Serge’s story
Early in April, Serge put up a request for a loan of $4,300, offering an interest rate to lenders of 12.9 percent. “This loan is probably the hardest thing I have had to ask for in a very long time, and I appreciate your help,” his listing began.
Serge went on to describe his situation. He receives financial aid, he said, but his next disbursement doesn’t come until September, and he’d have a hard time until then. But he assured possible lenders that his future looked bright. He’s in his last year of school, and he expects to find a job soon. “I don’t anticipate any problems paying this loan back,” he wrote.
Despite his assurances, a risk-averse investor would have found much to be wary of in Serge’s listing. His chosen field of study is creative writing, not a major known for the swiftness with which it places graduates in steady employment. There’s a more basic problem, which is whether you can trust him. Serge posted a photograph — he’s seated at a desk, writing, a cat perched nearby — and though he looks decent enough, it would have been impossible for any lenders to know for sure that Serge was really a student due to get a financial aid check in September, and was not, instead, just practicing his creative writing to get some quick cash.
As it happened, people believed Serge’s story, and he got his loan. But that’s not the case with everyone. Lending money on Prosper is no different from lending money in real life — it’s possible, and some might say likely, that some people aren’t who they say they are, and that they won’t pay you back. Prosper is explicit with lenders about this risk, and it advises people to get around it by diversifying. If you have $5,000 to invest in Prosper, the site encourages you to spread your money among many people. Every loan on Prosper lasts for three years (borrowers face no penalty for paying the loan early). If you give $50 to 100 people who have a credit grade of C, chances are that over the course of three years, some people — about three, according to Hesperian — will default on their loans. But if you get a 15 percent return on your money from those who do pay you back, you’ll make more than $2,000 on your $10,000 investment, enough to cover your losses.