I attended a short seminar in which Hannele Walenius presented a joint research on P2P lending, where a loan is established by means of an auction. They had examined and analyzed bidding strategies on Prosper.com, an American P2P lending site. They withheld judgement on such a system. I had only heard of similar initiatives, but had not delved deeper into the social mechanics connected to it.
What we currently see in these lending systems is quite troubling. The social mechanics of auctions are seriously flawed. And perhaps this is getting magnified in the current financial climate. The auction system in principle and in practice leads to an adverse selection. Interest rates are generally higher than the market rate. It attracts people who can't get loans elsewhere, due to their bad credit rating. Reading the auction ads from prospected borrowers, indicate bad financial planning skills. Payment deficiencies are alarmingly high.
As of August 2008, approximately 18.5% of all money loaned on Prosper from inception (February 2006) through June 2008 are in some form of delinquency. Also, more than 35% of all loans that originated in February 2007 are in some form of delinquency.
Lenders are drawn by the possibility of higher revenues. The perception of ownership, which occurs after having placed a bid, blurs reasoning (and I would also say morals). It tends towards online loan sharking in nature.
Many of the sites have problems through legislation, because they haven't obtained a banking license.
On November 24, 2008, the SEC found Prosper.com to be in violation of the Securities Act of 1933. As a result of these findings, the SEC has imposed a cease and desist order on Prosper.
Many p2p lending sites have ceased their activities at the moment, among which Prosper.com.
the website prosper.com and its peers appear to take the function of a savings and loans bank without any form of regulation or control. with people who are able to repay and lenders who have sufficient capabilities to judge the risks associated it could work but I fear that this site is atracted by neither and that the only people making money here are the debt collectors.
There is secured and unsecured p2p lending, Prosper.com belongs to the latter category. In the unsecured one the site only acts as an intermediary. The crowd it eventually attracts springs from the lack of collateral, hence it becomes high-risk, highly speculative game.
I have never believed that this kind of concept would produce anything but higher costs and bigger risks for all involved. Good to get this established here.
and an other one bites the dust, p2p lending site boober.nl has gone bust, costing 1,85 million euro to 1200 people.
