I have no problem at all with affiliate links. By all means monetize your blog to its fullest potential. However, I prefer to see a disclaimer either near the link or in the initial paragraph of the piece that discloses the advertising and affiliate relationship. I just worry about a post “Is It Safe” and then concluding with “try with no risk on your part.” I do think that gives the wrong impression or is at least confusing.

About defaults, I have read in other sources that the collection agencies used by Prosper have a poor track record of recovering funds from bum borrowers. These companies also take a fee for their service. When there is a default you stand a very good chance to loose most of your money. Even AA loans loose 1.75% of their return to defaults (A – 4.76%, B – 7.45%, C – 10.78%, D – 10.58%, and E – 16.52%). With these kinds of defaults you are fighting uphill for every dollar you get. In order to diversify enough to get these average rates and be sure not to just loose 100% of your investment, you should fund about 100 loans for every one you think will go bad. To invest in AA you should fund 175 loans at $50 each ($8750) to smooth out returns to get close to the average. Obviously this goes up dramatically as you go down in credit worthiness. When you get to D credit grade you should fund 1058 loans at $50 ($52,900) to spread your risk correctly to loose ‘only’ 10.58% of your APR. With small amounts your APY will differ greatly from your coupon because the returned capital can not be easily reinvested if it is small amounts. If you loan out $50 it will take forever to get back enough profit and principle to make another loan so you money sits in Prosper earning no return. You loan out $50 for 3 years to an A borrower at an 11% rate. After fees and assuming you don’t have a default (with is a 1 in 20 chance) you will find that your annualized return is only about 4.5%. This is because of fees and because an average half of your capital was actually sitting on the sidelines. If you have a massive amount you could fund a new loan (or a few) each month from your returned capital so your yield would actually approach the coupon (which is the amount of interest most lenders THINK they are getting paid) value.

Now to address performance. When it is all said and done 8.14% from an AA borrower or 6.95% from an A borrower (net fees and defaults) is not enough return to justify the risk. There are corporate bonds from companies like Ford, JP Morgan, Royal Bank of Scotland, and MGM Mirage that pay better than 6.95%% and they are backed by real assets. As you move lower down the credit scale it gets even worse. There is nothing securing a Prosper loan beyond a credit score and harassing phone calls from a debt collector. You see my point?

Anyway, this turned into a phone blog-post as comment. I’m probably going to post it over at my blog now. I haven’t proof read and things aren’t perfectly explained but I hope you now have a picture of what a mediocre (at best) investment peer to peer currently represents.

I agree, the companies are young, but the business plan is solid. If the companies fold, there are credit agencies that will take over the loans. If they are bought out, I imagine the loans would stay in place as they are. They are legal documents, and so far as I know, they are not subject to change at someone’s whim.

I don’t agree that there is a conflict on interest by having affiliate links within the post. I have neither stated these companies or loans are guaranteed, nor have I stated you should blindly invest in them. I have always stated to do full research before investing. The fact that the companies are offering sign-on bonuses to new lenders and the people referring them is the kind of free money many people are looking for. In fact, anyone can sign up with Lending club and get a $25 bonus without being obligated to make a loan. What’s wrong with free money?

Your affiliate links and attempt to drive traffic to the lenders should be viewed as suspect by readers as well. It is a conflict of interest that you should disclose right off the bat in your post.

I’m going to give it a shot soon.

Is there a referral program? If I do this, could you get the credit? Given your very thorough blog post, I think you SHOULD get some credit