As interest rates continue dropping, I'm starting to wonder if there might not be other places I could look that would offer better returns. I've been hesitant to date to get involved with the whole 'social lending' phenomenon (though I did do a post a while back about Prosper.com) but with my BEST savings account now paying out a measly 4.4%, I think I've decided I'm going to give it a go.
If you don't recall my earlier post, social lending is essentially person-to-person lending that is usually facilitated by a company like Prosper.com. Prosper takes loan applications from individuals, evaluates their credit history (which is made available to the potential lenders), and then brings lenders like me together with people looking to borrow. Borrowers can often get better rates than they might otherwise be able to get from a bank loan and lenders can certainly get better rates than they would by putting money into a savings account or a cd. There is, however, the risk of default.
Prosper (and other lending sites like LendingClub.com or Zopa.com) have done their best to try to reduce defaults. They employ collection agencies that go after non-paying borrowers and essentially treat defaults the exact same way a bank would. Prosper also allows me to break up my loans into $50 increments - meaning I could fund 10 different loans with $50 each and diversify my risk a bit. Given that Prosper's conservative loan portfolio (the one that they rank as the safest investment) is paying out more than 8% interest, I'm gonna give it a shot. I'll let you know what happens!!
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