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| How can I prevent defaults? |
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You can't pick your relatives, and you can't prevent defaults. You can,
however, know that you are assuming some risk when you make a loan, and
take steps to reduce that risk. Here are a few techniques for reducing
your risk when lending:
- Lend to lower-risk borrowers:
If you're worried about defaults, lend to borrowers who have higher
credit grades (AA, A, B) and less than 20% debt-to-income ratios.
- Find borrowers who are members of groups: Borrowers
in groups may have a lower risk of default because of a sense of
loyalty toward other members of the group and/or the group leader. This
sense of loyalty and shared reputation should encourage a borrower to
make monthly payments on time.
- Make small loans to many borrowers: One of the best
ways to lower your risk (no matter who you're lending to), is to lend
smaller amounts to many borrowers. The more loans you make, the less
risk you'll take compared to lending to just one or a few. And the best
part is that it doesn't cost a cent more to lend to a lot of borrowers
than to lend to just one. In fact, there's even a tool you can use,
called a standing order, that will place bids for you.
- Understand the risk profile of your borrowers: Use the marketplace performance page
to see performance, delinquency, and default data on Prosper loans.
Using this data, you can gain a better understanding of the dynamics of
the Prosper marketplace, and use that knowledge to minimize the risk
taken on borrowers.
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