The following is a guest post by a Prosper member: CreditKarma…  You can use the Prosper Performance tool to estimate default risk for Prosper loans.

When I was a marketing and risk analyst with a credit card issuer, the customer’s credit score never really mattered per se. My concern was always with the default risk for any given score. For example, it was more important to know that a 720 FICO™ Score customer had a 1 in 237 probability of default. The score was meaningless to me (the lender) without the corresponding risk probability.

As such, I always wondered why Fair Isaac and credit bureaus used arbitrary scores when default risk is so much more informative to all parties. If I had to speculate, I would guess the following reasons:

1. Intellectual Property Protection - It is probably much easier to patent and copyright some arbitrary score and score algorithm than it is to patent logistic regression (the math term used in developing scores) and an arbitrary score range.
2. Consumers Don’t Want to Be Labeled - Consumers may object to such an outright classification as default risk. To say one person is a 450 FICO™ is probably not as offensive as saying that person has a 1 in 3 chance of defaulting on a loan.

Today, the reason is moot as it has become ingrained in consumers. As I read the comments in various blogs and discussion forums, I am still amazed at the level of mis-information accepted as truth. People claiming there certain scores are FAKO’s* or that doing X will yield Y result in your score. I personally think the confusion stems from the number of data sources, models, default variables, and uses of scores. It took me a degree in mathematics, economics, and 10 years of industry experience just to get my arms around credit scores and credit uses.

All this brings me back to the question: why doesn’t the industry just share your default risk? Isn’t that just an easier thing to understand than some arbitrary score range. Some people may object to a probability label but as they say, “a rose by any other name…”

Editor’s Note: *FAKO or Fake-O has been around for years, but the term was popularized by Suze Orman fairly recently. Orman is, admittedly, on Fair Isaac’s payroll.

This is a guest post from Prosper Lender David Makes Cents.

I was just reading an article that I found on Stumble Upon that made me mad! Well ok not really mad because I am a pretty mellow person, but lets just say I didn’t agree with it. The name of their post is pretty much the opposite of mine it was: Why I think P2p lending is a bad idea. So in this post I will try to prove to you otherwise and tell you about my positive experience with p2p lending sites.

Quick p2p history

Ok, so if you haven’t heard of p2p lending I am going to try to catch you up real fast because this is not really the point of the post. Peer to Peer (p2p) lending is essentially people with a little extra cash helping out those who need a little extra cash by giving them better interest rates than they would other wise get from a credit card.

Why P2P lending helps borrowers.

1. Borrowers can get credit that they would not have otherwise been able to get. With the credit crunch as it is, it is becoming increasingly hard to obtain credit. Many ordinary folks with good to decent credit are no longer able to obtain credit. I know you may be saying to yourself, “Credit is bad, these people would be better off without credit.” Well I disagree. Currently the market is looking pretty rough, some people would not be able to put food on their table without credit. If enough people had credit, the economy would get a boost and then they would have jobs to be able to pay back their loans.
2. Borrowers can get lower rates than they would from credit cards. Even though the Fed has been dropping rates left and right, credit card rates have stayed high. This is due to a dry up of credit. It is getting hard for common people to get credit anymore. Prosper and other p2p lending sites’ rates have been holding steady. This is because there is still around the same supply of people lending on these sites and the popularity of p2p throughout the blogosphere.

Why P2P lending helps lenders

1. Much Better rates! Right now the stock market is way down. Most analysts predict it to be going down or making small gains for the next few years. Investors need a place to put their money. P2P lending is an excellent place to put this. If you invest in the people with decent credit scores, you will get pretty good rates of return.
2. Good diversification. With most of the major p2p lending sites like Prosper , you can invest as little as $50 per person. If you are investing a few thousand dollars, you can have your money spread out amongst 100s of people. All the major investors praise diversification.
3. Helping others. This is a big part of the reason I lend on p2p sites. I mainly bid on loans that are looking for debt consolidation. With these loans, borrowers are allowed to pay off all their credit cards and put all of their debt into one single, lower payment. The rates are always lower than they would to be to the credit card banks. I am letting them keep more of their own money.

Summary

One of the points that the author of the post I am responding to said was that the only reason people are promoting p2p lending is for referrals. Well in this post I HAVE USED NO REFERRAL LINKS. I would hate to be discredited by something as stupid as that. I have been investing in Prosper for a while now and have no defaults or late payments. Every one I have lent to has paid me back on time. I am currently putting another $1k into my account because I like it so much

The only reason I would put in the referring link is so that potential new lenders could receive the $25 dollar bonus that Prosper offers if they want to sign up. I am not going to put a link in my post but I will have a banner on my sidebar that is an affiliate link. If you read this and are interested in signing up consider finding a referral banner to sign up so that you will receive the $25 bonus.

*If you liked this post please check out this and other posts at http://www.davidmakescents.com

This is a guest post by Prosper member poppadollars.

A lot has been written about identity theft the last few years. Many people are concerned, and rightly so, that someone will hijack their good name and credit and abuse it. Typically, someone will discover the problem after some time has elapsed and problems have mounted to the point their credit has been seriously impaired. Maybe they apply for a loan and are rejected when normally they would have been approved. Maybe a collection agency contacts them about a delinquent account they never heard of.

Maybe a credit card statement they have routinely received fails to show up in the mail.

After further investigation they may discover loans and credit cards obtained in their name they never applied for or had thrown in the trash. In some cases it may appear that someone has created a whole new life at another address based on their name and credit history.

How can you discourage identity theft?

1. Check your credit reports from all three reporting agencies at least once a year (it is free). Follow up on any suspicious activity or accounts you do not recognize.
2. Reconcile your bank and credit card statements each month and follow up on any unusual transactions.
3. If your mailbox is accessible from the street, rent a PO box and have your bills sent to the PO box (or pay them on-line). This will avoid the bulk of the offers that come to a box on the street where anyone can easily divert them to their own use.
4. Buy a shredder and shred anything that has your name and account information on it instead of discarding mail in the trash. It is too easy for someone to dumpster dive and pull your financial information.
5. When using your credit card only deal with reputable merchants. Use third party payment options like eBay’s “Paypal” service or a service from your credit card company to pay for items on-line without disclosing your account information to the vendor.
6. Never give out personal or financial information over the phone or on-line to someone who has cold called you. Ask for a name and phone number. If they claim to be from someone you normally deal with, obtain the phone number independently through the phone book or other means to make sure you are calling who you think you are calling. Do not click on the links sent in e-mails to access contact web sites. It is very easy to create a web site that looks authentic, but is not the company you think you are dealing with.
7. When you mail checks to pay bills, place the envelope in the post office or a collection box, not a mail box accessible easily from the street by anyone in a vehicle. Checks can easily be altered.

Sometimes we joke that the best identity theft protection is to run all your credit cards to the limit and borrow as much as your are able. That way your identity is not worth stealing, but a better solution is to be vigilant and take some routine steps to make yourself less accessible a target.

Guest Post from Living off Dividends (aka on Prosper WealthBuildingLessons). 

I have a blog called living off dividends where I discuss, among other things, my passion for investing and generating income that can be used to replace one’s salary. I have numerous different types of investments like rental properties, stocks, canadian income funds, CDs, foreign currency ETFs as well as owning loans on Prosper.com.

Since a lot of my net worth is in illiquid investments like real estate, the rest of my investing has to be relatively liquid. This means that it shouldn’t be locked up for 10-15 years or more and it should be relatively easy to invest in.

Building a portfolio of loans on Prosper.com is easy and while it does tie up the money for 3 years, the returns are almost three times larger than on a 3 year CD.

Bidding on loans on Prosper.com is a form of asset allocation. You can’t always predict which asset class will do well so you spread your investments over various classes as a way of lowering your risk and boosting your yield.

While bidding on loans on Prosper.com is not without risk, my overall experience (and investment returns) have been quite positive. I’ve been investing for nearly 18 months and I’m receiving over 13% annualized returns. That sure beats any 3 year CDs on the market! I love investments where I can get 5% more than I get in a savings account, and without too much risk.

As an investing buff, I’m also a big fan of compound interest. I think it was Albert Einstein who said that one of the greatest mathematical discoveries was compound interest. One of the greatest proponents of this belief are the credit card companies. They charge you 20%+ interest on your balance, but you don’t usually have to pay more than a fourth of the interest accrued every month. This results in you having to pay interest on the accrued interest from the very next month.

I like my investments to have the potential for compounded returns. The interest on your savings automatically gets compounded. But most people stop there. They don’t try to compound the returns of their other investments. By re-investing a stock dividend back into the stock, you can essentially compound your stock returns too. Even Prosper loans have the potential for compounded returns by re-bidding the interest payments back into more loans.

So far, I’m quite happy with lending on Prosper.com. It fulfills most of my investment criteria and at tax time they even streamline your accounting by providing you with a statement detailing your interest income and expenses. If you haven’t already given it a shot, now’s a great time to do so.

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Nirav is the author of Living Off Dividends, a blog about investing. He’s currently lives in San Diego, California but has lived in England and India. He is an active lender on Prosper.

The following is a guest post by Prosper Lender Steven Grimes.

I’ve been bidding out money as a lender on Prosper for awhile now, and I find it a great hobby. Some people like skiing, some people like remote control airplanes, I like making money!

I own rental property and it’s a little worrisome at times to say the least. To date, Prosper has not called me to fix a leaky pipe or a broken door or a stopped up toilet. Prosper works!

I was skeptical at first, but over time I have grown to trust my instincts in picking out people to commit my money to. It’s pretty easy with all the info Prosper gives you.

I’ve gotten three friends to join and now it gives us more to talk about. Of course they were skeptical in the beginning, but as I kept showing them my stats, I won them over. I don’t easily recommend anything, especially when it comes to money, but this works.

I’ve turned several small fortunes into smaller ones through stocks and mutual funds before, and it looks impossible to take that kind of a beating on Prosper. Go conservative, make 8%, go aggressive and hang on for more profit. It’s a way for the little guy to take a piece away from the big guys. I bet banks are shivering at the growth and potential of this direct lending site.

I do feel like I’m helping people and I’m having fun and creating an income string for my future at the same time!