A little over a year ago, I started loaning cash on Prosper.com, I actually leveraged my credit rating to loan money at a low rate and then reloaned that money out at a much higher rate. The scheme seemed to be working as I was pulling in the equivalent of about 18% per year but only paying about 7.5% on that money. I also had the equivalent amount that I loaned sitting in my emigrant direct account earning 5.05% APY so I had an effective net gain of about 15.5% for basically doing nothing and not risking my own cash. I decided to pay off my own loan 6 months after I took it out since I figured that I could make even more if I didn't have to pay my own interest.

So here we are about a year or so later and Prosper has turned out to be the biggest loser of my portfolio. Thankfully, it has not actually lost money--I just didn't make anything. I still consider it a loss since I would have earned 5.05% on that money in my emigrant direct account if I just left well enough alone.

Anyway, at this point, I'm just biding my time and will extract what I can over the next year and a half hopefully staying positive. Here's what I learned:

1. Don't loan money to students (especially nursing students). I'm not sure what it is, but I got burned on several nursing school loans. One didn't even bother to make a single payment! That's a first payment default--fraud, in my book.

2. Don't loan money to people who need it for medical reasons. While I sympathize to those that are in a medical bind, the chances are that they will be able to recover and actually earn enough to pay the loan off is very poor--that's why a significant percentage of bankruptcies are due to medical bills.

3. Don't loan money to people who are starting a business in an established field. I loaned money to a person with A credit who was starting a coffeeshop figuring that their business plan looked good and their head is screwed on straight considering they have good credit and have saved a good amount of money to start this business of theirs. The truth of the matter is that things just go wrong for whatever reason. You can plan contingencies for just about everything, but sometimes it is not enough.

4. Don't loan money to people who can't spell. I always followed this rule and it says a lot when a person doesn't take the time to understand the difference between "no" and "know".

5. Don't loan money to people to buy real estate. I knew the market was going to implode so I avoided these sort of 1st/2nd home loans. If you can't afford a house....rent. Don't go on prosper and ask for a down payment...sheesh!

6. Avoid prosper altogether. Unless prosper fixes some of its structural deficiencies, I'm out. I'd only do peer to peer lending again if a site implements payback bounties that would work as such:

For each credit rating, they would calculate the actual failure rate (failed dollar amount / total dollar amount for credit grade) and take that percentage as a bounty on each loan. So let's say that the D credit rating on prosper fails 15% of the time. If a person wants to take out a loan for $1000, they will only get $850 if the loan is funded. The rest sits in an escrow account. If they pay off the $850 + interest for the $1000, the $150 goes back to the financiers. If they default, the financiers get their $1000 using the $150 plus bounties from other loans. Since the bounty is calculated based on actual failure rate, the system is self funding and protects the financiers.

Anyway, for the time being, I will most likely use prosper to ensure that my and Hongyun's credit rating gets as close to 850 as possible. Maybe I'll just take out loans and pay them back within two months and see if that helps our credit rating.