Title: Prosper.com: can lenders really expect high returns?

Authors: David W. Johnk

Addresses: College of Business Administration, University of Texas-Pan American, 1201 West University Drive, Edinburg, TX 78539, USA

Abstract: This paper examines Prosper (www.prosper.com), a rapidly growing for-profit company that provides the service of connecting individual lenders with borrowers over the internet. By using information technology they have created the space for a new financial market through the disintermediation of unsecured credit suppliers such as banks and credit card companies. The interest rates of the loans are determined via online auctions, similar to eBay. At first look, Prosper loans are attractive investments that offer annual interest rates of more than 20% to lenders. However, information asymmetry problems reduce effectiveness. Once historical default rates are considered, AA credit grade is predicted to have the highest expected return at only 2.27% annually.

Keywords: Prosper loans; online loans; electronic commerce; e-commerce; social lending; P2P lending; financial services; peer-to-peer; financial markets; interest rates; online auctions; disintermediation; unsecured credit suppliers; banks; credit cards; information asymmetry.

DOI: 10.1504/IJSS.2012.049424

International Journal of Services and Standards, 2012 Vol.8 No.2, pp.133 - 156

Published online: 27 Dec 2014 *

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