Is Lending Through Prosper.Com A Viable Investment?

A lot of different bloggers are experimenting with lending money on Prosper.com as a methodology of earning a higher rate of return than money market accounts, certificates of deposit and savings accounts.

Prosper.com is a relatively new service that allows borrows to place requests for loans and then lenders can big to fulfill part of that loan at the going interest rate. The going interest rate is determined by the free market, lenders can bid the interest rate that they want to lend the money at, and the borrowers can then choose the best interest rate form all the lenders ho have bid on their loan. Borrowers then pay their money back to Prosper, and then prosper will distribute the money to all of the lenders for that particular loan. Lenders distribute their money to a number of different borrowers to minimize the risk that they are taking. But the question remains, is lending money through Prosper.com a worthwhile investment?

In order for prosper.com to be a successful and a sustainable market place, it has to be a benefit to both the borrowers and the lenders. If either side is getting had, the system will inevitably break down. This is true for any market place though. Unlike eBay and other online market places, it’s a lot harder to determine the value of the likelihood of the borrower to repay the loan, as opposed to finding the value of a physical good that is sold on eBay.

Prosper.com finds a balance of rate of return in two different ways. First, the rate has to be better than the money that people can get other places. Lenders might put their money in CD’s and savings accounts which get 5% rates. It is also must be below the rate that borrowers can get money elsewhere, such as on a credit card. The price will fall somewhere in between there.

It’s interesting that lenders on prosper are lending money to people at rates of return less than what banks would lend money at. We don’t have better financial information than banks, and are certainly not better financiers than them! The reason people can lend money at lower rates than banks, is because they don’t have any overhead. You’re just a person with an internet connection, you don’t need to have a branch, tellers, staff, facilities and ATM machines. You’re just you!

But should we do this? In most cases, no. When you are loaning money on prosper, you are definitely dealing with sub-prime borrowers. There’s a lot more risk when lending money on prosper as opposed to putting money in the bank. If you want to take on some more risk for a higher rate of return, you’re most likely off better than investing in a junk bond fund. You could also become part owner in a bank by investing in their stock. When all is said and done, there are much less risky and much more viable alternatives. Just like what you see in Majestic Lake Financial Reviews, the feedback od customers to Prosper.com are mostly positive.