Prosper.com - 9 months later

Once upon a time I asked folks whether I should invest in Treasury Direct (government) or Prosper.com. I tried both and overtime I've really started to enjoy investing in Prosper.com and thought I would share.

I have 13 loans so far (one new bid to make the 14th loan) with an average interest rate of around 17%. I've been using Prosper.com as a sort of personal fiat money experiment to have fun creating dollars out of the air much like banks are allowed to do. Prosper allows you to reinvest or withdraw any monies you have received as payment on your loans. My goal is to have enough principle and interest repaid each month to generate one new loan by itself. I'm pretty close and currently get to generate a new $50 loan each month while adding only $20 to the account thanks to repayment of principle and interest.

On this board we have many younger folks and I would say a key advantage of registering for Prosper.com is that even if you never borrow or lend money on the site, it allows you to see the thinking of other parties with regard to finances. Financial planning and management is one of those great societal taboos that people will still read about in books but still never discuss face to face. On this site you can see people who are asking for loans and in doing so they present you with the financial facts of their lives. You get to see what sort of debt to income ratio yields what sort of interest rate. You can see how many lines of credit they have open. Many post summaries of their monthly expenses to show how the prosper loan will be able to be repaid.

It reminds me very much of when I had to generate those first resumes. You know someone has shown you the various forms but don't know the best way to combine them for you. In my case a nice book (today it would probably be a website) that had a couple thousand resume examples helped me see the thinking of others and then I could apply what I knew best for myself. It is really neat to see the financial thinking of others, both good and bad laid out there in the listings.

Of my 13 loans, I've had a few go late in terms of payments a few times. Prosper will show them as being less than 15 days late and I suppose they attempt a second debit on their account and each time the payment has come in. I started with very high interest loans and have been rolling the repayments into top grade credit loans. My oldest loans are now 10 months old out of a three year term. I'm hoping to keep reinvesting the money paid back in over the long term to watch a small sum become a significant sum.

Anyone else have any sites or resources they like to look at financially?

Nick

Well you have your choice to engage in high risk lending or not.



I've been using Prosper as my own fiat money multiplier experiment. I've started with mostly high risk loans and have rolled the returned principle and interest into safer loans. I'm rolling the grade E & HR loans (23.75% interest rate into 8.25%) A loans for example.

The point of micro-finance though is to spread the risk. As SDW notes, you aren't loaning $1000 to one person, but loaning $50 to 20 different people.

Nick

I've not had any defaults. If you are a lender, it gives you a pane where you can see your lending overview. Here is mine.

Principal loaned: \t $930.33
Payment status: \t
13: Current
1: Late (<15d)
Avg. interest rate: \t16.50%
Principal repaid: \t$134.96
Interest & fees paid: \t$80.65
Service fees: \t-$2.18
Loan value: \t$799.39

Mine looks a bit wonky because I immediately take the repaid principal and roll it back into new loans. Those loans haven't really begun paying yet and contributing to the return in a big way. I've put $775 of my own money into Prosper.com but I have $930 worth of principal loaned out because I roll it back into new loans.

Here is what it notes about my lending performance.

Lending Performance
Net income (interest + fees): \t$74.18
Net defaults: \t$0.00
Net gain/loss: \t$74.18

My first loans originated in June from my first infusion of $500 so that is really about $68 worth of return on $500 of investment in less than a year. I added another $200 in December and finally have been adding $20-25 a month to "top off" the returned interest and principal each month and originate a new loan. The investment gap between June and Dec. is just my own way of letting this settle in.

By settle in, I mean that all the lending data at Prosper.com is public, but since it was new, there wasn't much data yet.

Now that it has some time under its belt, you can look here and see default rates for various credit grades and so forth.

Finally Prosper allows you to join and support groups where people lend or borrow money according to particular traits, political affiliation, sexual orientation, computer choice, etc.

One of my loans belongs to this group.

Another belongs to this group.

One belongs to this group.

You don't have to belong to a group to lend to it. I go it alone for now not belonging to any group.

Nick

Yes. That might be best.

A final report here on Prosper.com at roughly the 17-18 month mark.

I've decided to forgo new lending for several reasons and have begun withdrawing funds.

I have a total of sixteen loans but it was as high as 18-19. Of the remaining sixteen, I suspect over time four of them will go to default. They have been consistently late and grow progressively more so over time.

Here are the reasons I've decided to pull out and not continue Prosper.

First, people have complained about the lack of attention to fraudulent borrowers by Prosper themselves. Since Prosper buys back loans when it determines the borrower was fraudulent this is a very problematic and self-serving situation.

Second, it has become known that the ability to debit an account in order to attempt to obtain loan payments can be stopped at the request of the borrower. Prosper had advertised this as a means of helping secure repayment of the loan.

Third, inflexible loan terms have made it harder to lend. It is three years or nothing in terms of lending, but borrowers can prepay or payoff at any time. This means your best loans earn little to no interest before they are paid off as those with great credit often don't hold the loan for more than a year.

Finally, the late/default process itself is quite short with external collections having a lower than average cure rate. This to me says there is still too much of a disconnect between what the borrower is providing and Prosper is collecting with regards to information.

I still believe in micro-lending. Kiva.org has done a wonderful job and I have 100% repayment rate there. I want to try micro-lending and when someone else gives it a try here in the U.S. Until then, Prosper's growing pains have made it unpalatable.

Nick

I'll share. I had to weather the bad storm like most creditors. I've had nine notes paid in full but seven notes were charged off. I kept reinvesting the paid back funds and my return for this entire time frame....

$6.15 - Gain.

Not a loss, but certainly not worth the time for that gain. I've been withdrawing funds as they get paid back and become available. I have $52 left at Prosper. As I noted above, I've never lost a cent at Kiva.org. I keep reinvesting my money there. I've made 27 loans and had them all paid back.

Well this is the Prosper.com - 3 year later edition. The last of my loans is either paid off or gone to collections.

While there was a lot to knock, I've personally found it an incredible little experiment. I'm very tempted to try it again, not so much for the returns, but just because of the wonderful data it provided me.

So I started with $1000. I ended up with $1,008.31. I said at the beginning I was taking the initial returns from the high risk loans and rolling it into lower risk loans. The returned capital could immediately be re-loaned, just like banks. The total amount of capital used to purchase notes, aka returned principle plus interest payments was $1,307.31. I had $271.56 paid back in excess of principle but $263.25 in principle loss due to bad loans.

While the gain was very VERY small, it was still better than most investments did during this time.

There were 20 loans in total. 12 of them paid in full.

The "grades" of those loans in terms of Prosper assigned credit score were as follows:

AA, C, AA, A, AA, B, AA, AA, A, A, AA, E.

Of the 20 loans, 8 of them went to collections and defaulted.

The "grades" of those loans in terms of Prosper assigned credit score were as follows:

C, HR, A, E, HR, B, E, E.

There were exceptions as you see but for the most part, people followed their "rule" with regard to acting as their credit score. The one "A" grade had two people working in the commercial real estate industry and upon reflection clearly were overextended even if their grade didn't reflect it. The "B" charge off was from buying a home. Again in hindsight, easy to see the risk factors there and I doubt with today's standards either loan would have received those grades. Borrowing downpayments or borrowing to either create a second mortgage or pay off second mortgages (both of those loans) clearly is not "A" level credit in 2010 terms.

As a school teacher, I've had ridiculously similar results in classes, almost terrifyingly so. I've had classes where kids have 50 grades in a trimester and 100 grades in a trimester. Their performance is terrifyingly consistent for the most part.

My experiment was micro, but the macro implications are pretty bad when thinking in terms of society or perhaps even sovereign debt.