Crunch! Data Analysis Bruises Peer-to-Peer Lending; Prosper Gives the Criticism a Critique

American Banker, January 26, 2010 | Go to article overview

Crunch! Data Analysis Bruises Peer-to-Peer Lending; Prosper Gives the Criticism a Critique


There's a critical discussion of peer-to-peer lending in the blogosphere that's definitely worth a read. In a scathing article for The Big Money last week, Mark Gimein called Prosper Marketplace Inc.'s advertised returns misleading. Taking defaults into account, he wrote, the majority of investors who have lent $188 million through Prosper's online exchange have actually lost money.

Prosper demanded a retraction. The company doesn't dispute any of the figures in Gimein's story, but it says he uses them "out of context."

For example, Gimein points to data on Prosper's Web site showing a default rate of 39% on all loans that have reached the end of their three-year term. In an open letter to The Big Money posted on Prosper's blog, the company said Gimein errs in discussing its loans "in the context only of cumulative ... default rates rather than in terms of the average annual returns lenders have earned." Prosper says the annual yield on loans that have reached the end of their three-year term was 16% and the annual loss suffered by lenders was 20%, resulting in an annual average return of negative 4%.

"Although this return is negative, put in the context of the largest recession in generations, and the performance of other asset classes during the same time period, this paints a very different and more accurate picture of how lenders have fared on Prosper."

Gimein also cites numbers he says he crunched on another blogger's Web site showing that more than half of Prosper loans with interest rates of 18% and up have defaulted. Proper says this gives "the impression that lenders on these loans have lost over half of the funds that they lent, and that losses ran roughly three times the interest rate on loans." Rather, the company says, "lenders on these loans lost 10% on an annual basis, and while not positive, it's a far cry from the 54% loss that Mr. Gimein's flawed analysis leads the reader to believe."

Because Gimein doesn't provide any actual returns data, he leaves "the false impression that lenders have lost 39% to 54% on their Prosper lending," the company says. Instead, "the median return across all Prosper lenders was negative 3.2%." It added that "39% of lenders have made money on their Prosper investment."

Instead of undermining the case for its lending model, the company argues, "a low single digit loss for Prosper lenders in the context of the worst recession since the Great Depression shows great promise for peer-to-peer lending as an alternative asset class."

It's a valid point that Gimein's analysis would have benefited from actual return data, but the returns Prosper provides aren't exactly enticing. And they don't detract from Gimein's argument that Prosper's advertising is misleading. The company's home page touts three "portfolio plans," which let you automatically bid on loans matching certain criteria, with "estimated" returns of between 6% and 14%.

And, as Gimein points out in his article, the "marketplace performance" charts on Prosper.com indicate that loans in the AA to E categories were profitable, at least between July 15 and Dec. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Crunch! Data Analysis Bruises Peer-to-Peer Lending; Prosper Gives the Criticism a Critique
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.