One of the most common mistakes someone seeking to borrow money on Prosper.com makes is to engage in what I call the “fantasy loan”. The “fantasy loan” is when a borrower posts a loan at a ridicilously low interest rate and waits in a false hope that this loan will ever get funded. With this type of listing, it’s a fantasy to even expect a lender to place a bid, see for yourself.

So, let’s define terms. What is a “fantasy loan”? It’s when a registered borrower posts a loan request at or below a 5% interest rate (you can probably stretch this to 7% as it is very rare for even 7% interest rates to get funded) in the hopes that somehow the entire lending community will ignore the risks and return on investments of unsecured loans and fund a loan a well below half of the normal interest rate.

This magical thinking is more common than we might think: of the 2267 loan requests posted as of the writing of this article, 63 of them are at or below 5%. That’s 5.3% of all the listings on the Prosper website that will never even be considered for a loan. Let’s take this a step further, of the 63 loan requests, 37 of them are for E and HR credit grades! There is actually someone posting a loan at a 1% interest rate with a HR credit rating. Enough said.

Borrowers might think this has no impact, but many, after realizing that they must be competitive to get a loan funded often re-list the loan request at a more reasonable rate. Then re-list again, and again until they abandon what they think is ‘reasonable’ to what is actually ‘competitive’. Too many re-lists are damaging, just as too many inquiries in your credit report are, so keep this in mind.

For Prosper.com to work, borrowers and lenders have to come together and let the website’s marketplace determine what is a reasonable interest rate. Lenders like myself are interested in loaning money, but we also don’t want to sift through a large number of “fantasy loan” listings.