Prosper

Prosper is a peer-to-peer lending plaform, an eBay of unsecured personal loans. The premise is that banks take in deposits at low interest and lend them out at high interest, so there is an opportunity to disintermediate the banks. The borrower gets a lower rate, the lender gets a higher rate, and Prosper gets a little something in the middle for matching the borrowers and lenders.

I am a lender at Prosper, with $200 of edutainment money. You can see my loan portfolio if you like. It's been a fascinating experience, reading people's sob stories and bidding on the loans. Prosper would make a great hobby, at the $2000 level or so, where you'd have decent diversification and receive enough money in payments to make a new loan every three or four weeks. The hobby would keep your interest and pay for itself besides.

I think there is an agency problem. Prosper offloads all the risk to the lenders, so there is no direct incentive to collect on the loans. On the other hand, Prosper is a start-up with $40 million in venture capital, so there is a strong incentive to scale up as rapidly as possible by whatever means are available. In my judgment, Prosper has to scale up from $90+ million in outstanding loans to about $7 or $8 billion. The US consumer debt market is $2.5 trillion, so it is certainly possible.

The result is that a lot of lenders have been sucked in by the marketing hype and ended up with much lower returns than they expected. There is a large community of lenders, many of them disgruntled, both on and off Prosper, for example at Prospers.org. If you're even thinking about lending on Prosper, read the forums and learn from the mistakes of others.

As for me, I've stopped lending at the edutainment level. It's still early days. Prosper is changing, lender behavior is changing, and there are competitors on the horizon. Someone will get it right, and peer-to-peer lending may become a viable asset class for investors.

However, all the things that make Prosper unattractive for lenders, work to the borrowers' advantage. If you want to borrow money, by all means check out Prosper! Read the forums, and study which stories get funded and which don't. You may be able to borrow on excellent terms at Prosper.