I discovered peer-to-peer lending with Prosper.com in October last year and I quickly became fascinated with the whole concept. After some initial learning curve and paper bidding, I took the leap and invested $1,000 in 20 loans of $50 each. I am happy to report that all my loans are still going smoothly.

By reinvesting the profits, I now have 22 loans at an average interest rate of 14.99%. All of these loans have been current with their payments so far. Time will tell whether my success is just “dumb luck” or the method by which these loans were selected has some long-term merit.

In this series of posts, I’ll be sharing with you the method I’ve developed for selecting loans. The reason being is two fold: one is to give back to the Prosper community that has helped me learn the ropes, and secondly, to improve the method through public peer review for everyone’s benefit.

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Popularity: 24% [?]

According to their press release, Prosper.com has filed with the U.S. Securities and Exchange Commission that it intends to offer the ability for lenders to buy and sell their loan positions to other lenders. From Prosper’s press release,

Following effectiveness of the registration statement, Prosper intends to establish and maintain a secondary trading market online auction platform, or Resale Platform, pursuant to which lenders may seek to transfer borrower notes to other Prosper registered lenders.

The S-1 filing itself provides another clue. Apparently the service will allow loans to be bought-and-sold provided that they are at least 3 months old:

Prosper intends to establish a secondary trading market online auction platform, or the Resale Platform, on which the Notes may be resold after three months following the date that they are acquired from Prosper by the winning bidders.

This would be a great addition to their service, as the lack of liquidity has been one of the drawbacks for lenders. Having such a feature may also attract more lenders, as buying an already performing loan would naturally have less risk than taking one’s chances on a new loan with no history.

Popularity: 15% [?]

Have you ever wondered what it would be like to be a banker? A new trend is emerging online that will give you a flavor for what it’s like. Prosper.com is the leader in this new trend, called peer-to-peer lending, where people borrow money directly from other people, instead of through a more traditional loan with a bank or on their credit card.

What’s interesting about Prosper is that lenders bid on loans in an eBay-like auction format. A lender bids on a loan by specifying the dollar amount and interest rate s/he is willing to contribute to the loan. When the bidding period ends, lenders having bid the lowest interest rates on a loan are the ones that fund it.

This post will focus on the lending side of Prosper instead of the borrowing half, since the lending side provides passive income opportunities. The rate of return of this passive income depends on many factors including your risk tolerance, diversification, the amount of up-front due diligence, discipline with your lending rules, factoring in for any defaults, and finally a bit of intuition as to the borrower’s character.

My personal average APR on Prosper is currently 14.86% with 21 loans, no late payments and no defaults. None of my loans however are over 3 months old, so there’s still plenty of time to test the thoroughness of my Prosper strategy.

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Popularity: 27% [?]

This is part 2 of a 3-part review of Prosper.com. Part 1 can be found here.

The Downside

Prosper loans have more inherent risk compared to other kinds of interest-bearing instruments. The only money that should ever be put to work in Prosper are those funds that are purely discretionary; that is, money you can afford to be without.

A prudent mindset to approaching loans on Prosper is to take even greater care in evaluating them than you would with a stock on the stock market. Here’s why: continue

Popularity: 17% [?]

This is the final part of a 3-part post on Prosper.com. The beginning of this review can be found here.

The Bottom Line

For many people, Prosper.com is above their risk tolerance. As far as I’m concerned though, I am a firm believer that education, due diligence and discipline are great mitigators of risk. On the discipline front, I have created a set of lending rules I use when evaluating loans on Prosper. Any loan that does not meet all of the rules’ criteria is immediately out of the running. No exceptions. In future posts on Prosper, I’ll be sharing my lending rules along with periodic updates on the performance of my portfolio and additional lessons learned along the way. Stay tuned to the “Related Posts” section at the end of this post for more info on Prosper.

Getting Started

I recommend you start out on “paper” with your loans. You can sign up for a free account as a lender without any prerequisites or commitments. Once you have an account, research loans and write down those that you would have done if you were using real money. Track these loans over time to get a feel for how well you’re learning the ropes.

You can also learn from other Prosper members by “spying” on the loans they select. One of my absolute favorite sites is Eric’s Credit Community. I especially love watching the lenders on this page.

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Popularity: 17% [?]