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Posts Tagged ‘p2p lending’

Person-to-Person Lending sites and Real Estate

Donald L. Plunkett, Jr. Donald L. Plunkett, Jr.
Tuesday, January 29th, 2008

Person-to-person lending sites like Prosper.com and Zopa.com allow borrowers to request funds from others via the Internet, typically for things like starting a business or refinancing high interest rate credit card debt.  Essentially they cut out the middlemen such as a bank, credit card company, or payday lender that would normally make these types of loans.  In many cases, the creditworthiness of the borrower is so low that banks wouldn’t offer the loan anyway.  While these sites have had tremendous buzz and free publicity via main stream news outlets like Money Magazine, NPR, Smart Money, USA Today, the Wall Street Journal and many others, the truth is that the sites are struggling with high default rates with many loans.

After making a few loans, I realized that historical rating agency default rates for credit cards ended up being way lower than what was actually happening on Prosper.  Even high FICO score, “A” and “AA” borrowers were defaulting far more frequently than was expected.  I received a message from a previous borrower who actually paid on time requesting additional funds for another loan.  I politely told her, “I’m done with Prosper, no thank you.”  She responded back about a day later with the following, “ Wow, it is surprising how many comments I have gotten with the same message. A lot of people are not happy with Prosper. I used this way of borrowing money because it worked for me the first time. I have review some of the borrowers loan profile and they seem like a scam. Its a shame cause then people with real needs get screwed.  thanks for your message and good luck.”

The main problem with Prosper is that the loans are not collateralized.  The borrower has no skin in the game and will not lose their property on automobile if they don’t make a payment.  If Prosper required some sort of collateral, I think you could have an eBay-like success story.  Costs and profit margins that lenders charge could be reduced or eliminated.  Lenders could lend more confidently knowing that they have a Plan B (foreclosure) if the borrower doesn’t pay.  As it stands, Prosper seems to be nothing more than a lender of last resort rather than a viable financing and investment alternative.