Prosper.com: can lenders really expect high returns?
by David W. Johnk
International Journal of Services and Standards (IJSS), Vol. 8, No. 2, 2012

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.

Online publication date: Sat, 27-Dec-2014

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