"eBay of Finance" Individual-to-Individual Loans as Investment?

[BigMoneyJim]

I saw this posted over at Slashdot. There doesn't seem to have been a discussion over here about this type of thing. Offhand it seems high risk. Has anyone toyed with these?

www.zopa.com
http://en.wikipedia.org/wiki/Zopa.com

www.prosper.com
http://en.wikipedia.org/wiki/Prosper_(web_site)

They are described as "eBay for finance" or "eBay for loans" where individual lenders are matched up with individual borrowers. I'm sure lots of regulatory questions are popping into your head now, but I'll skip the details as I'm sketchy on them myself and really am mainly trying to find out if anyone here has delved into this type of thing.

I'm more intruiged to be a lender, but offhand I have difficulty imagining that they can provide collection services and manage to keep the returns decent enough to offset the extra risk as opposed to a MM fund or ING Direct or Emigrant Direct.

 

[cute fuzzy bunny]

I remember a thread about it, a while back.

A lot of the loans are to really dicey looking people...and IIRC...YOU'RE the collection agency if they default.

 

[Martha]

Jim, here is a thread where we talked about one these lenders: http://early-retirement.org/forums/index.php?topic=5902.msg104853#msg104853

Tread carefully.

 

[Martha]

.

YOU'RE the collection agency if they default.

Actually no. At least for Prosper you don't even get to know the name of your borrower. Prosper does the collection and sells the loan off if unsuccessful.

 

[brewer12345]

Prosper looks like you are basically making credit card-type loans and relying on Prosper's mechanisms to underwrite the credit. So you don't get to look at income, debt service levels, etc., you just rely on Prosper's letter grade. If things don't pan out, they hire a collection agency for you, but basically you get squat as a recovery.

I think there are a lot more places to earn the same return or better with less risk.

 

[justin]

Yeah. If you want junk quality debt, go buy Vanguard's high yield bond fund w/ 7+% yields.

Some of those Prosper loans are ridiculous. Especially the "I want to pay off my credit cards" and "I need $3000 for a new laptop and new outfits for my new job".

Or the guy asking for $600 to fund his advertising expenses for his business (so he can grow his business). I don't know about you, but if a business owner can't find $600 to advertise and grow his business, I wouldn't want to lend him much money.

Caveat emptor...

 

[Cool Dood]

I was going to start a thread on this...

You could probably manage to devise a "Prosper retirement," where you lived off the interest from Prosper loans. I guess the return might not make up for the added risk and other stuff, instead of just using bonds or whatever instrument. Although I guess it will eventually be arbitraged to a pretty fair price. Still, probably a good idea to diversify, and one wouldn't really want to retire on just loans/bonds anyway...

 

[brewer12345]

I suspect that Prosper will do just fine until the next spike in unemployment. Then those loans will default in droves and it will be game over.

 

[Cool Dood]

I suspect that Prosper will do just fine until the next spike in unemployment. Then those loans will default in droves and it will be game over.

You have a really cynical view of human nature

 

[Martha]

I wonder how many of these loans actually get made.  Most of the bidding on the Prosper site is at pretty hefty interest rates.  As I posted on the previous thread, there are a number of usury issues and even Proper posts state by state interest rate limitiations.

I would be very concerned about securities issues. A sale of a loan is the offering of a security.

Zopa is for UK lenders only.

 

[BigMoneyJim]

Oh, I didn't see that previous thread on Prosper. Google failed me.

Okay, good enough for me. I wouldn't touch these with a 10 foot pole.

And good point comparing these to high yield bonds where I compared them to ED, ING and MMs.

Zopa is running a "Free Chickens With Every Loan" ad at the top of their site. It was the first thing I saw. It doesn't instill a lot of warm fuzzy feelings about putting money there!

Thanks all!

 

[brewer12345]

You have a really cynical view of human nature

Nah, just experience in looking at credit card companies. Go look at what happened to COF's stock price in the last recession.

 

[Cool Dood]

Nah, just experience in looking at credit card companies. Go look at what happened to COF's stock price in the last recession.

Hm, just looked... they seem to be in almost exactly the same place they would've been if the boom and recession had never happened. Other than the high volatility which a small place like Prosper might not survive, I don't see what's the matter....

 

[brewer12345]

Hm, just looked... they seem to be in almost exactly the same place they would've been if the boom and recession had never happened. Other than the high volatility which a small place like Prosper might not survive, I don't see what's the matter.... 

I think the ride from 70 to 25 in about a year was pretty upsetting to lot of shareholders.

 

[Cool Dood]

Free chickens? I'm there!!

 

[Cool Dood]

I think the ride from 70 to 25 in about a year was pretty upsetting to lot of shareholders.

Well, I'd imagine the bursting of any bubble to be pretty upsetting to a lot of shareholders. So? There's no harm done other than a few hurt feelings.

I still don't see what's the matter. (Not trying to be a pain in the a**, just asking! )

 

[brewer12345]

Well, I'd imagine the bursting of any bubble to be pretty upsetting to a lot of shareholders. So? There's no harm done other than a few hurt feelings.

I still don't see what's the matter. (Not trying to be a pain in the a**, just asking! )

Just by way of comparison, take a look at the chart of a conservatively run lender/financial institiution over the same time period. Just for laffs, look at AF. Lenders without a ton of unsecured credit risk generally did quite nocely in that time period, and were definately less volatile.

 

[Cool Dood]

Just by way of comparison, take a look at the chart of a conservatively run lender/financial institiution over the same time period. Just for laffs, look at AF. Lenders without a ton of unsecured credit risk generally did quite nocely in that time period, and were definately less volatile.

Hm....

Correct me if I'm wrong -- what I see is COF blasted ahead of AF during the boom, fell back a bit during the bust, and never dropped back down to the level of AF. So unless you bough COF at the height of the bubble, you'd have been much better off in COF. As I said (in bold, even ), correct me if I'm doing something wrong...

 

[brewer12345]

You are missing two important things:

1) AF pays out very significant dividends and COF does not. Big difference in total return over time.

2) I am suggesting that piling into Prosper now is akin to buying COF at the top.

 

[Martha]

Remember Conseco?

We had the stock for a while and sold, making some money.

Then they bought Greentree and its iffy loan portfolio and ended up in Chapter 11.

 

[Cool Dood]

You are missing two important things:

1) AF pays out very significant dividends and COF does not. Big difference in total return over time.

By my non-calculated estimation, you'd still be way ahead with COF even without the bigger dividends.

2) I am suggesting that piling into Prosper now is akin to buying COF at the top.

Why?

 

[CybrMike]

I've loaned out $2K at around 20%. Just to test it out. We'll see what happens.

 

[brewer12345]

I suspect the calculations are way beyond me, but AF has paid cumulative dividends of about $4.50 a share since 1993 on a stock that you could have bought for about $4.75 back then.  COF has always paid a dividend that could best be described as "nominal".  

I say that lending on prosper is likely similar to buying COF at the top because consumer credit in the US is currently very good.  Employment is the big driver, but low rates help too.  If rates continue rising, employment drops, or the housing market tanks, it would be very easy to see defaults spike.  Ain't gonna be fun to have lent money via prosper then.

 

[Cool Dood]

I say that lending on prosper is likely similar to buying COF at the top because consumer credit in the US is currently very good. Employment is the big driver, but low rates help too. If rates continue rising, employment drops, or the housing market tanks, it would be very easy to see defaults spike. Ain't gonna be fun to have lent money via prosper then.

Well, you could be right -- I certainly don't know enough to offer an informed opinion, let alone to argue that you're wrong. I guess I also don't have the experience to judge how bad the situation would get if or when any of your predictions come true... I don't really know much about default rates and how much they're affected by circumstances like high interest rates or sudden drops in major sectors like housing.

As for my magic 8-ball/blue-footed booby droppings, while I can definitely see the possibility of a huge short- to intermediate-term drop in jobs, housing, etc., I don't count it a certainty, and I do think that there would be a recovery, and I also see the possibility of continuing improvements in the overall economy rather than a major recession brought on by housing or anything else.

 

[brewer12345]

As for my magic 8-ball/blue-footed booby droppings, while I can definitely see the possibility of a huge short- to intermediate-term drop in jobs, housing, etc., I don't count it a certainty, and I do think that there would be a recovery, and I also see the possibility of continuing improvements in the overall economy rather than a major recession brought on by housing or anything else.

What I am getting at is that you can lend on prosper for only a few % over treasuries, yet if consumer credity quality (which is currently very good) degrades you would take a beating. When a default happens with this type of loan, you would be lucky to get 10 cents on the dollar in recovery. Not enough reward for the risk, IMO, and there are plenty of better places to take the risk if you are chasing yield.