Peer-to-Peer Lending: Is Investing in Peer-to-Peer Loans Through Prosper.com a Good Investment?

Prosper.com has been around for several years now and has recently began a significant advertising campaign, which includes running ads on CNBC and many are wondering if Prosper.com is a viable alternative investment for some of their investment dollars.

If you’re unfamiliar with the company, it’s one of a few online market places that allow individuals to lend money to another. Unlike its main competitor, Lending Club, which offers credit-score based interest rates, Prosper determines interest rates through an auction system. Lenders bid on loans and if the loan is fully funded, the lenders that bid the lowest interest rates will fund the loan to the borrower. Prosper.com does all of the work writing loan documents, collecting payments from the borrower and dispersing payments to lenders.

When first registering on the site as a lender, you might find it rather addicting. Investors can browse through hundreds of loan requests from individuals looking to borrow money for purposes such as buying an engagement ring, consolidating credit card, starting a new business, or adding onto their home.

Like most investments, many different analyst and personal finance experts have differing opinions about how much, if any, money should be invested in peer-to-peer loans through Prosper.com. On their website, Prosper.com advertises that investors will earn between 7-13% on their money depending on the level of risk that they have had.

Many earlier investors in Prosper.com loans have felt burned because of higher than expected default rates and lackluster collections efforts on behalf of Prosper.com. Many investors have said they have either broken even or lost money on their investment. Depending upon whose estimates you believe, some would even argue that the average interest rate investors are earning is less than 0%.

Some personal finance bloggers have reported a bit better results, earning a positive rate of return over the life of the loans that they have funded.

Although the interest rates that investors will earn are likely less than what Prosper.com and its competitors report, some have made money by funding loans in peer-to-peer marketplaces such as Prosper.com and Lending Club.

It’s important to remember that peer-to-peer loans are still a relatively new asset class. Regardless of the company that you use, it’s going to take some time before peer-to-peer loan companies can do an highly effective job of determine who is credit worthy and what interest rates they should be charged.