Online Peer-to-Peer Lending: A Lenders' Perspective

Online Peer-to-Peer lending platforms claim to be beneficial for both borrowers and lenders by eliminating expensive intermediaries and reducing transaction costs. However, are the often inexperienced lenders who operate in a pseudonymous online environment with potentially significant information asymmetries really able to obtain an attractive return on their investment? This paper discusses the question by presenting profitability data from the US platform Prosper.com. Although the overall investment performance has not been satisfactory for most rating categories, it is shown that following some simple investment rules improves profitability of a portfolio and leads to acceptable returns for all credit rating categories with exception of the high-risk one.