One of the big differences I see between Prosper and conventional investing is its personal nature. Some people like that—it’s fun for them to help people fund their dreams or repay their debt. Tricia at Blogging Away Debt used Prosper to consolidate some of her debt at a better rate. Very exciting for her!
At the same time, by signing up as a lender with Prosper, you’re taking the risk that someone won’t pay you back. Therefore, Prosper has you specify which collections agency you want to use (two choices) before you fund the loan.
I have to say that part makes me really uncomfortable. I’m sure there are ethical debt collectors out there, but one hears so many horror stories. In particular, Micah was traumatized as a child by threatening debt collectors (he’s still afraid to answer the phone).
While traditional investing isn’t perfect either, at least one can (probably) avoid the possibility of setting a collections agency on someone. I just don’t want to be involved in that.
As I was musing on this, I came up with a few answers which might make lenders feel more comfortable:
1. There are certainly a number of responsible borrowers on Prosper (like Tricia!), no reason that you’ll necessarily get a default.
2. Lend only to high-grade borrowers (A or AA) because they have such a low chance of default.
3. Maybe Prosper works with more ethical debt collections agencies? One would hope they’d taken the time and specified that if the agents start threatening/harassing/or doing anything illegal towards Prosper borrowers, the agency will lose its contract.
I like #2 best.
What are the implications of choosing high grade borrowers?
If I stuck to high grade borrowers to avoid the chance of default and conscience troubles, then I wouldn’t get the same kind of returns as I might be lending to someone with a C or D. Does Prosper then lose its worth to me? Might I do better with a CD?I’d probably use the experimental section of my portfolio (yeah, haven’t got one of those yet) and I wouldn’t expect it to earn much more than a good CD or Money Market. I’d frame it as a combination of making money and helping people out…
I think that the best way to make money on Prosper is by hoping the collections agencies are decent folks and going with a wide mix of borrowers. I’m just not able to do that.
Postscript: Oh, and if you do want to sign up with Prosper, check out my left sidebar.