Prosper is a peer-to-peer lending site where you can post a listing for someone to loan you money, or you can loan other members money. It's an auction format, so lenders bid for loans. I've reserved judgement, but definitely felt uncomfortable knowing some "lenders" may not understand exactly what they are getting into and may not have a good grasp of the risk-reward principle. Prosper works on the Tupperware principle of getting your friends and associates to participate.
Having watched PayPal evolve, I learned that in early phases of cyber-versions of financial services, there are lots of lessons to be learned, usually borne by the users, not the company.
Prosper just filed with the SEC, so I checked to see what kind of performance the loans have achieved (see page 48 of the filing).
Loans are classified into risk categories, and the "NC" credit grade category of loans had such a high default rate, they discontinued it in February:
Default Rate Based on Number of Loans Defaulted: 40 percent of "NC" loans
Default Rate Based on Principal Amount of Loans Defaulted: 40.03 percent of "NC" loans
The next grade of loans was " HR" with a default rate of 19.56 percent (22.06 percent based on the amount of principal).
The total default rate across all credit grades was 5.36 percent (8.42 percent based on the amount of principal).
Those kinds of numbers would keep me up at night, caveat emptor to lenders. And as a borrower, I'd be asking if Prosper loan defaults would show up on my credit rating.
Note that Prosper does disclose the default rate in a tutorial on its site, but suggested adding the rate as a percentage to the interest you should charge lenders. Interesting!
I did a search on Google News to see who wrote about the SEC filing. Two news outlets and one well-known tech blogger wrote about it, but nowhere did they mention the default rate. To me, the default rate was the interesting part. ("Disruptive" is right!)
Look at the fees Prosper charges, and you'll understand the best investment on Prosper is Prosper itself - they get fees from borrowers and lenders - without lending a penny. (eBay founder and Chairman Pierre Omidyar's Omidyar Network is an investor in Prosper.)
So why is Prosper filing with the SEC? They want to create a secondary trading market online auction platform, or "Resale Platform," where lenders can sell their loans (called Notes). Keep in mind: "The Notes are not the obligations of Prosper, any depository bank or any collection agency. The Notes are not guaranteed or issued by any governmental agency," and "Prosper has no obligation for payment of principal of or interest or other charges on the Notes."
In reading about Prosper, I felt like I was reading about Second Life (or subprime mortgages). In case this posting was too oblique, here's my opinion: This service probably has helped some borrowers and made money for some lenders, and it has lost some people money. If you can't afford to lose the money you lend on Prosper and laugh it off, don't lend it.