In every field of investing, there are certain leaders that the intelligent investor keeps a close eye on.  These are investors that have had a consistent track record of great returns and are widely known for their knowledge of the market and their ability to separate the good from the bad.  In the stock market, you have legendary investors such as Warren Buffet or Peter Lynch.  For bonds, Bill Gross, and for real estate you have the likes of Donald Trump.

Although peer-to-peer lending is a relatively new investment vehicle, there are leaders emerging in this new field as well and you would do well to watch what they are doing.  In order to help you do just that, I’ve created several new features on my Prosper community site, http://www.ericscc.com, that allow you to identify the most successful lenders and follow their lead using personal watch lists and automated e-mail alerts.  In case you aren’t familiar with ericscc.com, I’ve been tracking overall market, lender and group performance on Prosper almost since the beginning.  In addition to lender tracking, you’ll find a wealth of other information and market statistics to help you better understand the Prosper marketplace.

In addition to watching what other Prosper lenders are doing, there can also be some value in watching Prosper groups as well.  The group concept on Prosper offers an interesting twist to peer-to-peer lending.  Although it isn’t a perfect comparison, I like to think of groups as being a bit like mutual funds.  You have a manager (group leader) who uses his experience or social connections to try to bring in above-average borrowers for his group’s investors.  However, just as most mutual funds do not beat the S&P over the long haul; most groups will not outperform the overall Prosper loan market either.  The trick is to find those few gems out there that are able to consistently bring in quality borrowers, and keep an eye out for new listings from those groups.  So, similar to our lender tracking tools, we also offer tools to help you evaluate the groups on Prosper and receive notifications when a group you are watching posts a new listing. 

If you are having trouble picking good loans, using these tools to follow the market leaders is certainly a good place to start!

Eric is a software engineer and investor, and has been a Prosper.com lender since May of 2006.  He also operates www.ericscc.com, a free Prosper.com market and lending statistics website.

I come from a background in international development and I’m a huge fan of Muhammad Yunus / Grameen Bank and the concept of micro-loans and empowering entrepreneurs. I was so excited when Prosper started because it’s the first large-scale micro-loan concept I’ve seen in the US. I believe that micro-loans and the social community around borrowers will make them responsible, low-risk investments. So far, my borrowers have not disappointed me. (Disclosure: I’ve got $200.00 spread across 4 loans.)

Growing up Korean-American, I saw how pooling community finances made a real difference in helping new immigrants get start up capital to buy their own businesses and live out the American dream.  How can immigrants with zero credit history get a bank loan? They can’t. By drawing on their cultural bonds, and loaning one another money, it was possible to avoid banks and their credit risk models that aren’t willing to take a bet on a man because they like the cut of their jib.
The strength of social networks and shared dreams makes everyone work towards the same goals, and being in a Group can take lending and borrowing to next level and strengthen a community with shared prosperity.

Being a bit of an iconoclast, I love the idea that Prosper lies just outside of traditional banking and circumvents some of the hide-bound thinking of regular banks. I’m willing to take a risk on a person at 19% APR when their local bank isn’t. Heck, so are another 100 people and that’s how a borrower can get a real loan.

I wish Prosper had been around 5 years ago. I could have really used it. I walked into my credit union with my high-interest rate credit cards (19% and 20+%), filled out a loan application and literally cried tears of joy when they said they could give me a 5-year installment loan at 15% APR. It was a godsend for me, but I wonder if Prosper.com existed back then, whether or not I could have done better in the open market. Who can say, but I do know that my situation was like that of many loan listings out there to consolidate credit cards. Getting a loan when you think a bank won’t make one can make all the difference in a person’s psyche.

I love it when loan listings have budgets and monthly cash flow statements. Listings like that show me that people really care about getting their financial house in order. That’s so exciting. I love sharing in people’s financial dreams of owning a home, a business, going to college, etc. It makes me feel a little like a philanthropist, but with tangible, re-investable returns. And who doesn’t like that?

Mapgirl writes daily on her financial goals at Mapgirl’s Fiscal Challenge.

When Prosper created their portfolio plans, they added a tool to help new lenders enter the marketplace. It assembles a portfolio of loans whose only objective is to track the average loan return in the specific market slices, much like index funds have done with the stock market. Want to play it conservative, you buy a S&P 500 Index. Feeling aggressive? Try the EAEF Foreign Stock Index. If a lender is interested in tracking the loan market, new lenders can establish portfolios without the learning curve of manual bidding.

Those of us who take a managed fund approach to our lending by using manual bids will have to be careful because the portfolio plans will change the bidding environment. If the portfolios are widely adopted, we should expect loans within the portfolio’s umbrella to be in higher demand. Higher demand for certain loans will result in lower interest rates for those loans, lowering the possible return on investment. A similar effect has been found when the S&P 500 adds a new stock to the portfolio.

At the same time, it creates opportunities to find nuggets that are outside of Prosper’s four portfolio plans. This is risky territory (otherwise it would be inside the portfolios), but risk is a problem for lenders when they’re not paid appropriately to take on the risk. Careful efforts to mitigate risk can drive down the net defaults and appropriate bidding can compensate for the remaining risk. For example, non-autofunded C grade loans with 0 delinquencies and 2 to 3 inquiries are more dangerous than those with the balanced portfolio preferred 0 or 1 inquiries (-9.05% vs. -5.02% net defaults respectively). If you take those 2 to 3 inquiry loans and further constrain bidding based on other risk factors like DTI and loan amount ( DTI less than 20%, amount less than $10k), it’s possible to find listings that have better net defaults (-3.97%) than those found in the portfolio criteria.

This was just one of many opportunities. Prosper doesn’t add these more finely tailored criteria to the portfolios because there aren’t enough listings to support the volume of loans portfolios demand. For individuals willing to dig deep around the periphery however, it’s a veritable gold mine.

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Mike writes for Prosperous Land.