& Me

Nov 21, 2011 by

Proceed with caution

A little over three years ago, frustrated with very low interest rates that are even lower today, I decided to try lending money to total strangers through the magical Internet. I signed up with Prosper, a peer-to-peer lending service.

What Prosper Does

Prosper’s homepage sums up its service: “We connect people who want to invest money with people who want to borrow money.” The word “invest” is used loosely, but I won’t quibble. Today Prosper’s homepage also teases “10.69% Actual Returns”.

My Strategy

Being of Teutonic heritage, I approached my Prosper investment methodically. I resolved to lend a total of $10,000 in $100 chunks to 100 borrowers, thus diversifying my risk. (Aren’t I smart!) Lenders can select borrowers through Prosper by reading a “loan listing” posted by borrowers and asking questions of the prospective borrower if desired. I did this for a while, but quickly grew impatient and instead set up what Prosper calls “Quick Invest” criteria. Prosper’s algorithm then selected loan listings that met my criteria and presented them to me for a yea or nay. In a short while I’d loaned out my $10,000 and sat back to wait for the interest payments to start rolling in, smugly reflecting on my new status as financier and how clever I was for learning to make money without getting my hands dirty, my back sore, or working for someone else.


My Prosper “investment” recently ended. The $10,000 in loans ran their 3-year payoff course, and I made no additional loans. My return fell short of 10.69%. In fact, it fell short of 0%. Prosper reports my annualized return as -4.27%. I lost $596.88. Of the 100 loans I extended, 32 were “charged off,” meaning the borrower defaulted and refused to pay back the loan in full. In total, $2,135.62 of the $10,000 I loaned was charged off. The interest I did earn was not enough of offset these charge-offs, so I lost money. I’m feeling a bit less clever now.


I do not question the returns Prosper advertises, and I like the peer-to-peer lending model (in contrast to the Big-Bailed-Out-Bank-to-Little-Guy-Who-Pays-Taxes-for-Bailouts lending model). Maybe the main reason my investment didn’t work out was timing—my lending concluded just as the 2008 financial meltdown and still ongoing recession began. Maybe my Quick Invest lending criteria and borrower selection methods were flawed. I don’t know why I lost money, but apparently, unless Prosper is a fraud, some lenders are making money.

If you have experience with Prosper or a possible explanation to propose for my failure, please share them by commenting on this post.

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