Closing Out Our 12 Year Prosper Marketplace Experiment

Some readers will recall us mentioning the ‘peer-to-peer’ lending site Prosper.  This is simply a site where folks in need of a loan can borrow from other individuals.  I am now close to ending this 12 year ‘experiment’.  We are finally down to have just $106 in the account and as that closed out in the next month we are done with peer-to-peer lending.

We made our initial loan on this site in March of 2007.  At first it seemed like a promising site–a reasonable return for a reasonable risk.  Unfortunately the recession followed shortly after we began investing here and the losses turned from 1 here or there to somewhat of an avalanche.  I think over the course of the 1st 3 years over 25% of the portfolio of loans ended up being written off–this in spite of our attention to quality–never lending to low quality borrowers–so we thought.

It turns out that the Prosper methodology let lots of risk in the door-even though the borrower might have been ‘A’ rated.  This caused Prosper to tighten their standards and while there were fewer write-offs there continued to be defaults by borrowers with high credit ratings and supposedly high paying jobs.

In the end we ended up making over $13,000 worth of small loans (the actual loans were between $1000 and $25,000, but our ‘participation’ was never over $100/loan).  Our annualized return ended up being 4.59%–better than a sharp stick in the eye I guess, but not worth the personal heartburn created when a loan is made to an “A” borrower for a 3 year period only to have them default within 3 months.

So our learning with this very long experiment was that we will let bankers lend to folks and sustain the losses.  Personally we are not built to lend to individuals as we take the defaults too personally.

If we want to participate in peer-to-peer lending we will buy the 5.875% term preferred shares (RMPL-P) of RiverNorth Marketplace, a non public closed end fund, who has a large portfolio of peer-to-peer loans.

11 thoughts on “Closing Out Our 12 Year Prosper Marketplace Experiment”

  1. I’ve never invested with Prosper, due to the loans being unsecured. However, I’ve had some pretty decent success with a hard-money lender called PeerStreet. The loan size is larger at a minimum of $1,000 each and you are supposed to be an accredited investor to put funds into this investment. I do have some history in the real estate business and normally I try to screen each loan on my own before investing funds. It’s certainly not for everyone, but an alternative to the stock market and other fixed income investments.

  2. Given the heartache and lost time, more profitable to be a hard money lender. Just a different group of people.

  3. I have a Lending Club portfolio returning around 3% which I am waiting to close out. There just isn’t enough protection with an unsecured personal loan.

    I thought it would be smarter to invest in Funding Circle, which makes business loans secured by the business assets and a personal guarantee. Sadly, the default rate was also very high and the collection rate was very low. It’s now returning about 5%, but who knows what will happen in a bad economy? I’m also slowly exiting this marketplace and will be done with peer lending.

    I never risked a lot, but was desperate for alternatives to stocks, bonds and real estate. The U-Haul IC sounds like a good alternative, but I’m still looking for others. Commodities? Nope. Precious metals? Nope. Collectibles? Nope.

    1. Hi Bruce–mine was originally just an experiment–not sure how I ended up in there 12 years. Think I was searching yield in times when we had none.

  4. I had 2 goes at Prosper, and 1 at Lending Club. I, too, am just letting them go to zero. Initially, I thought I would be going big in P2P lending, but experience led me elsewhere.

    Too much time for too little return. Plus, the tax treatment is bad. Buy yourself a little portfolio of short to mid-term BBs or TPs (and many other options) and make more money with less aggravation.

  5. thanks Tim for sharing what not to do. I find in investing as in life that you learn more from the losses more than the successes-which I have had my share. I try not to reinvent the wheel so I will heed your story.

    1. I also tried Prosper for a little while – I forget when but probably about the same time. After 6 months, it was outlawed in Pennsylvania so I was not allowed to make any new loans. Results probably about the same as yours, Tim when the existing loans finally rolled off – saved me a decade of heartburn, I guess

      1. timdman–obviously from the comments and my experience you were fortunate to not have to invest more time.

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