I am not a fan of peer to peer lending, so please forgive me, when Glen Millar of Prosper – one of the leading P2P lending sites – sent me the following e-mail, if I didn’t fall all over myself with excitement:
As a personal finance blogger we thought you might have interest in Prosper (www.prosper.com) and peer-to-peer lending. You may know that Prosper was the first peer-to-peer lending marketplace in the US. In 5 years, we have originated over $215 million in loans on our site.
In fact, here’s what I said in my reply:
My argument in that post was about risk; Glen responded with a link to the following:
The basic argument being that Prosper manages loss/risk better than competing P2P sites through their proprietary rating system which “allows [Prosper] to maintain consistency when giving each listing a score. Prosper Ratings allow you to easily analyze a listing’s level of risk because the rating represents an estimated average annualized loss rate range.”
Which is all well and good until it is YOU that suffers the statistical loss/es (you can get unlucky and lose on a number of your loans); I don’t know about you, but I don’t like any system where I play statistical roulette without at least some measure (OK, illusion) of control.
The only control that you can really apply here is diversification: take out lots of small loans in your risk/reward categories:
In fact, if this risk-rating-system is so good, why doesn’t Prosper simply knock out the competition by adjusting the interest rate earned by the rating-weighted loss-rate and carry the risk themselves?!
But, what’s your for/against reasons?
I would like to hear both from readers who swear by P2P, and those who wouldn’t touch it with a 10 foot pole …