Friday, March 26, 2010

Is P2P Lending Worth It?

Peer-to-peer lending websites were once all the rage, then the economy collapsed and many of them like were forced to shut down their services.

Well, Prosper is back! The website is up-and-running once again, allowing people to borrow from and lend to one another at more desirable interest rates than what banks are currently offering.

So the original question about P2P lending remains... Is it worth it?

On the plus side, if you're a borrower, you can find much lower interest rates than your credit card company is no doubt offering. If you're a lender, you can earn far more than the measly 1% return that is now standard for CDs. Surely, this math is always what made P2P lending so enticing in the first place.

On the negative side, however, lenders' investments are not protected in any way by the FDIC, and although they can view their borrowers' ratings based on credit scores, ultimately they still have no idea who these people are, nor whether they might ever pay them back.

Ho-hum. Old news, right? Well, an anonymous friend of mine was courageous enough to invest some money in Prosper a while back as an experiment to answer some of these lingering questions. The results...

Total notes (loans): 37
Total charged-off notes (delinquent/ over 120 days past due): 23
Total notes paid-off in full: 14

Payments received: $2,661.88
Principal paid off: $2,145.24
Payments in excess of principal: $516.64
Principal charge-offs: $858.73
Gain/loss to date: -$342.09

Thus, from his experience, P2P lending was definitely NOT worth it. Of course, every situation is different, but let this be a data-driven cautionary tale to those who, once again, are overhyping P2P and microlending services. It remains more of an intellectual curiosity than a money-making enterprise.


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