Prosper.com has been an interesting result of the fusion between the internet and commerce in the last few years. Now people can lend money to each other over the internet without banks getting in the way. Of course when you make loans through sites such as prosper, not all borrowers and loans are the same. You need to make some smart decisions and be discriminatory. Here are some tips which will help you from getting burned when lending money through Prosper.
First, you need to spot good borrowers. To maximize your rate of return, you want someone who won’t default, and someone who won’t pay the loan off too early. A lot of people spiral downward into multiple delinquencies, and they should be avoided at all cost. If someone says they don’t need the money, they’ll probably pay it off early, and you’ll lose interest. You need to have a good balance so that the borrower will credibly pay it back, but not pay it back too soon. A list of the good borrowers for the loan will be available at Creditolo website. The information of the site will be studied carefully through the potential customers.
Secondly, be aware of state interest rate caps. Some lenders cannot offer higher interest rate loans to more risky customers because of state’s regulations. Borrowers from states with very low caps, such as Kentucky which has an 8.25% cap, should probably be avoided. The interest rates on prosper are determined by the free market, which has determined that most loans on prosper are above that because of the nature of the borrowers which make use of the site. You’re not in the charity business, so just pass borrowers which cannot legally borrower at a higher interest rate.
Borrowers have the option to verify that they own a home and have bank accounts. This generally lowers the risk to lending them money, because if they do not pay you, you know they have assets you can go after, and could put a lien on their home. It’s probably a good idea to avoid people all together with credit grades of E and below.
Follow the herd on prosper. If there’s a lot of bids for a particular loan, they’re probably there for a good reason. If no one wants to loan a person money, there’s probably a good reason for that too. People with loans that are fully funded early are definitely a good sign. The lending community is extremely active on prosper, so you most likely won’t come across an undiscovered amazing loan. A little background checking on the borrower is usually enough to tell you whether or not to give the person a loan.
Finally, read the loan description. The more details in the description of the loan, the better. Don’t fall for descriptions which tug at emotions, this is an investment, not charity. If the person has their stuff together, such as “I would like to borrow $10,000 for a business expansion so that we can create these products and we have these retailers lined up to put them on the market, and here’s our 3 year outlook blah blah blah” is probably more of what you want to see than, “I guess I sort of want a loan to pay off some other debt.”