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.
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:
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
by salt 7 years ago
If you had a spare $1000 what would you invest it in to make money.
by Jared Miles 5 years ago
What is your opinion of peer-to-peer lending?Do you think it's worth it, is the risk controlled, have you tried it?
by Zara Rasul 5 years ago
How do I find my FICO score for free?
by Traffic Creator 7 years ago
What is credit score?Why is it important?
by DebtFreedom 3 months ago
Just wondering how much you would be willing to pay for your child's art classes - and say the cost included supplies. What reasons might you be willing to pay more? Also, for the amount you say you are willing to pay, how long do you expect each class to be and how many classes? Please be...
by Natalie Frank 11 days ago
We have visited this topic at least twice before in recent months and I continue not to understand it. No matter what I do or how many views I get somehow I always earn between $1.25 and $2.25 a day which averages out to just barely enough to make payout each month. This was the case...
Copyright © 2018 HubPages Inc. and respective owners. Other product and company names shown may be trademarks of their respective owners. HubPages® is a registered Service Mark of HubPages, Inc. HubPages and Hubbers (authors) may earn revenue on this page based on affiliate relationships and advertisements with partners including Amazon, Google, and others.
|HubPages Device ID||This is used to identify particular browsers or devices when the access the service, and is used for security reasons.|
|Login||This is necessary to sign in to the HubPages Service.|
|HubPages Traffic Pixel||This is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.|
|Remarketing Pixels||We may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.|
|Conversion Tracking Pixels||We may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.|