Risky Business

Risky Business was Originally Posted on July 13, 2011 by lavarock

I recently heard about a website, Prosper.Com where you can borrow, lend and perhaps prosper.

It reminds me of the TV show decades ago called “Queen For A Day” where contestants told their story of woe and the audience voted on who the show should make “Queen For A Day” and help. Perhaps the family had a new baby and needed diapers and household items, and perhaps the husband was just laid off. Well, you get the idea.

So, Prosper lets people tell their tale, explain their situation and give you some financial information about them. Then Prosper may do a credit check and report that data. You as a lender can evaluate the information and decide if the person will pay the loan back. As they do, you get interest, etc.

Some people say that they are a good candidate for a loan because they always pay their debts, but the listing may show that they have been more than 90 days late on credit cards 15 times in the past 7 years. You get to evaluate all the risks and have guidence along the way.

Here is an example:

A woman wants $4,000 for a personal loan, but did not give the reason. The loan would be for 3 years at 31.99% with monthly payments of $174.20. Her rating is High Risk, based upon her information and that of similar people in similar situations and whether they defaulted. Her credit score is 700-719, she has no delinquent payments in 7 years. She has had 5 recent credit inquiries (perhaps trying to shop for a car?), she has had credit since 1977. Currently she has 19 open lines of credit and owes $108,000! She is using 1/2 of her available credit on the cards. Credit card companies like to see on 30% or less. She owns her own home. She says she is employed for 4 years as a nurse (RN) and makes $75k to $99k.

If I read the prospectus correctly, after fees and an estimate of other writeoffs for similar loans, your estimated return would be 9.67%, that is, assuming she does not default. So far her loan is funded 32% of the asked for $4,000. If lenders agree to loan 70%, this particular loan will be funded and she will get the money needed. They have different funding levels because say you need $10,000 to buy a car, however, you only get promised $9,000, you may decide not to take the loan as it would do you no good unless you can purchase the whole car.

Now I agree that this is a risky proposal to invest in people and hoping that you don’t lose money, but it can also help people. The site has forums and groups where others help you decide if loans are wort hthe risk.

For borrowers, this may be the last chance they have to get money to avoid a foreclosure or reposession of a vehicle. It may also be a way for people to continue their spending and not solve the underlying problems that got them into the mess they are currently in.

If you want to loan money or to borrow money, I suggest that you read the information on sites like this very carefully. I will be investing in a couple of very secure loans where I have little chance of losing money. That also means that my return will be small and perhaps just beat a banks interest paid on savings.

By the way, the loan I mentioned above I won’t be investing in. If this poor woman already owes more than a years worth of income t ocredit card debt, another $4,000 won’t help much. Yes, she may have paid for student loans with a credit card, but this one is too risky for me. I did pick one from the bottom of the list to give an example. The AA rating ones are a lot less risky!