prosper marketplace

What Easter Island Can Teach Us About Money

Tara Struyk — Wed, 11 Jan 2012 11:24:25 +0000

“A fool and his money are soon parted.” That was a favorite quote of my late grandfather, who, by all accounts, was not a terribly genial man (although he loved timeless, biting quotes). We probably all know at least a few people who struggle to manage their money. In fact, most of us fall into this trap ourselves at some point in our lives, left scratching our heads and wondering just what the heck happened to that paycheck. But I’m not convinced this tendency toward overspending can be written off as easily as my grandfather’s quip implies. After all, the majority of U.S. households carry some debt; on average, it’s about 115% of disposable income. Even the government is in over its head. So what exactly is going on here? Are we all just foolish with our money? (See also: The Many Reasons to Make Do With Less)

The Spectre of Prosperity

I recently read the book Collapse: How Societies Choose to Fail or Succeed by Jared Diamond. It tells the story of the Polynesian people who colonized Easter Island, one of the most remote bits of habitable land on the planet. And while you might think that these people are about as far from the complications of modern finance as you can imagine, I found myself thinking about how people often behave when it comes to their financial lives — and how they manage to raze a perfectly fruitful financial life, time and time again.

According to Diamond, when Polynesians first landed on Easter Island in about 700 A.D., it was a lush paradise; by the time European settlers arrived in 1722, it was a wasteland. The islanders had cut down each and every tree on the island to fuel their fires, build their cities, and erect the giant stone statues that still stand there today. It’s a story that’s often used to point out humans’ tendency to build their lives on the present, without any thought about the future. It all boils down to the human tendency to procrastinate, to defer, to say “I’ll deal with it later.” Whether we’re talking about politicians, subprime homebuyers, or credit card junkies, the result is the same — a spectre of prosperity that’s haunted by its long-term consequences.

To me, the Easter Island people are a lot like those who cling to huge homes they can barely afford to pay for, or those who spend like there’s no tomorrow and are unable to retire. Why do we do this? It seems that for both the people of Easter Island and many people today, there’s at least one thing that’s a lot stronger than self-preservation — pride.

Building an Illusion

When I think about Easter Island and how each every tree was felled one by one, I wonder who was charged with cutting down that very last tree. It's easy to wonder what they were thinking. After all, they must have known they were cutting down the future of their society in pursuit of a life that just wasn’t sustainable. In the end, their society went from a thriving island of thousands to just hundreds of islanders with little food to sustain them and no wood to build homes or fishing boats. Their beautiful stone statues were the trappings of wealth, and these statues grew larger and larger over time. But just like going into debt to build a beautiful house and live a certain life, what many people — past and present — work so hard to build is an illusion, and one with disastrous consequences.

What Are You Building?

If you visit Easter Island now, you’ll still see its famous statues — hundreds of them, some standing more than 30 feet tall. The largest of all stand abandoned, unfinished. Presumably, the resources to quarry the stone and transport it across the island had run out, as had much of the food required to sustain the workers.

The consequences of building a life on money that is not your own are much less dramatic than the situation on Easter Island. But think of those statues looking out over the barren landscape of Easter Island and the vast ocean that surrounds it. At one time, they were emblems of prosperity and power. Now they are a sad curiosity, and the society they represented long gone. What they say about that society, however, hasn’t changed. So ask yourself this — are you erecting a monument to the present or building a life for the future? The problem with the Easter Islanders is that they chose not to change course. Will you?

This article is from Tara Struyk of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Peer to Peer Lending: Prosper Marketplace or Lending Club?

Xin Lu — Wed, 22 Sep 2010 13:00:17 +0000

Peer to peer lenders allow people to lend and borrow from each other. The two largest companies in this business are Lending Club and Prosper. I have been a customer of both for several years, and here is a quick comparison guide on which company's service you should choose if you are looking to borrow or lend money.

For Borrowers

If you are a borrower who wants the lowest rate for your loan, then Prosper Marketplace has a slight edge over Lending Club. The reason is that Prosper's credit requirements are less strict than Lending Club. The minimum credit score requirement at Prosper is 640, whereas it is 660 at Lending Club. You can also set up your loan request as an auction at Prosper. From my experience, those with decent credit profiles get lower rates at Prosper than they would at Lending Club because lenders bid down the rates of the good borrowers quite a bit.

Additionally, borrowers that could qualify as an AA rating at Prosper may only be rated a C or D at Lending Club because Lending Club's rating formula takes into account factors such as debt-to-income ratio and loan size. Even though Lending Club's fixed interest rates are lower than Prosper's for certain credit ranges, it is possible that most borrowers would be rated higher at Prosper and consequently receive a lower rate.

In addition to the interest rate, you have to consider the origination fee. Tthe fees are lower at Lending Club for most borrowers. At Prosper, the origination fee for a person with AA credit is 2.41% with no minimum, whereas at Lending Club the lowest origination fee is only 1% for a 36-month loan.

However, for those borrowers with lower-amount loans and credit in the middle ranges, then Lending Club's origination fee could be a little cheaper. For example, a person with a $2000 loan request with a credit rating of A would be charged $45 at Lending Club, but he or she would be charged 3% or $60 at Prosper. However, since Prosper is more lenient on the credit assessment, it is very likely that an A borrower from Lending Club could be rated AA at Prosper and receive a 0.50% origination fee.

Although it seems that Prosper would give a borrower the lower rate, you do have to consider that Lending Club is the only one that offers 5-year loans. If you want a lower monthly payment and a longer repayment period, then Lending Club is the way to go. Also, another reason for a borrower to consider Lending Club is that almost all of Lending Club's borrowing requests are funded because they approve a smaller pool of borrowers, whereas at Prosper there are many borrowing requests that do not completely fund.

Click here to sign up for a loan at Prosper today!

For Lenders

If you are a lender, then Lending Club is the platform for better returns. One big reason is that it seems that the screening Lending Club uses for borrowers is just much stricter. Most loan requests are rejected outright so the quality of borrowers is higher. Additionally, as I already pointed out, the fees for borrowers with lower credit is fairly high, which turns many borrowers away.

From my experience in the past three years, I have had one default at Lending Club, while at Prosper nearly half of the borrowers have defaulted. I chose the highest-rated borrowers in both marketplaces, so it would seem that the pool at Lending Club is just better. Lending Club also has a very good collection process that starts as soon as the loan goes late, and you are updated on the collection process. I have had a couple late loans that were actually cured by Lending Club, whereas at Prosper there is very little transparency to how they collect on late loans.

Additionally, Lending Club has an IRA program where you can let your investments grow tax free. This is great for those who are looking to invest long term because the interest paid from peer to peer loans are usually taxed at your highest marginal tax rate if it isn't tax sheltered. Lending Club also offers bonuses from time to time for doing various tasks, such as setting up recurring deposits.

Personally, I am lending at Lending Club exclusively now because the default rate has been quite low and the returns has been consistent. I have had one loan default after two-and-a-half years and the overall return is around 9%. I have been monitoring my loans once every week and selling off the loans that show drastic changes in the borrower's credit score. I usually sell those loans at a slight discount of 0.5 to 1% and they usually sell within a day, so I would say that the liquidity is fairly good. Prosper also has a note trading system, but it seems that the notes I put up for sale are just not moving as fast because they have already defaulted.

Although I am no longer adding more money to Prosper, I have to say that if you have a high tolerance for risk then there are loans at Prosper that offer better rates than at Lending Club. I do have a few performing loans at Prosper that are paying 30%, and that is a rate not reachable at Lending Club.

The bottom line is that these peer to peer lending marketplaces do facilitate money lending between people, but you as a consumer should always research which option is the best for you. If you are looking for a personal loan of $25,000 or less and have a credit score of at least 640, then it doesn't hurt to check out these peer to peer lending companies. The loans are much cheaper than getting a payday loan and I think the fees are very reasonable. If you are an investor looking for a better return on your idle cash, then Lending Club might be the better choice for getting your feet wet. After three years, I think that the peer to peer lending industry has improved quite a bit, and I hope that it is here to stay because it is a good alternative to many other loan options.

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: