Prosper P2P Lending 1% Cashback + Potential Market Inefficiency

I kinda missed the boat last Thursday 2/17 because peer-to-peer lending site Prosper.com had a promotion going on for borrowers that stated that they would make a entire month’s loan payment for you. A quote from their e-mail:

It’s our fifth birthday, and to celebrate we have a special gift just for you! If you apply for a loan and submit a listing on our site today, February 17th, we will make your second loan payment (up to $300)*!

Astute borrowers realized that they could simply take out a loan and pay it back after 2-3 months since there was no pre-payment penalty. After all loan initiation and other fees, the borrower could still net a little over a hundred bucks. Not bad for “borrowing” money!

However, this also meant that somebody had to fund their loans. I’m sure some potential investors found it weird that Prosper suddenly had a lot of AA-rated loans from folks with very good credit and peculiar descriptions like “I really don’t need this money for anything, and intend to pay this loan off in 3 months.” :) The requested loan amounts will also be very close to $3,500, the ideal amount for profit maximization.

To top it off, I just got this e-mail from Prosper regarding getting 1% cash back on any bids placed on Monday, February 21, 2011. Here’s the e-mail text. No special link or promo code was given, so I can only assume it is open to all.

This offer is as straight-forward as they come: invest in any listing on the site today, and you’ll earn 1.0% cash back*! With a cash back offer and returns averaging 10.1%**, why wait?

* The promotional period begins at 12:01 AM PT and ends at 11:59 PM PT on Monday, February 21, 2011. 1.0% cash back will be paid on all bids placed during the promotional period that ultimately become funded loans. Cash bonus will be deposited to your Prosper account by March 31, 2011.

Update: Promotion extended to end of 2/23:

* The promotional period began at 12:01 AM PT on Monday, February 21, and will end at 11:59 PM PT on Wednesday, February 23, 2011. 1.00% cash back will be paid on all bids placed during the promotional period that ultimately become funded loans. Cash bonus will be deposited to your Prosper account by March 31, 2011.

Now, if you could technically find and fund several of these high-quality borrowers who have an incentive to pay off their loan in 3 months, you could have an investment that would return around 1% in interest + 1% cash back over a period of just around 3 months. That’s a lot better than a savings account.

I know that some of you readers got in on this. If you’re still looking to get funded, share your loan listing below using your usual commenter e-mail. This is not risk-free as you are still lending money to strangers, but if you’re an AA borrower on Prosper who initiated a loan listing on 1/17th or shows as early on 1/18th for ~$3,500, then I am more willing to take the risk. I am relatively comfortable with P2P lending with certain criteria, and already have over a few thousand dollars in highly-rated loans on LendingClub.

Comments

  1. Prosper is only available to lenders from Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming.

  2. Jonathan – I’ve looked at these peer 2 peer lending sites and I just don’t get it. I can get the same return (or greater) from corporate bonds with less risk (IMO I guess). Whats the appeal to the lender other than helping out folks?

  3. This sounds interesting on the lending side but I’m not so sure that it works out so well for the borrower compared to other opportunities. For the same hit on my credit report it would be a lot easier to open up a credit card with a signup bonus, many of which are worth over $100.

  4. I love these marketing gimmicks. I used to change long distance carriers every month to make money – back when they offered up to $100 to sign up (back to the 90s for this one). I recently got $300 for signing up for an American Express card and buying groceries with it for a month (it was $300 towards any travel expenses billed to the card, but we fly often, so it was easy to redeem).

  5. Drat, the only time it is not good to live in Texas… Neither Lending Tree or Prosper allow us to invest.

  6. Jonathan,

    As you know, I’m one of the ones who took advantage of the Birthday deal for borrowers. Just to correct your comment about making a little over $100 borrowing $3500: I expect to make $250. That’s $300 from Prosper making my 2nd payment for me, minus $17 origination fee as an AA borrower (0.5%), minus approximately $30 interest (at 4.99% APR) over two months. So, if I figure correctly, I should make 7% over two months. Better than any credit card signup bonus I ever got!

  7. @Dan – Yes, you’re right for AA loans. For the rest of the loans the closing (origination) fee appears to go up significantly. They’ve changed it from before, it used to be $75 minimum if I recall.

    Closing fee
    The closing fee is a percentage of the amount borrowed and varies by Prosper Rating:
    AA: 0.50%
    A, B 3.0%
    C-E: 4.5%

  8. @2million – Well, I don’t consider this part of my retirement portfolio, it is certainly a hobby. I also have money at Kiva and Microplace in addition to Prosper and LendingClub, but they are more of a charitable hobby I suppose. All but Kiva (no interest) still have me at a small positive return higher than online savings accounts.

    The Vanguard high-yield corporate fund currently yields about 5.9% but with a 5 year duration. If you held a bunch of these rolling 3-year loans, the average maturity would be about 1.5 years, so less interest rate risk.

  9. Oneironwoman says:

    I have been both a Prosper Lender and Borrower since 2007. Out of 9 notes, 2 charged off, 4 paid their accounts in full before the due date and 3 are still current until the end of the year on their 3 year notes. I had a loan myself that will be paid off in the next couple of months but I will say that the borrowing process has gotten harder. No doubt due to the people with charge offs they have become more strict but even for borrowers like myself with 100% payment history, A rated credit & with a detailed listing it’s difficult. They’ve eliminated the forums to request reviews of your listing & Prosper isn’t even thorough in posting the information in the listing (example they say “no” for mortgage when I have one) At any rate, I’ve about broken even as a lender thus far with a few more months on the remaining loan payment to receive which should yield me about an extra $100-$150

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