This is part 7 in a series of posts on my experiences with Prosper, the peer to peer lender.
See Part 1 , See Part 2 , See Part 3 , See Part 4 , See Part 5 , See Part 6.
I've been using Prosper for over 2 months now, and I must admit that I'm overall very pleased with the service. I've got about $1500 invested with an average return of 18%. So far no defaults, but it's still very early in the game. A lot can happen in the 3 year life of the loan. With Lending Club I'm up to 9 loans > 30 days late, and I'd say my average loan age is about 6 months. I'm still very far ahead on LC because of the generous bonus they gave out in February.
One of the things I like about Prosper is the guidance they give on the manual bidding. My first 20 or so loans were done with the automatic bid program from Prosper that I edited, but even though the program is very customizable, it still doesn't cover all things I consider in a loan. (For instance, the ratio of loan amount to revolving credit balance). So recently I've been doing more manual bidding then automatic.
When you place a bid on a loan, you enter in the lowest amount you are willing to take for an interest rate. Since there are so many factors that go into the risk of loan default, choosing a reasonable interest rate on your own would be a very difficult proposition. But thanks to Prosper's loan history, they now give you general guidance on what your expected return is for a any given loan. If you expand the image to the left you can see the bid page. I entered in 20% as the minimum I would be willing to accept in interest on this loan. Prosper then factors in risk of default (estimated loss), Prosper fees, and a minor adustment for accrued
interest and late fees that are not collected on loans. The bottom line is your actual expected return. For these particular loan characteristics at that interest rate, I can expect a return of 8.42%. I can adjust my minimum interest rate up or down to give me a different expected return.
Personally, I try to set the expected return for all my loans at around 7%. This is for a few reasons. First I need to stay competitive with other bidders. If I bid too high, I'll get outbid and receive no loans. If I bid too low, then when some of my loans do end up in default I won't make enough interest from the other loans to compensate for my loss. This is another area where Prosper gives guidance. If you put in a bid that gives a low expected return,
Prosper will warn you of this and ask you to go back and change your bid. If you bid ridiculously low, they will even admonish you and tell you that you could earn more in a 2 year CD. Using this guidance you can put together a portfolio that will give you decent returns from a variety of credit grades. Prosper guides bidders to between 7-8% expected return depending on the credit grade.
If everything worked out just as the statistics predicted, then your return would be the expected return. However, individual lenders have a chance to beat the system here by choosing their own loans manually, or by creating a customized bidding program. My goal is to beat the average through both of those methods, giving me a return closer to 18% than 7%. Propser actaully rates people and groups on how well they beat the expected return for the loans they hold. Most groups I've seen do not beat the expected return.
My goal might be a bit audacious, like saying I'm going to beat the stock market by picking individual stocks. It can be done, but luck tends to play more of a factor than skill. P2P loans are supposed to be less risky due to the borrower knowing they owe real people and not just a bank, but I think the internet is too anonymous for that. All you have to make a decision is a 1 page summary with most of the information provided by the borrower. Only time will tell.
If you want to keep track of how I'm doing, check out my profile on Lending Stats.
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