I have never been able to understand how a guy could come out on making unsecured loans to strangers unless he has a staff with some guys named Vlad and Vinnie and Hector Malacosa to help with collections.
Ha
Well the 10,000' view, was as follows.
A. Banks make a good deal of money on the spread between regular saving/CDs and loans.
B. Credit reporting companies (Experian, EquiFax etc) generate a credit score which can be reliably used to assess risk. Not much different than Morningstar Mutual fund performance and risk star rating.
C. The internet, and electronic fund transfer can eliminate much of the cost of servicing a loan.
D. Prosper would take on task of credit verification and loan servicing, debt collection.
E. By connecting lender with borrower and cutting out the middle man, lenders good get interest rates well above CD rates while borrowers could get lower interest rates.
F. The combination of risking screwing up your credit rating (late payments on Prosper loans are reported to Experian) and peer pressure would keep loan default to same or lower levels experienced by CC companies.
The problem was that while A, and C were true. B simply was false, and Prosper did horrible job on D. My reasons for trying it was it sounded cool, and more importantly I thought there was a chance that peer-peer lending might be an non-coorelated asset class with junk bond type returns.
I loaned $2500 in late 2006, I expect to get back $1500-$1600 by the end of the year, or a 40% loss, worse than the market performance, but not some much so that I feel particularly angry. After all I could have bought ISM or OSM at par instead.... LOL.