Prosper.com has a birthday coming up

The first major Peer-2-Peer lending service in the U.S., Prosper.com, is set to celebrate it's one year anniversery next week. Let's take a look at how they've been doing.

For those of you who don't know, peer-2-peer lending is a system where borrowers seek funds from other individuals via websites such as prosper.com. The site works like an auction site in some ways. Borrowers set the amount they wish to borrow as well as the highest interest rate they are willing to pay for the loan. Lenders (who work together to collectively pool money together to satisfy individual loans) set the lowest interest rate they are willing to accept for their contribution to the loan. Once a loan is agreed upon, Prosper takes care of payments on both sides of the loan (and manages to take 1.5% off the top by the time they're done). And there you have it... just like magic, we've cut out the banks. But is it working?

The company has moved just over $35 million in loans in the last twelve months. According to the site's statistics (link), there is a current net default rate of 0.45%. This doesn't take into consideration the number of borrowers who are presently delinquent on their payments. This number totals slightly less than 10%. Most of these borrowers are at least a full month late on their payments. These delinquency rates are significantly higher than traditional consumer loans.

That certainly hasn't stopped lenders from pouring their money into the project. Registrations to the site have more than doubled since December. There are over 130,000 registered members to date. According to Prosper Marketplace Analytics, an independent site keeping tabs on Prosper's statistics. Their charts seem to indicate a return on investment that is significantly higher than traditional savings rates and, if you stay away from loaning money to the higher risk borrowers on the site, traditional CD rates as well. This obviously comes with the risk of people not paying you, which is something you don't have to deal with putting your money in a bank as opposed to setting it loose online.

So we've got $35 million in loans. Almost 10% of them have either defaulted or are late on their payments, and we're only a year in. Prosper automatically sets the terms of these loans at 3 years. You can pay them off sooner, but you'd be right if you guessed that most people don't (about 5%have been paid in full, according to them). So the question lies in whether or not these delinquency rates are going to stay about the same, or continue to get worse as borrowers finish out the last two years of their loans.

In the end? Prosper is one more option to borrowers. But if they can't get financed someplace else (which was probably what drove a lot of people to the site), they're going to get rocked with steep interest rates. My advice to them is to avoid the hassle and start filling their piggy banks.

Prosper for Lenders? It hardly seems worth the risk, especially when you take into consideration the going rates with all the new online savings accounts (which don't require you to 1.) risk someone not paying you, and 2.) tie up your money for 3 years at a time).

My opinions aside, people are coming to the site. So who is Prosper good for? Prosper, that's who. They pulled in somewhere in the neighborhood of half a million bucks last year (Before operating costs, to be sure). But there weren't any record breaking delinquency rates in their profits, you can count on that. Prosper takes their money off the top.