It has been some time since I have opened my Prosper account. Finally, I logged on a few minutes ago to transfer out money again because I want keep my account free of cash since the SEC cease and desist order against Propser and the quiet period have increased the possibility that Prosper could fold. I have been worried about the default rate since that order. The SEC actions combined with all the talk on the internet of how many loans on Prosper go into default probably trigger some people to feel stupid for actually paying on their Prosper loans despite the obligation and the impact to the credit score.

So how are my Prosper Marketplace P2P loans fairing? My loans’ average loan credit grade is an A minus so I have not been chasing 30%+ low-credit-score loans. Currently, I have three late loans out of 16 loans, so 18% of my Prosper loans are late.

Update: See the bottom of this post for an update. From the time I drafted this post until a few days later, another loan is now late.

According to Eric’s CC, my estimated return is NEGATIVE 4.4%. LendingStats estimates that my Prosper ROI is between negative 4.9% and negative 9.8%. Below are the screen shots to capture the point in time statistics of my Prosper return.

I must thank the unofficial Prosper forums. Despite occasionally being a bit caustic, the members there have gathered enough information and been passionate enough in their opposition that they prevented me from losing more money on the Prosper Marketplace P2P Lending platform because I probably would have waded in a little faster without their commentary.

If you are thinking about P2P lending, read the advice to new lenders.

How is your return on investment with Prosper? Are you happy with it?

UPDATE:
Before I had time to take all the screenshots, write up a description and click the publish button on this post, a fourth of my Prosper loans is now late. It will likely to continue to go downhill from here.

Prosper Lending Portfolio Update (Jan 12, 2009)

• Pennsylvania loans or what were early Prosper lenders thinking?
• Prosper.com Correlations: Late Loans and Interest Rate Caps
• Lending Club Referral Program – It’s Official!
• Glenn Chapman on P2P lending at Prosper, Virgin, Kiva and Zopa
• Prosper.com Edits Wikipedia: Removing Criticism

Sorry for being nearly as quiet as Lending Club lately. A quick update on my Lending Club portfolio is in order. Most importantly, I had my first late loan. It is only 16-30 days late, but as most P2P lenders know, once a P2P loan is delinquent there only a small probability of recovery.

Before the quiet period started, I had participated in 51 loans for a total of $1,250.17. Two loans are fully paid, 48 issued and current, and one late (details below). The weighted average interest rate is 11.23%. So far, I have withdrawn $128 that I plan to reinvest in Prosper loans.

Details on the Delinquent Loan from Lending Club

If the following information is correct as presented, there is no reason that the borrower should have not been able to pay this loan.
Loan number: 243957
Grade: B4
Interest Rate: 10.39%
Loan Amount: $7,500
Location: Brooklyn, NY
Home ownership: Mortgage
Current Employer: Retired
Gross Income $3,750 / month
FICO Range: 679-713
Earliest Credit Line: 09/1996
Open Credit Lines: 5
Total Credit Lines: 10
Revolving Credit Balance: $33.00
Revolving Line Utilization: 0.30%
Inquiries in the Last 6 Months: 0
Accounts Now Delinquent: 0
Delinquent Amount: $0.00
Delinquencies (Last 2 yrs): 0
Months Since Last Delinquency: 24
Public Records On File: 0
Months Since Last Record: 0

So far, I am still pleased with my Lending Club portfolio, but three years is a fairly long period. I wonder how many of the 48 remaining loans are going to hold up.

• Another Late Lending Club P2P Loan
• Prosper.com Correlations: Late Loans and Interest Rate Caps
• Poll Results: Lending Club will Survive
• Change in Lending Club Cash Burn Rate Due to Quiet Period
• Prosper Marketplace Enters Quiet Period

So far all my Prosper.com and Lending Club loans are current. I would be annoyed with loan defaults, but currently the number of borrowers who pay the loan in a month or less is starting to bother me. Why does a borrower bother to take out a loan for one month?

Here are a few instances from Lending Club of early paybacks that wasted my time and tied up my money while trying to find and fund loans:

Loan # 172924
Grate/ Rate: E : 14.82%
My Monthly Expected payment: $0.85
Amount Paid Back: $25.84
ONE PAYMENT RECEIVED before being fully paid back. This person wasted the origination fee and a check against their credit score and then paid off the loan in one month.

Loan # 188937
Grate/ Rate: A : 8.32%
My Monthly Expected payment: $0.78
Amount Paid Back: $25.33
ONE HALF INTEREST PAYMENT RECEIVED before the loan was fully paid back.

Prosper.com has the same prepayment issue. One of my loans has already been fully paid. It was fully paid in less than one month. Of course this loan was a very small so it was at greater risk of early payment.

From the Lending Club FAQ:

What if one of my borrowers prepays a loan?

Borrowers can prepay their loans at any time with no penalty. If a borrower prepays a loan, your money will be transferred to your Lending Club account where you can reallocate it to new loans or withdraw it to your bank account.

From the Prosper.com Borrowing FAQ:

What happens if a borrower repays their loan early?

Borrowers can make extra loan payments or repay the loan entirely at any time without penalty.

• Lending money for only one month wastes lenders’ time and causes money to be idle longer negatively impacting return.
• Borrowing money to only pay it back in one month wastes a borrower’s time and potentially costs money because of the origination fee. Additionally borrower’s credit score could move lower due to an unnecessary hard credit check.

Borrowers, please do not borrow a P2P loan from Prosper.com or Lending Club only to pay it back in one month. It is a waste of your time and possibly money and it certainly wastes lenders’ time and money.

Lending Club and Prosper.com need to consider changing the terms of service to add an early payback penalty if a loan is paid back in less than six months.

Update:
I am not referring to people paying off a loan after six months or a year. These borrowers mentioned all paid off their loans in one month or less! There are legitimate reasons to pay off a loan after several months or to pay it down as quickly as possible — I understand that. Paying it off in 15 days means that they really did not need the loan in the first place.

Technorati Tags: Prosper.com, Lending Club, prepayment penalty, p2p lending, loans, borrowing, money

• Zopa Borrowers Receiving Negative Interest Rates on Loans
• Another Late Lending Club P2P Loan
• My first late loan at Lending Club
• Change in Lending Club Cash Burn Rate Due to Quiet Period
• Prosper and Lending Club Google Advertisements

I often read that borrowers in one state or another are more likely to default on Prosper loans. I decided to investigate if there is any truth to the likelihood that some states are worse credit risks than others. The example that often comes to mind is Georgia which has a high default rate. Currently Georgia has nearly 8% defaults and about 10% late which is a higher than average rate of late loans, but nine states have more loans that are two or more months late than Georgia.

My interest in state by state loan default rates prompted my article Pennsylvania Loans: What were early Prosper lenders thinking? At the same time, I noticed how state interest rate caps vary widely from state to state — Pennsylvania 6% and Georgia 36%. I decided to see if the interest rate caps could partially explain the difference in Prosper loan default rates by state. My theory is that a lower interest rate cap prevents high risk borrowers from funding in a particular state, therefore a state with lower interest rate caps should have a lower loan late percentage.
So on February 6th and 7th, I pulled all the late stats on lendingstats.com by state. For comparison purposes, I counted every loan two months or more late as “late” to calculate the correlations. I could have used only defaults or all late loans, but the point is consistency for comparison. I also collected the average age of loans in days, the total loan amount, the average credit rate of borrowers, and the average interest rate on loans. Since my primary goal was to compare the late loans to interest rate caps, I threw out a few states that have multi-tiered rate cap limits such as Massachusetts.
H ere is an example of the data for each state:

State: Alabama
Interest Rate Cap: 36%
Number of Loans: 418
Total Loan Amount: $2.23M
Average Loan Amount: $5,334
Average Age of Loans (Loan Days): 292
Average Credit Score: 4.94 (Lending Stats converts the letter score into a number to generate an average.)
Average Interest Rate: 21.22%
Percentage two or more months late: 16.55%

Link to the spreadsheet of summarized state by state Prosper loan data.

So which factors are most correlated with late Prosper loans? The average credit score is the most correlated with the late loan percentage by state (0.73). The second and their most correlated statistics were the average interest rate and the number of loans respectively. The fourth most correlated factor was the state interest rate cap (0.27). Below is the table with the correlation statistics for each factor analyzed. You can click the table to enlarge the graphic. Details are also in the spreadsheet.

I also correlated among the various statistics by state. There were some interesting correlations such as the expected strong positive correlation (0.8) between the interest rate cap and the average interest rate.

Although, it was interesting to examine how much of an impact the default rate on Prosper loans might have been effected by state interest rate caps, I expected a stronger correlation.

I still did not prove whether or not the Prosper loan late percentages vary by state. Maybe next time…

Problems with the analysis: 1) I only used factors that were quick and easy to pull off of the summary page by state on lendingstats.com so other factors such as DTI were not used. 2) I pulled the data over two days because it was tedious, so that extra day for a few states could have impacted the late statistics. 3) Correlation does not prove causality.

• Pennsylvania loans or what were early Prosper lenders thinking?
• Glenn Chapman on P2P lending at Prosper, Virgin, Kiva and Zopa
• Lending Club Statistics: Denying Most Loans
• One Year Review: My Prosper Lending Experience
• My first late loan at Lending Club

Browsing some Prosper lending statistics at LendingStats.com, I noticed that Pennsylvania loans are exceptionally late. 23% of the loans by dollar volume have already defaulted — despite the low rate cap of 6%. The low rate cap presumably should keep higher risk borrowers from receiving a loan. See Pennsylvania Loans Sorted By Origination Date. Other lower end rate cap states like Hawaii and Arkansas also have low loan volume and a default rate much lower than Pennsylvania. The state of Delaware’s return was saved by a repurchase — excluding that case of fraud (since Prosper repurchased the loan) its default rate is also much lower.

Before looking at the Pennsylvania detail, I thought that one loan must be skewing the numbers because of the small volume of loans — only $48K. At that volume, a single $25K loan in default would case over a 50% default rate. The sample size is small, but it is the details behind the defaults that is most amazing.

What were these early Prosper lenders thinking?

There are six loans in default for an average dollar amount of $2,100. Every loan in default was graded as HR. The most amazing part if that the average interest rate charged for these six HR loans, was only 2.87%. These were all originated 2006.

Here are the details behind some of the defaulted loans in PA:

• Loan 58577 — Interest rate of 1%. BorrowersGL loaned out the full $1,000
• Loan 58756 – -Interest rate of 1%. BorowerGL loaned out all but $50 of the $1,000.
• Loan 54897 — Interest rate of 5%. MuleShoes loaned $2,950 of $3K.
• Loan 53022 — Interest rate of 5%. MuleShoes loaned all $2K.
• Loan 47411 — Interest rate of 0.21% (Yes, less than 1% interest). Again MuleShoes for the whole $2,600.
• Loan 45007 — Interest rate of 5% on $3,000 by MuleShoes.

What were these lenders thinking? Interest rates of 1% and less when Prosper also takes a percentage point of the interest paid. 47411 was a money loser automatically — even before default. These loans do not make any logical sense. So, I must check… How are BorowersGL and MuleShoes doing on their rate of return on Prosper peer-to-peer loans:

Update: Be sure to read the comments below because there were several interesting items posted.  

BorrowersGL extended $65K in loans. 41% of the loans are in default. The estimated ROI for GL is negative 17%, but Eric’s CC estimates the ROI at negative 23%.

MuleShoes loaned out nearly $400,000 putting Mule in the top ten Prosper lenders. The rate of return is negative 18%, but the Eric’s ROI estimate is negative 31%. 45% of the loans are late or in default. Check out the graph of bid history — MuleShoes jumped in head first without checking the water depth.

I am shaking my head, wondering what to comment further on this. I think I’ll just let the biding pattern and loan performance speak for themselves.

• Prosper.com Correlations: Late Loans and Interest Rate Caps
• One Year Review: My Prosper Lending Experience
• 11 Reasons my Prosper Experiment is on Hold: Withdrawing Cash
• Lending Club Quiet Period Burn Rate Update
• Zopa Borrowers Receiving Negative Interest Rates on Loans

While browsing for articles for an academic project, I decided to browse academic journals for articles on Prosper Marketplace and related interest rates. I thought someone must have published in a peer reviewed journal something on Prosper, but I did not find any existing articles outside of newspaper fluff pieces on P2P lending.

I broadened the search for other industries and the impact that the internet has made on rates. I found an article with empirical proof that the internet lowered life insurance rates. The article “Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry” by Jeffrey Brown and Austan Goolsbee in the Journal of Political Economy (Vol. 110, No. 3. (Jun., 2002), pp. 481-507.), shows that life insurance rates were reduced by 8-15% by the internet. The authors proved that internet price search services reduced off-line life insurance prices.

Consumers often receive lower interest rates with a peer-to-peer loan than they would with a traditional lending institution. Although, a lower rate is not guaranteed. After reading the above research results on insurance that made me wonder about the impact of P2P lending on regular banking interest rates for consumer banking:

• The Mortgage Foreclosure Crisis and your P2P Lending Strategy
• Second Peer to Peer Lending Carnival
• Stanley Bing: Who is to Blame for the Subprime Credit Crisis?
• Lending Club Promissory Note Details – June 2008
• First Peer-to-Peer Lending Carnival

My funds arrived to Prosper Marketplace a few days ago. I planned to jump into Prosper and start carefully selecting loans for funding. I browsed a few loans, but I have cold feet.

So I opened my blog to reflect…. Why am I nervous about bidding? I had no problem lending on Lending Club for a total of about $1,000 to date. So why is Prosper Marketplace different?

My trouble in starting to bid seems to come down to the openness of the market. That same openness is great for transparency. As I have read on other blogs, browsing P2P lending is voyeurism. I think it is a bit of Voyeurism and Exhibitionism.

Peer-to-Peer lending feels voyeuristic for several reasons:

• Many loans provide interesting, entertaining, or just odd stories.
• After browsing loans, you cannot help but to feel more secure in your own financial future because you had to read so many poor quality loans.
• It can be fun to pass judgment on others occasionally and with Prosper or Lending Club, you can decide who receives funding and who does not.
• Peer-to-Peer lending allows you to feel superior to others who are not as financially savvy. That is why most of them need the money.

Peer-to-Peer lending is great fun to view the financial lives of others. I like that part of the openness.

So what about the exhibitionism? I am not calling borrowers exhibitionists. I imagine many borrowers do not like revealing their financial lives in public, but doing so helps the loan fund and at a better rate. The exhibitionism statement comes from my lack of exhibitionism. Personally, I do not like being watched.

Even as a lender, every bid you make can be viewed at Prosper statistics sites such as Lending Stats and Eric’s Credit Community. Anyone can view your return on investment and all the bad loans you extended. For example, you can see Rate Ladder’s or Lazy Man’s rate of return. Both have admitted some early mistakes in their lending, so low returns do not necessarily mean that they do not have good advice to share. They, along with some other bloggers, helped in providing advice to new P2P lenders based on their experiences.

My concern about the openness is how some people use other lenders’ low rate of return as criticism or as an attempt to end an argument — like Goodwin’s Law. I have seen this technique used in the comments on several blogs and forum posts. Essentially the unstated argument is: “Your return is low (lower than mine) therefore the information you are presenting is false (not as correct as my information).” This is flawed logic.

In most markets, no one knows individual investors’ rate of return due to there being no openly available personal data. You cannot see my personal rate of return on stock market investments. It is easy for investors to exaggerate — or outright lie about — their rate of return on the stock market. People only talk about their winning picks and not the losers. In the Prosper Marketplace, you do not need to tell anyone because everyone can see all your trades. So everyone will know if I make bad decisions in Prosper lending. In contrast to Prosper, Lending Club only currently posts loan statistics, but they will likely make similar data available in the future.

I suppose that if I am going to invest in P2P loans with Prosper, I must overcome this fear of exhibitionism. Besides, I know that all the openly available lending data is positive for the market. Time to make a few bids.

——–

Note that by the time I reviewed this post for publication, I had already placed a few bids on Prosper loans. Of course, you can see them all in detail.

• Lending Club IRA: Why it is good for your retirement
• Advice for Potential a New Peer-to-Peer Lender
• Second Peer to Peer Lending Carnival
• WSJ writes about P2P Lending
• Investment in Prosper Loans – My Next $500

I checked my initial Lending Club portfolio and all the first payments have arrived on time. It is a minor milestone considering that each borrower must make 35 more payments to allow me to achieve my expected return on the portfolio. It still feels good to see the money arrive.

My first Lending Club portfolio consisted of 10 loans for a total of $375 at a wighted average interest rate of 9.27%. Despite the advantage that Lending Club allows small bids – $25 – I still extended half those loans at $50 each which was probably a mistake, but not a big one since they are all relatively low credit risks. The total payment is $11.93 per month.

It feels good to receive the first payment, but $11.93 is an insignificant portion of the entire expected payment stream.

Now the question becomes – what to do with the loan proceeds? Like probably most lenders, I will reinvest the money in more Lending Club loans to try to increase the monthly payment that I receive.

Below is a screen shot of the portfolio with the first payment data.

I will continue to report the data periodically to keep track of the Lending Club loans that I selected for funding.

• P2P Borrowers Waste Time and Money with Early Payoffs
• Change in Lending Club Cash Burn Rate Due to Quiet Period
• Another Late Lending Club P2P Loan
• Lending Club’s SEC S-1 Risks
• Zopa Borrowers Receiving Negative Interest Rates on Loans

I decided to review the statistics at Lending Club and I scrolled down past the table towards the CSV file of data. There I noticed an amazing figure — Loans Not Approved for Listing. 5,137 loans for $44.9 million dollars have been denied for listing on Lending Club. The total number of loans approved is only 645 for $5.2 million. Only 11.2% of all loans submitted to the site were approved for listing, so Lending Club is attempting to keep out many of the lower quality lenders despite the fees that they could earn for originating possibly many of those loans. [Update: See the comments by Rob at Lending Club to know what loans are denied.]

I am glad to see how many loans they are filtering out, but one statistic on the page bothers me – the percentage of Lending Club’s late loans is currently premature to present in my mind. Currently, the percentage late is listed as 0.47% with a footnote that reads:

“A loan status changes from ‘current’ to ‘late’ when a payment has not been made within 15 days after its due date. For purposes of the statistics presented on this page, the entire amount of principal remaining due (not just that particular payment) is then considered ‘late.’”

A better footnote would also include that the average loan is only 79 days old. (I mentioned in an earlier post that Prosper posts a similar short-term statistic, but Prosper does footnote the time frame covered.) Seventy Nine days… that means the average borrower has only needed to make two out of 36 payments. Approximately 162 loans out of 633 issued (26%) have not had a single payment due yet (less than 30 days old), so those should be entirely thrown out of the late calculation. A better number is actually 0.849% late, but again it is still premature to present that statistic. ( (4 late / (633 – 162)) = 0.00849)

Notes: 1) On the fully paid loans, I had to estimate the issue date (#90376 and #122065) because the issue date field is blank. I used the average of the issue date of the loans on either side. 2) All statistics are current as of Thursday January 10th.

• Prosper.com Correlations: Late Loans and Interest Rate Caps
• Eric Launches LendingClubStats.com
• Another Late Lending Club P2P Loan
• Lending Club late loan is current again
• Pennsylvania loans or what were early Prosper lenders thinking?

I returned to the Zopa lending site today for a second impression after my initial review of Zopa. I noticed something that knocked my socks off about Zopa’s business model of social lending — some borrowers are not paying interest after receiving “help” from lenders. In fact, some borrowers are “paying” negative interest at Zopa! In other words, they are receiving money for having borrowed money. This is an amazing development in P2P lending!

The proof in the Zopa homepage screen shot below. I cropped out part of the screen (red line) to make the graphic smaller and added three blue checks to show you the borrowers that I am highlighting below as examples. Click the thumbnail below to see it in more detail.

The three borrowers that I am highlighting (blue checks in graphic) are:

1. TinaM who is borrowing $5,000 to go back to school with a started interest rate of 9.99%. Currently TinaM is receiving help of $70.
2. wlaffin who is borrowing $5,000 to pay off credit cards at a stated interest rate of 12.99%. Currently, he is receiving help of $66.
3. Rugsaq who is borrowing $10,000 to grow his transportation business at 12.99% stated rate and is receiving help of $70.

Note that the links are to the profile pages which do not include the loans and the help amounts. The loans, interest rates, and help amounts are listed in the graphic above.

Calculating the actual interest rates…

Since most web-based loan calculators will not allow you to solve for the interest rate, I used Excel solver together with the interest rate spreadsheet from this website. Since I do not know the length of the loans, I must make some assumptions: 1) The length of the loan is two years 2) and the help will continue for the life of the loan. Additionally, for simplification, I have rounded dollar amounts (not interest rates) to whole numbers and I have only linked to my spreadsheets for the first example.

1) If TinaM is paying a stated 9.99% interest on a 24 month loan, the payment is $230 per month with total interest paid of $537. The monthly interest rate is 0.8325% (9.99%/12). (XLS file) Since TinaM is receiving help of $70 per month from lenders, I used the same spreadsheet to solve for (goal seek functionality) the interest TinaM would be paying on a $5,000 loan if her payment was only $160 per month. The actual interest rate TinaM will pay is negative 24.15% and she will actually be paid $1,160 for having taken this loan. (XLS file) TinaM will only pay $3,840 for her $5,000 loan because lenders will giver her a little help.

Perhaps the best method of showing the difference is to show the two graphs of the loans. Note that the interest rates listed are the monthly interest rates. The first graph is the stated rate of 9.9% and the second graph is the effective rate of negative 24%.

2) Using the same calculations and assumptions, Zopa user wlaffin is not paying 12.9% interest annually with a payment of $237. Instead, due to the help of $66 per month, he is receiving a loan at a negative interest rate of 18% and receiving $885 for having taken out this loan.

3) Since Zopa borrower Ruqsaq is requesting a $10,000 loan for business expansion, I am going to change the assumption to a 3 year loan term instead of 2 years to calculate his effective interest rate. At his stated interest rate, he would pay $336 per month and $2,112 total in interest. The actual interest rate he will pay with $70 in help is a negative 2.79% per year. The monthly payment will only be $266 and he will receive an effective payment of $424 for having taken out this loan.

Unfortunately, not all borrowers are receiving much help from Zopa lenders, so negative interest rates are not standard. In fact, many people seem to be receiving little or no help at all. However, the average help according to the home page* is $22 per month, so it is still a good idea to borrow money with Zopa versus other P2P lending sites. The other sites, such as Prosper and Lending Club, do not offer the possibility to pay negative interest on your loan.

* Zopa home page lists $22/month help as average as of December 9th, 2007.

zopa, p2p lending, interest rate, help, money

Technorati Tags: zopa, p2p lending, interest rate, help, money

• P2P Borrowers Waste Time and Money with Early Payoffs
• First Two Months Blogging P2P Lending
• Pennsylvania loans or what were early Prosper lenders thinking?
• Zopa Open for P2P Lending in the USA
• Another Late Lending Club P2P Loan