turmoil stemming from the ongoing credit crunch, subprime mortgage meltdown and housing value slump naturally begs questions about what impact this market environment is having on the Prosper marketplace. In a nutshell, we would categorize the impact as broadly constructive for Prosper lenders and prime and near prime borrowers.
As consumers are being hit with the evaporation of introductory credit card rate offers and home equity loan options, Prosper is becoming an even more attractive financing alternative, particularly for more creditworthy borrowers.
At the same time, lenders on Prosper are exhibiting rational behavior by steering their bids toward borrowers in the higher credit categories and being far more cautious about chasing higher rates offered by subprime borrowers. Evidence of this flight to safety is seen in Prosper’s mix of funded borrowers. For example, the subprime category accounted for only 9 percent of loans funded in August 2007, a marked decrease from August 2006 and the 2007 year-to-date average of 25 percent and 14 percent, respectively.
What remains to be seen is whether lenders on Prosper will start placing less weight on homeownership as a factor in their bidding strategies. It is possible that we may begin to see evidence of this trend given that in our most recent defaulted loan sale the debt buyer placed zero value on homeownership across all credit categories – a highly unusual shift away from placing value on what is typically considered Americans’ largest asset."Here at PLR, we have also noticed the movement of lenders away from subprime or high risk borrowers. In addition, we just wrote an article about how homeowners may actually be a greater risk than non-homeowners given the current market situation. This article was written before the recent Prosper debt sale where homeowners were not given a premium. Here are the statistics that Prosper wants to highlight for their first market survey:
August 2007 Prosper People-to-People Lending Market Survey
Membership and Loan Volume Statistics
| ||August 2007|| ||August 2006|| ||2007 Year-to-Date|| ||Since Inception|
|New Members|| ||30,623|| ||12,825|| ||270,866|| ||408,633|
|Funded Loans|| ||$6.6 million|| ||$3.9 million|| ||$56.6 million|| ||$85.0 million|
|Average Loan Size|| ||$6,733|| ||$5,080|| ||$6,969|| ||$6,037|
|Daily Average Number of Borrower Listings|| ||2,575|| ||1,173|| ||2,202|| ||1,366|
| || || || || || || || |
| || || || || || || || |
Estimated Annual Return on Prosper Select Index
| ||August 2007|
|Prosper Select Index|| ||10.31%|
|Prime Select Index|| ||9.41%|
|Near Prime Select Index|| ||10.73%|
|Sub Prime Select Index|| ||14.95%|
| || |
| || |
Average Borrower Rates on Prosper Select Loans
| ||August 2007|| ||July 2007|| ||August 2006|| ||2007 Year-to-Date|| ||Since Inception|
|Prime Select Loans|| ||10.15%|| ||10.29%|| ||11.64%|| ||10.03%|| ||10.14%|
|Near Prime Select Loans|| ||16.83%|| ||17.08%|| ||16.25%|| ||15.90%|| ||16.06%|
|Sub Prime Select Loans|| ||25.88%|| ||22.13%|| ||28.72%|| ||23.30%|| ||23.89%|
| || || || || || || || || || |
| || || || || || || || || || |
Mix of Funded Borrowers
| ||August 2007|| ||August 2006|| ||2007 Year-to-Date|| ||Since Inception|
|Prime|| ||32%|| ||26%|| ||30%|| ||28%|
|Near Prime|| ||59%|| ||49%|| ||57%|| ||54%|
|Sub Prime|| ||9%|| ||25%|| ||14%|| ||18%|
| || || || || || || || |
| || || || || || || || |
|Top Five Prosper Borrower States in August 2007|
(PLR review note: Here's why Pennsylvania, the second most populous state, is not on the top state list.)
It's very important to note how Prosper has defined the terms used above, especially the Prosper select index. Only borrowers with zero current delinquencies, three or fewer credit inquiries, and a debt-to-income ratio of 40 percent or less are counted in the calculations. Here are the full definitions:
2007 Year-to-Date: January 1, 2007 through August 31, 2007.
Since Inception: November 1, 2005 through August 31, 2007. Prosper’s by invitation only “friends and family” launch began on November 1, 2005 and Prosper launched to the general public on February 13, 2006.
Prosper Select Index: The Prosper Select Index return is the estimated average annual return on invested principal, based on actual delinquency performance to date. The Prosper Select Index includes AA - E credit grade loans for borrowers whose credit reports at the time of application indicated zero current delinquencies, three or fewer credit inquiries, and a debt-to-income ratio of 40 percent or less. The annual return period reflects loans originated in the twelve month period ending one month prior to the observation date of August 31, 2007. Prime Select includes AA and A credit grade loans (credit scores of 720+). Near Prime Select includes B, C, D credit grade loans (credit scores between 600 and 719). Sub Prime Select includes E credit grade loans (credit scores between 560 and 599).
Average Borrower Rates: Average Borrower Rates are the weighted average borrower rates on Prosper Select Index loans. Rates shown are interest rates, not annual percentage rates.
Mix of Funded Borrowers: Prime includes AA and A credit grade loans (credit scores of 720+). Near Prime includes B, C, D credit grade loans (credit scores between 600 and 719). Sub Prime includes E and HR credit grade loans (credit scores below 600).Just a couple of weeks ago Prosper was taken to task in the forums and and Prosper blogs for announcing that returns on Prosper beat the S&P 500. Critics said the data which showed Prosper beating the S&P 500 was carefully picked and misleading. Others argue that lenders have the same ability to carefully pick their loans. I look forward to seeing how lenders respond to this report.
All things considered, I think that this monthly data report from Prosper will be valuable. It's good to hear Chris Larsen's analysis and it gives a regular public way for Prosper to report their growth and success.
Pennsylvania, for example, is the sixth most populous state with over 12 million people. Based on their state lending laws, Prosper only allows loans to borrowers residing in Pennsylvania at 6% and below. Rather than helping borrowers get a good interest rate the practical effect of this legislation has been to prevent borrowers from obtaining a loan. According to LendingStat's loan breakdown by state, only 21 loans have been made to Pennsylvania borrowers ranking them a distant #42 despite their large population. Almost all of these 21 loans are for the minimum loan amount - $1,000.
Pennsylvania's Pittsburgh Post Gazette interviewed Prosper founder Chris Larsen and published an article about the loan caps and Prosper in today's paper - Peer-to-peer lending sites a growing presence on the Web. Here's the excerpt dealing with Pennsylvania's rate cap:
"For Prosper.com, business has been hampered so far in Pennsylvania by a state statute that sets a maximum interest rate of 6 percent annually on loans of less than $50,000. That makes it hard for Pennsylvania borrowers to attract lenders on the site, Mr. Larsen said.
State and federal laws have carved out exemptions that allow banks and other entities in the state to charge more than 6 percent, but Pennsylvania regulators are still determining whether Prosper.com qualifies.
'We're trying to work with regulators, but it takes time,' Mr. Larsen said.
CircleLending said the 6 percent ceiling 'has not come up as an issue' because lenders know borrowers and are more interested in helping out than making a hefty return.
The Pennsylvania Department of Banking had little to say about the peer-to-peer lending business, other than the agency has noticed significant growth recently.
Officials are examining whether this new type of lending operation should be required to be licensed in the state, spokeswoman Heather Tyler said last week.
For now, she said, 'As always, the banking department urges consumers to use caution and do their homework in selecting a financial service provider.'"
The Pennsylvania loan cap has frustrated many borrowers who have vented in the forums. Borrowers have asked, "Is it possible to get a loan in PA?" Another borrower, Gibsound, started a thread called Pennsylvanians against PA STATE CAP of 6%. He said, "Now don't get me wrong. I love Pennsylvania. However I don't like the state cap of 6%." Jack Talalai who is active on the Prosper forums and works in Pennsylvania's banking industry explained the legislation behind the rate caps is based on the Loan Interest and Protection Law. From the tone of borrowers, it looks like they are tired of being 'protected'.
Update (4/15/2008): Prosper raised the rate cap for all states to 36%
Update (9/2008): Pennsylvania lenders booted from Prosper
Wired has just published a glowing article about Facebook that makes the same Microsoft comparison - How Mark Zuckerberg Turned Facebook Into the Web's Hottest Platform.
"And by turning itself into a platform for new applications, Facebook has launched a whole new branch of the software development industry, just like Bill Gates did with MS-DOS in the 1980s. By allowing developers to charge for their wares or collect the advertising revenue they generate, Zuckerberg set up a system for every programmer to get paid for their efforts. Now venture capitalists like Bay Partners are scrambling to fund almost anyone who has an idea for a Facebook application."
According to the article, Facebook turned down a $1 billion dollar from Yahoo. I've heard the claim before but not the details:
"...Zuckerberg disagreed, but when Yahoo came calling with a bid of $1 billion in cash, the pressure became too much. He relented in July, verbally agreeing to sell Facebook to Yahoo. Strategically, it seemed like a good match. Yahoo had hundreds of millions of users, but its foray into social networking was struggling. Facebook had cool tools and was looking for a mass audience.
The timing, however, couldn't have been worse. In the days after Zuckerberg agreed to sell, Yahoo announced it was projecting slower sales and earnings growth, and that the launch of its new advertising platform would be delayed. Its stock price plunged 22 percent overnight. Terry Semel, Yahoo's CEO at the time, reacted by cutting his offer from $1 billion to $800 million. Zuckerberg, who had been warned about Semel's reputation for last-minute renegotiations, walked away. Two months later, Semel reissued the original $1 billion bid, but by then Zuckerberg had convinced his board and executive team that Yahoo wasn't a serious partner and that Facebook would be worth more on its own. He rejected the offer and became famous as the cocky youngster who turned down $1 billion.
Today, Zuckerberg, 23, is famous for other reasons. For one thing, analysts think he could be the nation's richest man under 25, with a net worth estimated at $1.5 billion. But more important, he has transformed his company from second-tier social network to full-fledged platform that organizes the entire Internet. As a result, Facebook is the now most buzzed-about company in Silicon Valley, and Zuckerberg is constantly compared to visionaries like Steve Jobs and Bill Gates."
The comparison between Zuckerberg and Gates is probably a better one to make that Facebook and Microsoft. Both dropped out of school to build a technology company. Gates built an empire and became the richest man in the world. Zuckerberg is estimated to be the richest man under 25. It's a wonderful story and I'm a big fan of Facebook. Lending Club was very wise to start on the Facebook platform. But Facebook is still not the next Microsoft.
If Facebook is the next Microsoft what does that make Lending Club?
Here is the text of Prosper's announcement:
"At Prosper, we have been listening to your feedback regarding groups and group leader rewards.
The original philosophy behind Prosper Groups was to enable borrowers in close-knit communities to leverage the reputation and peer pressure of their group to attract more bids from lenders, resulting in potentially lower interest rates for borrowers, and lower default rates for lenders. We have found, after nearly two years of experience, that the strongest groups are comprised of close networks of friends and associates, where compensation is not the dominant motivation for the group leader’s services.
As a result, we are making changes to Prosper Groups. In the next month, Prosper will discontinue payment rewards on new loans for group leaders. Group leaders will continue to earn payment rewards on all eligible loans originating before the change. Group leaders can also receive referral rewards for referring borrowers or lenders to Prosper under our Referral Program.
We hope this change will encourage group leaders to grow their groups by inviting new members from their pre-existing social networks, turning Prosper Groups into a more powerful community development tool and making Prosper simpler for both borrowers and lenders.
For more details on these changes, please visit our Group Changes Frequently Asked Questions (FAQ).
Thank you for helping us become the Internet’s leading community lending site."
Lenders have been asking for this change for a long time. The reaction to the news on the Prosper forums was very supportive of the change. A lender who goes by FitzND said "what a great change", while Loan Chimp said HALLELUJAH!! in big bold blue letters.
There are several reasons why lenders did not like the prior group structure. One complaint was that they earned up to 2% of the loan payments for doing something that didn't add overall value to the loan. A second complaint was that some lenders would "pump and dump" loans. They would aggressively promote the loans before they funded, but do little to help keep the loan current other than making some early community payments to make their group rating look better than it really was. Several lenders described the group leaders' promotion of poor quality loans as "putting lipstick on a pig." Some even worried that unscrupulous group leaders might try to steal someone's identity, although no actual instances of that have been alleged or reported.
Overall, this is a welcome and sensible change. Groups will continue to exist on Prosper, but with this change group leadership will be on a 100% voluntary basis. Prosper will no longer have group leaders whose sole motivation is turning a quick profit from members of their group.
Andrew is also a lender on Prosper, and has made about $7,000 in loans. His lending portfolio is not doing very well. 5.65% of his loans have defaulted, and another 3.5% of his loans are late. He should have followed the advice of staying away from HR and E borrowers, but many of his loans were made before reliable statistics were available.
Prosper Andrew has been active in the forums with more than 500 posts, and has been the main point of contact to Prosper for many lenders. On one of his posts he posted the results of a visualization tool run on the Prosper database. That turned out to be a pretty cool image:
GlobeFunder is committed to being the leader in providing loan funding where it is needed most, at market-driven interest rates, with the highest levels of service and integrity. GlobeFunder's lending marketplace scales by lowering capital costs for borrowers and providing market-driven investment returns for lenders. GlobeFunder's mission is to change the lending industry for positive impact to borrowers and lenders around the world.
GlobeFunder members decide where to direct their funds in an automatic and aggregated loan selection search process, making loans to borrowers. Loans are auctioned to ensure market-driven interest rates, and payments will facilitate transactions from lenders to fund loans in GlobeFunder. Loan funding and borrower repayments will be processed and serviced by GlobeFunder.
Borrowers are US individuals and participating institutions in the microfinance industry from around the world that need capital. The October 2007 launch of GlobeFunder will provide a marketplace to US borrowers seeking loan funding. Prospective borrowers may join GlobeFunder online, and several important verification checks are conducted before borrowers are able to post a loan request including identity checks, credit scoring, residency, debt and income, qualifying their loan and then ultimately originating the loan if approved. US borrower loan request are then published on GlobeFunder and auctioned to US lenders.