Tuesday, May 09, 2006

prosper.com update - money in

I've transfered about $500 to prosper and set up an automatic lending profile.
I'm going to focus on borrowers with A or AA credit initially with a few select B grades.
Overall I've found about $450 worth of loans to big on and am waiting for the results.

Prosper is interesting as you big the minimum interest rate you're willing to pay and the system starts high and carries your bid down if necessary. I wonder how many bids will come in above my minimum versus at my minimum (or how many I lost).

One thought is that I really would like a larger deal flow. There doesn't seem to be enough volume, but then again I've only been following it for a few days.

At the moment my average interest rate is about 12.25%. Not bad for almost entirely A or AA credit.

One consideration is that my money will be tied up for up to 3 years, however, I have a feeling some borrowers will pay down early (at no penalty).

Due to the lack of liquidity I don't feel comfortable putting too much into this. Also to manage risk, I'll be diversifying my portfolio by making many small loans. I expect the first year will be more of an experiment, however, I also think the first year is probably the most inefficient and ripe with opportunity.

Good luck,


Anonymous said...

Prosper.com is an interesting idea. Since you have used it and thought it through, maybe you can shed some light on the questions I couldn't figure out (and these questions are stopping me from signing up at prosper.com)

How are borrowers graded? What kind of people are they? I like the concept of prosper.com but have no idea who borrows money using it instead of going with more traditional - and what seem to be cheaper - options.

What happens when someone defaults? Is this strictly your problem to try to collect?

What kind of requests are out there in terms of amounts and grades of borrowers?

makingourway said...


Prosper grades people using a composite credit scoring model. Their scores are transposed to a letter grade chart. Each letter has a corresponding default rate. AA has a very low default rate of 0.2%, while D or lower have much higher rates.

Prosper will tell you if it can confirm the borrower's bank accounts and home ownership.

Just before you bid, you are able to see the borrower's summarized credit history and even have the opportunity to e-mail the borrower questions.

Although the rates may seem high, the actual funded rates aren't that much higher than traditional bank loans.

Remember, prosper is offering unsecured credit. Compare prosper rates to credit card rates. In today's environment even people with excellent credit have to pay >9% for unsecured credit card debt and people with less steller credit can be paying >24% interest.

When someone defaults, it is reported to the public credit bureaus and eventually will be forwarded to one of three collections agencies you choose. This is actually the most mysterious aspect of the whole equation as I'm uncertain what differentiates the three collection firms other than their collection fees. I was unable to find a listing of successful collection data per firm.

You should go to the prosper site to see what kind of requests are open. There is a very wide variety of loan requests out there. I prefer to fund A and AA borrowers with a few B and very few C.

My goal here is to accumulate a very highly diversified loan portfolio composed of many small loans to mitigate against default risk.

With a sufficiently large number of loans you should be able to statistically adjust your returns based on expected default rates.

I hope this answered your questions.

My biggest concerns are:

a. deal flow - will there be enough loans that meet my requirements
b. liquidity - my money is tied up for the next 3 years.
c. opportunity risk - should I be investing in overseas growth ETF which are running > 10% per year right now?
d. If I keep my loan portfolio <$10,000 my upside is limited to $1500 or less per year. Although greater than the 4.5% I can get in a high yield money market, is it really worth my time to make the extra $1000?