First of all, I love Prosper.com. It is a great idea (person-to-person lending, breaking the loan apart into smaller chucks to diversify, credit checks, etc.)…
BUT, that fact that a lenders money doesn’t earn interest is ridiculous.
Once money (it takes 4 business days) is in Prosper.com account interest is not earned. This includes any money not in loan bids, any money in a non winning loan bid, any money in a winning loan bid, and money in a loan pending review. Just to be clear I am not asking for faster, quicker, or less through loan reviews. It can anywhere from 2 days to 2+ weeks once a loan is closed until it is funded. So who is earning interest for those extended periods? Prosper.com is earning interest on OUR the float!
So how much interest are we being shorted? PayPal currently yeilds 5.03%
What does Prosper.com have to say?
Do lenders earn interest on deposits?
Lenders do not currently earn interest on deposits to their Prosper account. Because of rules associated with pooled accounts (such as the ones that we use to hold your money), we are not allowed to earn interest on those accounts. However, Prosper is actively looking into ways that we can allow for interest to be earned on amounts deposited.
Prosper encourages lenders to transfer money to Prosper as needed to fund loans, while leaving a modest amount available for immediate bidding on interesting opportunities. How much cash you keep in your Prosper account will depend on how frequently, and in what amounts, you bid.
Additionally, using standing orders can significantly improve the pace at which you acquire loans and will allow you to move more money faster. Because standing orders are automated, they can minimize the amount of time your money sits idle and therefore improve your internal rate of return (IRR).
Hogwash! Paypal is a pooled account and they are paying one of the higher money market rates in the country. Would lenders have to give up FDIC pass-through insurance? No even Paypal has FDIC pass-through insurance. See exert from PayPal FAQ below.
Protection Policies - Privacy & Security
What is FDIC pass-through insurance?
PayPal, as your agent, will place your U.S. funds that are in your PayPal account balance in a pooled account at an unaffiliated FDIC-insured bank or savings institution, which is eligible for pass-through FDIC insurance coverage. FDIC insurance will cover up to a total of $100,000.00 USD of deposits you hold at that bank.
You can read more about FDIC pass-through insurance by clicking on the ‘Information about FDIC pass-through insurance’ link at the bottom of any PayPal page.
Prosper.com the lenders would like their money. Stop holding our float for exorbitant periods and pay interest from the moment money enters Prosper.com until it exits via transfer or loan funding.
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Carnival of Personal Finance #87 in Rio…
Welcome to the 87th edition of the Carnival of Personal Finance. Just in time for the real “Carni’val in Rio” this week’s edition is ready to party!! So grab a cocktail and lets get started with the parade. First up,……
[...] RateLadder takes a look at the lending angle, wondering why money currently being lended doesn't earn interest. Once money (it takes 4 business days) is in Prosper.com account interest is not earned. This includes any money not in loan bids, any money in a non winning loan bid, any money in a winning loan bid, and money in a loan pending review. Just to be clear I am not asking for faster, quicker, or less through loan reviews. It can anywhere from 2 days to 2+ weeks once a loan is closed until it is funded. So who is earning interest for those extended periods? Prosper.com is earning interest on OUR the float! [...]
My personal belief is that it’s Wells Fargo (not Prosper) earning interest on our money while it sits, and their ability to do that was made part of the deal to keep Prosper’s costs down.
Of course, that’s just my theory.
Prosper is making money even indirectly by your theory.
I don’t believe Prosper is making money on our idle funds but rather they are saving money on substantial processing fees that would be charged by Wells Fargo for supporting all the ACH activity. The account is probably on Account Analysis and is assigned an Earnings Credit that is paid to Prosper but used to offset fees that would be charged on the account.
It’s a huge benefit their gaining on our idle funds!
Both Wells Fargo and Prosper benefit significantly on our money.
Do you think Paypal is able to pay 5% because they have 1 (maybe 2) orders of more magnitude more money in the system?
I agree that Prosper needs to pay interest.
However, you’re not comparing apples-to-apples here.
PayPal does NOT pay interest on funds in an FDIC-insured pooled account. To earn interest through PayPal you have to elect to use a money market sweep account, which is not FDIC insured. Funds are moved from this account to the pooled account automatically as needed to cover any payments you initiate.
That said, I hope Prosper does come up with something similar, and soon. I’d prefer to keep my money at 5% in a minimal risk money market account than at no risk in a non interest-bearing pooled account.
if you really think this is a problem, figure this into your computations on the return you expect to get from the loans you make. I guess we all could complain about this or that, but remember, Prosper is the first of this kind of lending, there will be others and as the industry develops you will see competitive programs. In the mean time, do what you choose and quit complaining, we are all here voluntarily!
I am not complaining. I am the first to admit that Prosper is lender beware and that I am here of my own free will…
I fundamentally think Prosper would be better off paying interest and that it won’t cost them anything. If their account is on analysis (it is from what I have been told) Then wells fargo is going to leave them on analysis even after they skim off 3% or so in interest. As wells fargo makes ROA of 7-12%.
If Prosper pays interest it costs them the relationship with Wells Fargo. If that goes sour, the result is it’s going to the end customer. Perhaps there’s a money transfer or something similar added. You don’t just get something for nothing.
The float is worth a lot more to Wells Fargo than the paltry 3% it would take to make my VERY happy. I am not asking for the highest high interest savings rate. Find a middle ground.
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