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Prosper Arbitrage



I remember first reading about the peer to peer lending site, a year or so ago and was immediately impressed. I really believe that peer to peer lending will be huge made. For the first time in history people can loan money directly to others (instead of basically doing it through a bank) without ever seeing or speaking to them. Anyone can ask for a loan by pleading their case, and submitting to a credit check. And on the other side, anyone can lend money by creating an account and choosing who to lend to based on their profile, story, and credit score. Prosper takes a little off the top, and manages the loan payments. It’s really an amazing system, you can read more about it here.

But being the true aribtrageur I am, I had an immediate thought about this site the second I heard about it. Because there’s an opportunity for people with better credit to get loans from banks or elsewhere for most likely under 10% and there are some higher risk borrowers on prosper willing to pay upwards of 30% APR, there’s an opportunity to do some lending arbitrage. Of course lending to all the high risk, high apr borrowers is definitely risky, but the nature of prosper allows you to spread your risk just like banks do. So you could borrow say $100k at 7-8% APR with good credit, then lend it out at no more than $1k per borrower. By choosing the right situations to lend with good APR’s it could be possible to generate a risk adjusted ROI of 18% or more. After you pay off your loan the rest goes into your pocket (of course there are taxes to deal with as well), but it seems to be an opportunity to generate some nice fairly low risk returns.

It appears that some people may already be doing this. Take a look at the top lenders on the site:

Rank Screen Name $ Invested Est ROI
1 pensioner (details) $794941.10 18.76%
3 L5 (details) $547230.73 14.26%
5 MuleShoes (details) $367585.44 3.13%
7 Sneezie (details) $190234.69 10.49%
9 reguyncali (details) $161437.06 9.34%

(via Eric’s Credit Community)

If you have good credit, it may be something interesting to investigate further. I would definitely recommend checking out Eric’s Credit Community for more info on Prosper lenders.

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