When I first saw prosper, I thought it was great. I deposited $50 and lent out my first partial loan at 19%. I'm still getting payments from the person, and they're on target to pay me back the complete $50+interest at around $1.80/mo. My only complaint about the company is that you get locked into these 3 year loans. There aren't any means for folks to take out various term lengths, so that you could essentially stack your money as you would in CD investments. The only way to have a constant flow of funds that can be available immediately is to just continually fund small portions of loans each month over the next 3 years. That's kind of annoying.
All that being said, I work for a large bank, and I know how they make money. One of the main ways is to lend money on one side, and convince folks to deposit money (usually by paying them interest) on the other side. They always lend for more than they pay. It's pure arbitrage. I also know that there is often very little margin in it for banks. They need LOTS of customers to make it work. So I got to thinking, could an individual make arbitrage work at Prosper? I searched around and sure enough, there are plenty of folks lending money at 5-6% in order to then lend that money out again at 15-20% to make a profit. Unfortunately, I'm not sure it's a great living. Look at the chart I created below based on $5000 being borrowed at 6%. You need to get a very high return (which is hard, because the higher the rate, the riskier the customer).
$5000 Arbitrage | Personal Loan @ 6% | Lend Out @ 12% | Lend Out @ 18% |
Interest + is in, - is out | -475.96 | 978.6 | 1507.46 |
Income minus Expenses | 502.64 | 1031.5 | |
Income minus Expenses / 36 months | 13.96 | 28.65 | |
Income minus Taxes (25%) minus Expenses | 257.99 | 654.64 | |
Income minus Taxes (25%) minus Expenses / 36 | 7.16 | 18.18 |
So if you could borrow at 6% and lend at 18% with no mishaps, you would make roughly $18.18/mo off a $5000 arbitrage after taxes. To be honest, managing between 10-100 loans (depending on how large your contributions per loan is) is not going to be worth $18.18 of your time. Not unless you say live in a seriously deprived location where that might buy you a royal lifestyle for the week. In which case, you probably don't have good credit, nor access to the internet. The numbers scale linerally, so if you wanted to aim for making $1818/mo you'd need to lend 100x the $5000 or $500,000 to be exact. Now that to me, looks like A LOT of risk!
My thoughts: Arbitrage doesn't work at Prosper.