Deep dive into Prosper

A couple of months ago, I took a look at Prosper.com to see what that was all about, and I wrote a post about what I found. I spent a little more time looking at Prosper again over the past couple of days. This time, instead of looking at it holistically, I only looked at the loan requests in which the borrowers were categorized as HR, or High Risk. The reason I was specifically interested in HR applications was because I wanted to see what the drivers were for borrowing money when the borrowers' credit rating had already gone down the tubes.

There were something like sixteen pages of HR listings. I didn't look at each entry and this time I didn't make an attempt to randomize the listings I looked at, but while I was poking around a few common themes jumped out at me. I thought the things I noticed were interesting enough to share, and I'm also adding a few comments that came to mind as I collated them.

1. Loss of home
I saw a few different posts where either a medical crisis or an adjustible rate mortgage that reset caused the borrower to fall behind on payments. Some posters also wrote about imminent evictions from rental homes because of a medical crisis, job loss, or some other calamity.
f.z. says: If it's not possible to pay for everything at once, pay for housing first! I can't think of anything scarier than suddenly facing homelessness, and in some ways these desperate-sounding posts are the hardest to read. These situations also underscore the criticality of understanding the terms of a contract (e.g. mortgage), buying less home than the bank says you can afford (thus incurring less debt and ending up with potentially lower payments), getting the best medical insurance you can, and bulding up an emergency fund.

2. Payday loans and credit card debt
There were quite a few posts where people were trying to consolidate or clean up past credit card debt and get rid of payday loans. In some cases, the borrowers didn't realize what they were getting into; in others, they felt that they had no choice because of emergency situations (usually medical).
f.z. says: Yippee for people taking steps to clean up their credit. This is totally admirable. In these situations, it's important not only to get out of debt, but also to eliminate the conditions that caused the debt in the first place. For many people, it means modifying consumer expectations and buying habits, but it also includes the points I mentioned above about medical insurance and building up an emergency fund.

3. Weddings
I saw five or six posts from people who either wanted to buy engagement rings, pay for an upcoming wedding, pay debts incurred by a wedding, or pay for a son's or daughter's wedding.
f.z. says: To what extent are wedding expectations formed by organizations or institutions that make money out of the wedding industry? My favorite example is this: the brilliant people who came up with that garbage about spending two months' salary on an engagement ring were none other than (drumroll). . . the diamond industry! Starting out a life together with a partner is a wonderful thing, but getting in debt doing it isn't exactly setting the marriage up for success. Give yourselves peace of mind and scale back the wedding to what you can afford to pay up front.

4. Divorces
There were quite a few posts where the poster was financially devastated by the outcome of a divorce. In some cases, the poster was trying to keep a house for children; in others, the poster had assumed a large existing debt burden as part of the divorce settlement.
f.z. says: I have a lot of empathy for this one because divorce is absolutely devastating financially, and it often comes unexpected - as it did in my case. This is one of those situations where the best defense is a good offense from the very beginning: Both partners should have money in their own names. Debt should be kept to an absolute minimum. Pre-nups and post-nups are not a bad idea, especially for couples who have each managed to build up substantial assets prior to the marriage. A house doesn't make a home; sometimes the smart thing to do is to sell it and move into a cheaper place. Mediation can help keep the process civil and prevent the lawyers from walking away with most of the assets. And finally, one I learned personally: at $250 an hour (which is what I paid), sometimes it's cheaper to just give the other party what he or she wants instead of shelling out thousands of dollars to fight.

5. Medical bills
Debt incurred by medical bills ran the gamut from birth defects to major accidents, cancer, heart attacks, and just about everything in between. The posts I'm including in this category are ones in which the medical event was the direct cause of debt, but in many of the other categories, medical bills contributed heavily to payday loan use, credit card use, and in some cases divorce and the imminent loss of a home.
f.z. says: Put the chips down and move your butt: fitness is really and truly the fountain of youth. Done properly and consistently, it'll lower your risk for all kinds of ailments later in life. Fitness alone isn't enough, though. Make sure you get the best medical insurance you can and hang onto it. (There's no one-size-fits-all solution: healthy people who seldom get sick can often make do with a high deductible and an HMO. I'm healthy, but I have several long-term medical conditions that require ongoing management and some clear risk factors for bigger problems down the road. That's all meaningful enough to me that I voluntarily pay more out of pocket for a PPO plan instead.)

6. The holidays
The desire to have a nice Christmas was specifically indicated as a core driving factor for a surprising number of loan requests.
This is a tough one, especially with kids. I really liked what commenter ellen said on my last post about making memories with the kids in her family instead of reinforcing consumerism during the holidays. I don't know that there are any easy answers, but between turning off the television and volunteering for people who have even less at this time of year, the holidays can be a good opportuntiy to teach a set of values other than the ones that Madison Avenue espouses. At the very least, a debt-ridden Christmas doesn't make for a very happy new year.

7. Business start-up, business expansion, or school
f.z. says: Applause all around. Wearing my lender hat, however, I'd like to know that the businessfolk have maximized their chances of success through demonstrated market research, careful business planning, and plenty of hard work. For the students, I'd like to see grades and a writing sample, and hear about their future plans. Special note to the college student with the really nice Coach handbag in her photo: I've never felt like I can afford a Coach handbag and honor all of my other responsibilities the right way, so if you have one and are trying to borrow money for school, I'm inclined to think that your priorities aren't in the right order. That's a little snarky and not necessarily fair (it could have been a gift), but it was still my first reaction.

One thing that jumped out at me from the vast majority of posts I looked at was a list of monthly expenses, with a notation that that the delta between income and outflow would all go to Prosper. That works, but only as long as nothing goes wrong. My last bit of advice to a borrower of any kind would be to not make the budget so tight that it's not possible to set some money aside on a monthly basis for emergencies. Making one's financial circumstance better is a wonderful thing, but a large part of climbing out of a hole is staying out of it.