Wednesday, April 26, 2006

Just Starting to Use Prosper Lending: Here's Our Strategy

Bottom Line: The wife gave her blessing for starting Prosper lending. Our first deposit to Prosper will be credited tomorrow (4/27). I outline our initial strategy for originating loans.

Entering assumptions:

(1) The funding date is the monthly due date for loan repayment

(2) Prosper’s 120 day default definition is modified to my own default definition of 15 to 30 days for the purpose of loan portfolio management and forming blacklists of Prosper groups.

Our initial strategy:

(1) Originate loans with funding dates of roughly the 1st, 2nd, 3rd or 15th, 16th, 17th of the month (borrower’s payment due date just afterthe 1st or 15th, typical pay-days)

(2) $200/month cap (my way of dollar cost averaging)

(3) Loan to only group sponsored individuals (marginal benefit of screened applicants)

(4) Develop a blacklist (based on groups sponsoring people who are > 15 days delinquent)

(5) $50-$100 loans only ($50 for highest risk, $100 for lowest risk)

(6) Originate loans to achieve an 8.4% real return after taxes, inflation, defaults and zero interest limbo periods. I roughly estimate the required rate at 11.25% (with no defaults and above 15% with defaults).

(7) Cease using Prosper (or re-evaluate required rate of return) if I experience a default rate greater than 1 out of 25 loans. Realistically, default rate should be less than 1 out of 50; however, Prosper has shifted the lending paradigm

(8) Loan to those whose monthly payment is at or below what I perceive to be an equivalent monthly car note for them. Thus, i'll avoid many loans over $10k. (IMO, individuals with larger loans are more likely to refinance).

(9) I will likely focus on loans for people with credit ratings of B, C and D

(10) Focus on loans to people with positive debt to income ratios

I do not yet have any spreadsheets to track effective yields on the loan portfolio. I’ll develop one or find one later.

For those of you who are unaware about Prosper, this is a site for consumer-to-consumer loans. The site utilizes reverse Dutch auctions for borrowers and lenders to meet and originate loans. The site's mechanism is somewhat similar to Ebay, yet a bit different.

** We've Updated This Strategy on the 21st of May. Here's the updated strategy. Recommend reading comments below before cycling to updated strategy.


Finance Junkie said...

The funding date is 2 to 4 days after the listing closes.

The funding date is the actual date that the borrower gets the money and interest starts accruing.

This funding date will be the due date for subsequent loan payments.

Thus, i'm tailoring my strategy to include loans that close on the:
a) 30th, 31st, 1st and 2nd
b) 13th, 14th, 15th and 16th

This way, a borrower's payment due date is close to some of the normal paydays.

Anonymous said...

What difference does it make when the payment dates are? That's silly.

Anonymous said...

Given the new data in the drop down menu next to the credit score - I would prioritize B, C, D grade borrowers who have no current delinquincies, and if you can find them (they do exist), borrowers with no delinquencies in the last 7 years.

Finance Junkie said...

Fair enough in your classification of my funding/payment due date strategy as silly.

HOWEVER, i'd bet that it would produce statistically significant results at about 10% level or better.

The premise that people have more money immediately after pay-day and are inferred to be more likely to pay a bill is not that shabby.

Good luck w/ Prosper.

Finance Junkie said...

Payments on my first 3 loans are due on the 2, 3 and 17th of June. Let's see how they work.

Finance Junkie said...

Right now i'm looking at bidding on loan 13898.

This loan is on an "E" credit rated individual and may pay as high as 22.5%. I find that i'm taking more risk than intially planned.

I've emailed the above loan applicant a couple of questions. The loan has 4 days till closing. I'll wait for the borrower's response before bidding on this loan or a different one.

Finance Junkie said...

Saturday, 5/20:

I received a response from the prosper borrower for loan 13898.

(1) My question:

Do you have regularly scheduled pay dates? If so when do they occur?

I presume you might get paid on the 1st and 15th of the month. If this is the case, it appears that your loan funding/payment due date will be a full 9 days after your mid-month pay date....

Would this potential gap between pay day and loan payment date be a problem for you?

(2) His Response:

Hi there...

Thanks for your question. I am actually paid weekly, which may have to do with the fact that I work for a retailer, so cash flow in respect to this loan payment of $99 should not be an issue. I am hopeful to institute a weekly payment of $50 so as to cut the term down and "move on" as quickly as possible. Hope that this answers your question!

Finance Junkie said...

In my early use of prosper, I misunderstood the debt-to-income ratio...

When I say "positive debt-to-income ratios," I meant debt-to-income ratios of 20% or less.

Anonymous said...

On March 30, 2007, Prosper locked down discussion of the largest Prosper group, and banned several users from their forums for criticizing the leader of that group, claiming 'This thread has been locked because it violates the forum policies of "Baiting other members into a fight or displaying other aggressive behavior" and "Being mean-spirited, unruly, or rude."'. Discussions of other prominent groups were not locked, leading many forum users to speculate that the lockdown was in response to complaints from the leader of that group.