Wednesday, November 01, 2006 "Group Rewards" Apply Only to Borrowers (Not Lenders)

I recently blogged about joining a peer-to-peer lending group on Prosper. I like PsychDoc's group and respect it; however, I had an incorrect underlying assumption.

I frequently noticed that some groups at have 100% shared rewards. So, I thought, i'm a lender, I bid on PsychDoc's loans anyways... Why not juice up my returns by joining his group?

I was sooo wrong. Group rewards ARE NOT 100% SHARED (no matter the group, no matter what's advertised)!! They are only shared amongst those people that have ACTIVE LOANS. If you're a borrower, you'd say NO DUH! For those w/ training in Economics, you might say NO DUH. I too know the free-rider principle from Economics. However, I took at their word (100% shared rewards).

Note: PsychDoc did nothing wrong in advertising 100% shared rewards, many other groups do this. It's more so a matter of understanding policy.

Group rewards are shared by buying down the interest rate of borrowers. Next time you look at a group sponsored loan application, pay attention to the interest rate spread between lender and borrower rates. When a loan is funded, a borrower receives NO shared rewards until after 3 months. Prosper states that this is policy to ensure that the listing is a valid. After the 3rd month, the borrower will see that their interest expense is partially paid down by shared "group rewards" (provided their group shares rewards). I'm not sure how this is displayed. The amount of reward should remain level until their last payment. At that time, any additional rewards that may have piled up will be credited in lump sum.

So now, there's no point of me being in a group, unless I need to borrow money.

Disclaimer: The extent of my knowlege on the subject above is based exclusively on one phone call to Prosper. Some borrowers may be able to better detail how group rewards work. If I made any mistakes, please address them in my comments section below.

1 comment:

Finance Junkie said...

I think Prosper may have recently corrected this error in advertisement. I'm not finding any groups w/ 100% shared rewards in the Prosper templated sections of groups that I look at today.

However, you may still find some groups that list "100% shared rewards" in the group leader self edited/formatted sections.