What Is Peer-To-Peer Lending And How Is It Done?

1. 78

   ngurecoposted 15 years ago

   What Is Peer-To-Peer Lending And How Is It Done?

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2. 59

   fahad_likeposted 15 years ago

   Prosper was one of the first companies to market in the peer-to-peer space, and in hindsight its arrival at the height of the credit boom was incredibly ill-timed. If you lent money through Prosper back then, when most of its loans were extended, there’s a very high chance that you’ve lost money — in some cases, a lot of money. “Of investors with a portfolio of loans that are an average of at least two years old,” notes Gimein, “folks who have lost money outnumber those who’ve earned 6 percent annual return by more than six to one.”
   
   Prosper was founded in the days before everybody had heard the term “model risk”, back when it made perfect sense that credit risk could be modeled accurately by a computer algorithm using little more than a FICO score.
   
   One of the big problems that Prosper ran into — the massive credit crunch and the ensuing Great Recession — could reasonably be considered to be a one-off event with a low likelihood of happening again. But another is endemic to the model: Prosper borrowers with a given FICO score are inevitably going to be more likely to default on their debts than most other people with the same credit score.
   
   It wasn’t meant to be that way. Peer-to-peer lending was meant to create a personal connection between borrower and lender, and therefore make borrowers more likely to repay their debts than people faced with large obligations to hated, faceless banks. But it seems that adverse selection effects overwhelmed the site’s attempts to be warm and fuzzy. As Gimein explained in an email to me,
   
   I think in this case the adverse selection issues are insurmountable. Folks go to P2P loans almost always because they can’t get money through conventional channels, and often there is a reason. I’ve cut up the Prosper numbers in a bunch of ways, and one thing I’ve noticed is that some of the worst returns come from folks with okay credit who are willing to pay very high interest rates: they’re willing to pay a lot because their finances are in worse shape than they seem.

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3. 84

   wychicposted 15 years ago

   I started with Prosper throughout the credit boom and did and have continued to do well with it...but then again, I don't go off of someone's FICO score. Initially I tried to diversify by selecting loans over the entire range of scores, and now the only ones that have defaulted are actually the ones that were higher scoring to begin with. Like fahad_like mentioned, it could be because there are underlying issues that aren't revealed in the information...whereas people with lower credit scores don't qualify for anything else, and many are just trying desperately to establish or improve their credit. Luckily there is a lot of other information that's offered to potential lenders, so it really comes down to knowing how to make good selections. I put a bit more information about peer to peer lending basics in my Prosper review here:
   
   http://hubpages.com/hub/Prospercom-A-Website-Review
   
   And have also written a couple of other hubs on peer to peer lending to help some people just getting started or just considering it:
   
   http://hubpages.com/hub/How-You-Can-Ben … Peer-Loans
   
   http://hubpages.com/hub/Peer-to-Peer-Le … 2P-Lending

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