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Social Lending -- Just How Many Loans Can Go Late Before We Worry? (centernetworks.com)
5 points by transburgh on Jan 27, 2008 | hide | past | favorite | 2 comments



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.

I've been keeping my own coverage of social lending services updated. I hope you'll find it useful: http://socialstrategist.com/2007/06/08/small-loans-big-bucks...

*http://andyswan.com/2007/06/25/prosper-is-really-cool/ - Andy's first post

^http://www.prosper.com/lend/performance.aspx?af=0&esba=6... - Statistics from Prosper




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