I lend on Prosper but I am worried that there are borrowers who have figured out how to game the system. If you look at the borrower applications they are clearly not filled out by real people. When I first started lending there in 2007 you could tell it was a real person applying for the loan because the application form contained more information about the borrower and they actually answered questions. It seems pretty sketchy to me but I haven't pulled my money out just yet.
> [... I am worried that there are borrowers who have figured out how to game the system]
I thought this as well, but on LendingClub.
Out of all of my notes that have defaulted, they all seem to share the same pattern:
They make about 4 perfectly on-time payments then never make another payment again.
I believe the loans were taken out by real people, but I feel like they were people who knew that they were ultimately going to file for bankruptcy anyway, so they figured they might as well grab some quick cash before doing so. This is just my guess. It just seems too odd that all of my defaulted notes look pretty much the same. Maybe the 4 on-time payments were done to avoid any claims of fraudulent intent?
My fear was that there was some Reddit thread or something which was instructing people on how to do this.
They could have done the same thing with a credit card, but with LendingClub, you end up with actual cash, and I bet it's easier to get a loan funded on LendingClub than it is to apply for a credit card of the same amount.
[EDIT]: To add, apparently, if someone obtains a loan immediately before filing for bankruptcy, the creditor can move to basically have the loan un-wipable if they can prove that the loan was taken after the person already knew they were going to file for bankruptcy. However, I doubt LendingClub goes through this trouble for each note, which could make the platform more attractive for this type of fraud.
If someone were to decide they were going to file bankruptcy, they likely have already been missing mortgage, credit card, auto loan or other payments. Missing payments hammers your FICO (credit) score. Lending Club requires a minimum 660 FICO, which you're not going to be able to hold on to very long if you're missing payments. I am sure there are people who do this, but I doubt it is rampant.
Hmm, I'm not seeing that on my account. Of the last 20 charge-offs, all but one of them had at least 12 months of payments. The one made 6 payments and then disappeared (unable to contact; loan sold to third party debt buyer).
Why pay back some of the money at all then? If you are knowingly scamming the system (and the lender) you don't take out a $2,000 loan, just to pay back $400 before declaring bankruptcy.
My guess is to avoid the possibility of the creditor claiming that you took out the loan after already knowing that you were going to declare bankruptcy.
The 4 on-time payments make it look like you tried to pay the loan back but just couldn't afford it.
If no payments were made at all, it would be easier to prove that there was intentional fraud. If such is proven, it may be impossible to wipe the loan during bankruptcy.
And further, how do credit card or other lending companies avoid this (if at all)? Is there additional information or red flags they collect that LendingClub does not?
In what case would you be able to fool Prosper or LendingClub but not a traditional credit card company? Couldn't they just adopt similar lending standards? I always viewed p2p as just a more efficient way of mimicking the lending and interest-collecting functions of a bank/credit card company.
> In what case would you be able to fool Prosper or LendingClub but not a traditional credit card company? Couldn't they just adopt similar lending standards?
Traditional credit card lending standards are adopted because the issuer is the lender, and directly bears the default risk. On a peer-to-peer service, the money being lent is Other People's Money, and Other People bear the default risk. The incentive, then, is to leave it to those Other People to set lending standards that will protect their money.
Traditional card companies have an additional defense. Particularly now that there's very few big card issuers (chase, wellsfargo, citi, cap1, barclay, boa, usbank, amex, discover), they have blacklists if you include them in a bankruptcy. Amex and citi are 10 years I think. This can make re-establishing credit far more painful.
There are obviously alternatives such as debit cards and credit unions, but those will not come with the same benefits as the cards from national issuers.
I don't think being blacklisted from Prosper or LendingClub for IIB will serve as much of a deterrent.
LC does. I'm widely diversified on their automated system, but I have occasionally seen a credit for about 10% of a given loan that had been charged off, along with maybe 10% of that charged as a collections fee to me.
> I always viewed p2p as just a more efficient way of mimicking the lending and interest-collecting functions of a bank/credit card company.
How? Seems less efficient to me.
In any case, I thought one of the advantages (perhaps the biggest advantage) of borrowing through these companies is that they have less stringent standards than banks and credit cards.
I have tried without success to find discussion of this issue. I have just noticed that the borrower/loan profiles are getting more vague over time. It used to show a user id and the user ids were all really similar like mrhomeimprovement_67 and dental_bills99 but I see that now they don't even show that much information.
