Prosper Receives SEC Approval; Does PtoP Lending Work?

Prosper, a PtoP lender that was forced to stop operations 9 months ago by the SEC, finally received approval to begin operations again.  The real question though is about the viability of their model P to P lending and whether it makes sense from a borrower or a lender perspective.

Let's take a step back and explain how Prosper works.  It connects borrowers to investors without a middle man (bank).  It does this by listing borrowers and their needs for loans and then allowing ordinary people (like you and me) the opportunity to lend money to these people.  The site provides information on the loan, the borrowers, and their credit history.

Take a look at this Vespa example.  The borrower wants to raise money to purchase a Vespa scooter.  The dealer will provide her with a 36 month loan at 7.9% with 10% down. She posted her borrowing needs on Prosper and via the auction system was able to borrow the cash at 6.17% from a variety of individuals who contributed amounts ranging from $25 to $250.

It looks like a win for everyone.  The borrower gets the loan at a lower rate and the investors get to invest with a "credit worthy" borrower and earn a 6.17% return.  That's far higher than anything they could get from a bank.  Of course, the loan comes with 0 FDIC insurance and if the borrower defaults, the money is gone.

So does this make sense?  Fred93's Blog has some interesting stats on default rates.  According to graphs which track Prosper late payments, over 40% of Prosper borrowers are delinquint on their payments. That's astoundingly high.  It doesn't mean thehy will all default but it's still troubling. And the chart could still head higher.

On the boards at Prosper.org, a site dedicated to discussing Prosper, the talk is mostly negative (although negative discussion tends to be more prominent on most message boards). Posters are not only discussing loan losses on Prosper, but also the viability of a company that has essentially been out of business for the last nine months.

There are other models for Person-to-Person lending.  Sites such as Virgin Money try to faciliate lending between friends and family members.  In the end, this may be a more practical way to grow peer-to-peer lending versus lending to strangers.

If anyone has experience with Prosper, please post it below.