Prosper - Sir can you spare $25,000?

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Democratic Lending

Prosper dubs itself “America’s first people-to-people lending marketplace.” It is a sort of eBay for personal loans. Registered users list and bid on loans using Prosper’s auction platform. The platform claims over 430,000 members with over $90 million in loans funded.

 

Lenders set the minimum interest they are willing to earn and bid in increments of $50 to $25,000 on loan listings. Borrowers create loan listings for up to 3-year, fully amortized, unsecured loans up to $25,000 and set the maximum rate they are willing to pay a lender. The auction then begins and people who lend bid down the interest rate. Once the auction ends, Prosper take the bids with the lowest rates and combines them into one bigger loan to the lender. Prosper handles all loan administration tasks including loan repayment and collections on behalf of the matched borrower and lenders.

 

Prosper generates revenue by collecting a one-time 1% or 2% fee on funded loans from borrowers, and assessing a 0.5% or 1% per annum loan servicing fee to lenders.

Making Money

So can you use Prosper as an investment vehicle? Not everyone loans money for altruistic purposes. I think so. Personal loans are for the most part non-correlated to the stock market. The loans are usually for consumer purchases, debt consolidation, or other personal needs.

I came across a website that helps lenders get lending stats on Prosper and it appears that people are making money using it as an investment tool. Click on the chart below for a larger view.

The largest lender in their network loaned out a total of $930K to date! I dug further and found that he experienced a return of 5.01%. I would much rather put my money in a money-market account to earn 5%, but where’s the fun in that? Others are making more, much more. The top ROI lender made 19.8%. Now that’s a number I can live with.

To make money in Prosper just like any other investment, you should do your homework. So here’s how we’ll do it with a little inside knowledge and the right tools.

The Legal “Insider Trade”

Can you cheat Prosper? Well not really, but you can shadow the most successful lenders. Use Lendingstats.com to give you the inside track. By seeing who has the most profitable portfolio you get a view akin to watching Warren Buffet, one of the greatest investors of all time, telling his broker to buy a stock.

So here is the investment hack:

1. Go to lendingstats.com and click on “Stats” then click on “Top 10 Lenders by Estimated ROI”

   

2. Select a few of the top lenders and see what they made.
3. Click on “Bids” and see what loans they are bidding on.

   

4. Go to your Prosper account and bid on some of the same loans.

Be Lazy & Make Money

So there you have it. You can invest using Prosper minimizing your research. With the right tools and the right people to follow, you can make money off of social lending.