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We know that sounds strange. With the financial crisis still being felt, and credit standards still tight, there's an interestingly opportunistic environment in consumer credit. When banks are conserving capital so greedily that they aren't even making loans to people with good credit - much less bad credit - there's an opening at the bank window. Since all the banks are busy borrowing from the Fed's window, no bank tellers are left to man the banking windows and make any loans to consumers.
Which is where a personal loans company called Prosper.com comes into the story...
Prosper.com is the leading provider of a new type of personal loan which results in a note which can then be bought and sold, individually or in bulk - just like other equity issues. Additionally, diversification can be achieved rather easily, as an individual investor need only partake of a minimum of a $25 chunk of any one particular loan. In a marketplace with hundreds or thousands of loans available to select from each day, statistically significant diversification is easily achieved with a minimum investment in the $5k to $10k range. So, even small retail investors can get in on the action with a relatively small initial investment.
Prosper's business model is rather intriguing. It's a bit of a cross between eBay (Pierre Omidyar, founder of eBay, is a Prosper investor) and a normal equity exchange. Borrowers post listings on Prosper for personal loans up to $25,000 and investors can sift through the loan requests, view anonymized credit details, run quantitative analysis on the past performance of all loans in the marketplace, and define an investment strategy for their particular level of risk tolerance and targeted return. Prosper scores the loans based upon the same credit bureau information that a credit card company would use and provides a wide range of credit variables by which lenders can pick and choose which loans to invest. Alternatively, investment can be made via setting your investment criteria in a "plan" and you can then automatically deploy your own capital, in tiny chunks, over large numbers of individual personal loans which meet the criteria you've set, much as a limit order would function in a traditional equity market.
Prosper's personal loan rates for borrowers range from about 6% to 35%, depending on the borrower's credit score, credit history, and a number of other factors. Prosper's loans are all unsecured loans and they report borrower payment histories to the major credit bureaus and handles debt collection efforts when necessary. The majority of the loans are for debt consolidation, though loans for purposes such as weddings, motorcycle financing, and even environmentally conscious "green" loans are available, as well.
Prosper is reporting average returns on personal loans that it's issued since 2009 of around 10% with some of the lower credit quality (but higher yield) loans clocking in at between 14-17%, on a risk-adjusted basis. They make their money by charging borrowers an origination fee in the .5% to 4.5% range, depending on credit quality of the individual borrower, on a sliding scale (higher credit quality borrowers pay less, borrowers with lower credit quality pay more). Lender fees, or what Prosper calls "Loan Servicing Fees" (since it handles all payment processing, pulls money from borrower bank accounts each month and returns that money to lenders pro-rata, based upon their share of each particular Prosper loan) are a flat 1.0% of outstanding principal balance invested, annually compound.
Prosper.com offers personal loans to individuals online and is run by Chris Larsen, former CEO of eLoan.com. Prosper has issued $250 million in personal loans, currently, and recently received a fresh VC injection of $17.2mm in operating capital, including investment from Google's former CEO & current Executive Chairman, Eric Schmidt.
As always, GoodStocks does not offer investment advice - and leaves you to draw your own conclusions about investment alternatives!-The GoodStocks Gang, 6/14/2011 (Last updated on 11/17/2015)
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