Starting with Prosper.com - Risks
I signed up with Prosper.com recently. Prosper is a social lending network. The idea is that people with money to lend can get in touch with people that need to borrow. Prosper handles the legalities and administrative aspects.
This disintermediation (fancy word for cutting out the middle man) should result in better rates for both borrower and lenders.
There are some significant risks that make Prosper speculative at the moment. The two key items that cause me the most concern are the lack of history and the limited supply of borrowers.
Prosper has been operating for less than a year which means that there is little information to correlate credit scores to actual default rates. This I important because proper is not a car loan or a credit card. It will take a few years to build sufficient data to make reliable judgments.
There were over 500 loans originated last month and it looks like they’ll top 700 this month. This might seem like a lot, unfortunately it is not enough for diversification purposes. To limit risk I want to split my investment among many (over 100) loans with the same set of characteristics. There is no way I can do this.
Prosper is clearly in the speculative category for now. I am very interested in the value services like this can provide. I’m happy to earn a better interest rate than I can get at EmigrantDirect while helping someone else get a better rate than they can get with Visa. For now I will only be putting a small slice of my money to work here.
I’ll keep you up to date on what I learn and how well things work.