Perhaps I've gotten lucky as well, but I've done pretty well at Prosper thus far. I only have 17 loans so far, but they're all current with an average return in the 15% area. I think it is what you make it ultimately - the better job you do in your initial screening, the less headaches you have to put up with later on down the line.
I put a very small amount into prosper at the beginning of the year as an experiment, and have been re-investing the payments as I've gone along, but I have not put any additional funds in. I'm not going to be negative this year , but I probably won't have earned more than 5%, which sucks considering the risk. With prosper the most important thing to realize is that the experian statistics that Prosper shows you when you click on a loan that give the expected amount of principal to be lost to default for a particular credit grade do not apply to prosper. They aren't even close. The actual values on the prosper portfolio won't be known completely for awhile, but the trends (as of a few months ago), showed that at the very least, the amount lost to defaults would be several times worse than the experian statistics. So for example, you see someone with a B credit rating who is borrowing at 15% and you see that the experian rating shows that you will lose on average like 3% or whatever do to defaults , so you think "cool I can expect to make about 12% a year on loans like this!" Wrong, the money lost to defaults will be >9%. I have a friend who was still adding money to his account, even though he had a ton of defaults, expecting that it would eventually average out profitable due to the experian statistics! He had never read the forums, and so had no idea how bad things really were. The next most important thing to know about Prosper is that the statistics that Prosper shows you about their portfolio tend to be misleading because of the following: (1) First of all they are slow to count the loans that are defaulted as losses. (2) More importantly though, since prosper is growing rapidly, there are always a lot of brand-new unseasoned loans that are not much older than a month old. (2) Most borrowers make their first payment. The borrower still has all the money they just borrowed when their first payment is do so they don't have a problem making their first payment! Plus, the borrowers are generally aware that if they don't make their first payment they could potentially be guilty of fraud. (Don't know if this is actually true, but that is what they believe.) (3) So, even though the loans are defaulting at a very high rate, at any given time the portfolio consists of mostly new loans that haven't defaulted yet so their aggregate statistics for defaults or whatever always look pretty good. With prosper you must go online to the forums and read all of the threads where users have compiled detailed statistics about the prosper loan portfolio, before committing any serious money! There are some skilled statisticians among the prosper lender community who have posted some great data and analysis on the forums....unfortunately, last I checked Prosper was re-doing their forums so most of those great old posts and threads are probably lost. I personally believe that it's probably easy to make around ~10% a year from prosper lending, using the simplest screens. I currently re-invest the payments I receive using an entirely mechanical screening criteria, but I've only been doing this for a few months so I don't know how this will bear out. I've noticed that the few prosper lenders that have been around for awhile and that are happy with prosper generally invest using standing orders that automatically bid on loans that meet highly selective criteria. I still consider it an experiment. If later next year, loans using my current strategy do indeed generate around 10% or better, I'll probably start making regular investments into my prosper portfolio. I'm glad though, that I found the forums early on before I put much money into prosper, and saw how bad it could be. I've seen it over and over again, where people come into prosper and think they are going to make 20% a year lending to high risk borrowers, and so they make a lot of loans up front, and then don't come onto the forums until they start getting their wave of defaults after the first 3 months or so, and then find out that they are totally screwed, because they have already committed funds for 3 years. Here are some interesting facts I remember from the prosper forums....I'm going from memory, and I haven't read the forums in several months so take these with a grain of salt. * If a loan goes over 1 month late in the first 3months, it has better than a 90% chance of never getting another payment again. * The actual default losses are at least 4 times what the Experian statistics show for all credit grades other than AA. (I just checked out prosper.com and couldn't find the experian default table anywhere so maybe prosper isn't using these any more.) * linear projections were showing that 100% of the prosper loans with A credit grade and lower would go delinquent before the 3 year term of the loan, although most people expect that the trend would level off....but as of like 7 months or so, there wasn't any vintage where the numbers had started to level off. * Autofund loans default at significantly higher rates than non-autofund loans, like at least twice as much. * Group leaders can game the group-ratings system. Here's a basic summary of how they do it. First of all, group-leaders get a small piece of every loan payment. They advertise to borrowers that they have a high success rate for getting loans funded. This attracts borrowers. They advertise to lenders that they "bid on every loan in their group with their own money"...which encourages lenders to loan to their group. The prosper statistics verify this....you look at the group statistics and see that they do indeed fund a lot of loans, and you look at the loans and you can see that the group leader has bids out on the loans that are currently being offered....but here is how they are gaming the system: The group leader does indeed bid on most loans...which gets most of their loans funded, but they do it in a manner where most of the time they risk NO CAPITAL. What they do, is when the loan offering is close to expiration, the group leader will start making big bids on the loan at the minimum posted rate. This will start to trigger standing orders to bid on the loan as well because most people put a criteria in their standing order that the loan has to have a certain percentage already funded, and that their needs to be a minimum certain quantity of time left on the loan before the standing order triggers. People do this, because they don't want their capital tied up bid on a loan for a week, that never ends up getting funded. As the level of funding goes up, and the amount of time left on the bidding goes down, more and more standing orders get triggered, which further attracts discretionary bidders to bid. This causes the rate to go down until eventually the group-leader gets out-bid, after the loan gets fully funded so his bids aren't part of the loan funding. This way the group leader gets his member funded, and gets to collect a piece of each payment without any of his own capital at risk. Now for the first few months, the group-leader makes community payments on any loan that looks like it is about to default, so the group statistics look attractive, which encourages more lenders to bid the loans, and encourages more borrowers to join that group, as the group will be highly ranked for both borrowers and lenders. The group leader keeps doing this until eventually they are overwhelmed with defaults, and aren't bringing in enough money from group-leader payments to continue to pay the community payments on the loans that are defaulting, so the group leader stops doing it, and within a month or two the group's ranking plummets and lenders stop bidding on that group's loans. Hopefully at that point the group has MILLIONS of dollars of loans in the portfolio, so even if the defaults end up consuming 50% of the loans over the next 3 years for example, which is a disaster for the lenders who loaned money to the groupmembers, the group leader still get to collect group-leader fees on the remaining loans, (which are a percentage of each payment and I believe could be as high as 3% at one point) and so ends up with a nice steady-stream of income for several years to come, without risking any capital. So anyway those are some things I kind of remember from reading the data presented on the prosper forums....like I said that's all from memory so I'm probably a bit off on some of that. Also, a lot has changed at prosper in recent months, so things may have gotten better. I only log into prosper about once a month, to scan for loans that meet my saved-search criteria and place my bids, so I don't really know much about what is going on with prosper now-a-days.