About a year ago, I loaned $1000 worth of money to the highest risk people on prosper.com, at an average interest rate of 24%. I reinvested returns for about 6 months until I started getting defaults.
So far I've made $186.91 in interest and lost $344 in defaults. If I have no more defaults I'll have broken even after three years.
I commented to Allen, the post author, that I think it's very important that he include Andy's stated loan-making strategy before he starts casting doubt on Prosper's, or peer to peer lending in general's, effectiveness:
"We focus our lending efforts on people who [...] Have a lower credit score (and are thus willing to pay higher interest rates)"*
While Andy does try to mitigate that risk, he's still purposely lending to the highest-risk group available.
Using Prosper's own (very useful) dynamic statistics page, we can see that of all loans made since March 28th(when Andy made his first loan)^, 8.17% are late. BUT, only 4.53% are over 1 month late. Furthermore, out of the total number of late loans, ~60% are loans made to D, F, and HR credit ratings, the low credit score group Andy loaned to.
When you loan to a high risk group, you have to be willing to accept the potential negative consequences of that risk. Andy decided to limit that risk, but I think he staked too much importance on loaning to people with no delinquencies on their credit report, forgetting that past performance is not always a good indicator of future actions.
By Andy's own admission, he's gained 10% on the 5k he loaned. Hardly cause to start waving the bad debt flag, especially if the 2/3rds of his bad debt that are 1 month late or less come back to current, with late fees.
So far I've made $186.91 in interest and lost $344 in defaults. If I have no more defaults I'll have broken even after three years.