Top 10 Things New Lenders Should Know
August 14th, 2007 | Tutorials, ProsperI was looking through the forums today and decided to write a quick guide for new lenders. Hopefully this will save new lenders time and money.
1) Don’t invest in HR rated loans.
You will lose money in them. Here is a month by month breakdown of HR loans and delinquency rates. HR Delinquency Rates
2) Do not fall for sob stories, pretty pictures or empty promises.
This one is extremely hard to do. I’m guilty of this on multiple occasions. If you ever need a reminder of why just look at these 2 loans I made Listing 3151, Listing 4038.
3) Do a lot of research before you start investing. If you found this website then you are on the right track. Another nice place for information is the Prosper Forums.
4) The Experian Default Rates on Prosper are best guess estimates so take them with a grain of salt.
5) Set up minimum interest rates for every credit grade you want to bid on and stick to them.
This means you should not chase good loans down to ridiculously low interest rates. Whatever value there was in the loan would evaporate if the loan gets bid down too low. A good loan might even turn into a bad loan once the rate drops to low.
6) Make sure you account for Prosper loan servicing fees and Group fees when you bid on a listing.
7) If it’s too good to be true… Don’t bid on it.
e.g. AA credit, no delinquencies, 0% DTI, max interest rate and automatic funding.
8) Take endorsements and large bids from group leaders with a grain of salt.
If you see a large bid by a borrower’s group leader initially don’t take it as a guarantee that the borrower will pay. Often times a group leader will bid a large chunk initially on a loan in order to attract other lenders to bid on the loan. The large initial bid made by the group leader will fall off the listing once enough lenders have been sucked in. (pump and dump? not quite but close)
9) Check for inconsistencies when you are bidding on a listing.
Check to see that the story does not change from a previous listing they have made. Did the borrower change the reason for the loan from paying the rent to buying a car?
Check to see that if the numbers make sense. If the borrower says he/she makes $3000 extra a month but needs a 3 year loan for $1000 something is wrong.
10) Start investing in small amounts. You are bound to make errors at the beginning while your learning so make those losses small.
September 7th, 2007 at 5:04 am
The chart for HR delinquency rates is very interesting. It would be useful to know what are the actual default rates per year for Prosper loans by credit grade and/or other characteristics. For instance, what percent of loans defaulted between age 0 to 1 year, between age 1 to 2 years, and between age 2 years and 3 years, or any age range of choosing. It would be interesting to see how default rates vary over the life of loans. For instance, is the probability of defaulting constant over the life of a loan, or does it vary over time?
I look at the below chart for HR loans > 9 months old, and see a default rate of 27%. The customized chart doesn’t allow specifying a start and end age range, but since the first loans on Prosper only started in 11/2005, it can be assumed that this subset of loans is between 9-12 months old, ie. around 1 year old. Which seems to suggest that the yearly default rate for HR loans is actually closer to 30% than the published Experian default rate of 13.x%. (Although this may be partially explained by the fact that Experian rates are based on a subset of borrowers with DTI
September 7th, 2007 at 5:09 am
Above comment appears to be cut off at certain length. Continued below:
… with DTI
September 7th, 2007 at 5:12 am
Okay, I figured it out. It’s the typing of a “less than sign” that is making everything after that in the comment disappear, probably because it’s being parsed as an HTML/XML tag. Can comment previewing be added to the blog functionality? Here is the rest of the comment, take 3:
… with DTI less than 20%.) Using Experian default rates to calculate expected return, lenders on Prosper will lose money. Using Prosper data, for HR default rate around 30%, one would need to loan at around 40% interest rate just to break even. No wonder HR loans lose money. Interesting?
http://www.lendingstats.com/loanPerformance?lenderId=&lenderId=&keyword=&loanAgeFilter=4&dtiLow=0&dtiHigh=-1&loanAmountLow=0&loanAmountHigh=25000&locationFilter=&_los=1&_los=2&_los=3&_los=12&_los=13&_los=14&_los=4&_los=5&_los=6&_los=7&_los=8&_los=9&_los=10&_los=11&_ls=1&_ls=2&_ls=3&_ls=4&_ls=5&_ls=6&_ls=8&_rs=7&accountVerified=&homeOwner=&automaticFunding=&submit=Generate
September 7th, 2007 at 5:23 am
Whoops, I read the year wrong in the first post… the loan subset is between 9 months and 2 years old (instead of 1 year). Anyway, if the HR default rate is really 13%, I’m trying to figure out why they lose money if loaned out at 25%.
I should stop posting comments now.
September 7th, 2007 at 12:35 pm
Prosper has only been open to the public since early 2006. If you look at the default rate of HR loans (amount wise) for last year they are a whopping 27% with an additional 15% that are late. Considering that the average rate was 24% you would have to outperform the market by a significant margin to come out ahead. To come out ahead of treasuries you would have to pick even better.. This is why you should avoid lending to HR borrowers.
October 4th, 2007 at 1:07 am
E’s aren’t great either. I’m hoping the default rates will go down, as prosper has improved the information it provides to lenders over time.