Wednesday, June 21, 2006

Don't Have a Prosper Lending Account? Haven't Funded Your Account Yet? Don't Bother!

You can read my latest posting on prosper lending here... You can always come back to the below posting.

The title is a little bit misleading. It's actually my opinion that you should DELAY funding your account. Here's the reason why:

(1) Lenders and their deep pockets appear to be growing at a faster pace than borrowers willing to submit good applications. I define good as prosper borrowers appropriately setting the interest rate they're willing to pay in line with their credit grade. I'm finding TOO many cases of people with the worst two possible credit grades asking for loans at rates around 10%. Get real! Prosper.com's primary mission is not to provide a forum for charity. (Enough of my rant)

(2) This imbalance between lenders and borrowers is causing some of the good loans to get bid down to lender risk adjusted rates equivalent to a Certificate of Deposit.
- Prime example: Within the last 48hrs I watched a "D" credit graded teacher get a roughly 12.9% interest rate on her loan. Working backwards (by trial and error), prosper.com's auto fill calculator shows me that lender's bidding on this loan got a risk adjusted return of only 6.7%. On top of this, they're assessed Prosper's 0.5% annual fee to yield an APY of roughly 6.2%. These lenders are much better off buying preferred stock or going to bankdeals and finding a bank running a certificate of deposit promotion.

(3) Ok, here's the take away... If you haven't funded your account yet, consider taking a break for about two weeks and checking back. Perhaps the supply of borrowers (with good applications) will fall in line with the current demand of lenders.

(4) Alternatively, if you're patient, go ahead and fund your account. However, if you're picky like me, you may not be able to find more than one or two decent loans a week.

I'm thinking that the groups that "vett" the loan applications are not doing a sufficient job training their loan applicants in writing a loan request. If I ran a group, i'd seriously consider trying to set a minimum interest rate based on each loan applicants credit grade. While, there probably isn't an efficient mechanism for enforcing this, i'd certainly try to steer them in the right direction. Absent of opening my own group, I whole heartedly recommend the group "due diligence." It's group leader has consistently turned out quality applicants. Let's see if he keeps it up.

Additionally, I HOPE that over time, people are going to hear about the great rates that borrowers are getting on loans and that the growth rate in borrowers may eclipse that of lenders and correct this temporary supply-demand imbalance.

Finally, prosper borrowers should consider listing their loans at their state's max interest rate. Not very many people are doing this. If done, they'll get an instant rush of bids through prosper's automated fill system. On top of that, they'll get massive click traffic for their application. Their application will pass most of the lender's initial screens. In no time, they'll have a 100% bidded loan. Then, they can sit back and watch the lenders bid the rate of the loan down like starving piranas

Good Luck All (Borrowers/Lenders)!

8 comments:

Anonymous said...

1) Some states have caps. Can't get around them until prosper gets proper licenses
http://www.prosper.com/public/legal/states_and_licenses.aspx
2) Yeah, I'd expect that to get worse before people start defaulting on their loans and smacking lenders in the face ;)

This site might help you a bit:
http://www.savagenumber.com/

Particularly:
http://www.savagenumber.com/summary/matrix

Finance Junkie said...

A perfect example of a borrower setting their interest rate high and getting it bid down ("pirana style") by lenders is loan #20188.

https://www.prosper.com/public/lend/listing.aspx?listingID=20188

Their loan has gone from 20.99% to 10.10% and they still have 2 full days left of bidding action.

Anonymous said...

I think that has something to do with people using "auto fund" feature. For example, if grade level is A and loan > 15%, then auto fund it with min of say 9%.

Lazy Man and Money said...

Finance junkie, that person has A credit, which is pretty good. Of course lenders are going to flock to it as at 12%, it represents about a risk-adjusted 11% gain. I actually think it's a good system. If people with A credit didn't do better than 15%, they wouldn't apply at Prosper.com at all. This gives lenders a variety of loans to divisify their portfolio.

Dave Roberts said...

It has been awhile since you blogged on Prosper and I'm wondering what your current thoughts are (if they are even still on your radar). I just recently learned about micro-lending and I must say it is intriguing.

Finance Junkie said...

I went nearly a year w/o lending on prosper. Initially, I had about 50 loans avg interest rate 17.8% and zero delinquencies. I then got greedy and took too much risk, driving my avg interest rate to 22%. I got a lot of defaults with the increased risk. My nominal rate of return is now between 1-5%. I'm now trying lending again but would characterize my loans as low risk with an interest rate band of 10-17%.

Finance Junkie said...

Dave, send me an email at pluggedinfinance@gmail.com and I can chat with you a bit more on the subject (if you desire).

Joe I said...

I think that if the historical rates are accurate over time then people should be able to make decent decisions. If they don't want to fund the rates, then don't.