Wednesday, February 07, 2007

Prosper P2P Finance Update

A year after launching, Prosper, the eBay of loans, has seen more than $27 million in fundings at its P2P finance site. The firm is celebrating with a user conference confab modeled after eBay Live - Prosper Days - next week in San Francisco. The event is sold out but interested parties can attend the pre-conference cocktail on Sunday evening.

As of February 1, 2007, $27 million was extended in 5,427 loans at an average loan size of $5,000. The average loan size has declined from $6,000 as of November 1, 2006 when $20 million had been extended in 3,372 loans. The mix of loans across credit tiers is generally the same, with C, D, E, HR (high risk) and NC (no credit) categories garnering more listings and fundings than AA, A and B tiers but all tiers are growing.

Continuing to answer the question "Does P2P microcredit work?" the chart below shows how Prosper loans have been performing. The pink and turquoise lines represent Prosper defaults, loans 3+ months late, as of November 1, 2006 and February 1, 2007. Prosper defaults are still stabilizing into a consistent level but have remained lower than Experian defaults, strangely in all but the top credit tiers. One year into the P2P lending business is too early to conclusively determine that P2P lending is lower risk than traditional unsecured lending but the initial signs are good. Low defaults in addition to the favorable interest rates available on the site should entice more investors to lend capital on the Prosper platform.

Another important question is “Does group lending work?” that is, does the social pressure of being a group member increase the likelihood of repayment? Prosper claims that being a group member aids funding and improves repayment but has implemented their group program more like a multi-level marketing program than a true Grameen-style borrower peer group program. The chart below depicts the performance of Prosper group member loans vs. all loans and shows that in the lower credit tiers, C, D, E and HR, the main areas of Prosper borrowing, group loans perform worse than non-group loans.