Saturday, June 03, 2006

An Implied Tax On Prosper Lending Portfolios: Just Realized That Prosper Pays You Less Than What You List as Your Minimum Yield on Bids doesn't make money just off the "delta" between the borrowers APR and the lender's approved APR bids. There is an additional 0.5% fee charged on all loans. In addition, the group rewards don't come from the "delta" mentioned above. THEY GET DEBITED FROM PAYMENTS MADE TO THE LENDER. This is disturbing because a lender viewing the help section titled "FEES" (as of 3 Jun 2006) will not see anything about group rewards at all. Furthermore, goes to the point of saying in this specific section that "There are no other fees of any kind."

I previously inferred that they come from the "delta" between the borrower and lender's APR, now I feel a bit betrayed. However, I know realize that while Prosper should communicate this fee more effectively, it's a novel strategy to channel lenders into joining groups in order to offset this implied "group rewards" tax on loan portfolios.

I discovered all of this when I examined the performance on our first two loans. This is what I found:

(1) First loan of $50 to a "B" credit rated individual collecting 11.85%... $1.68 was paid, $0 removed as a not sufficient funds fee (NSF), $0.03 was removed as a group reward fee and $0.02 was removed as a fee.

(2) Second loan of $50 to an "E" credit rated individual collecting 21.50%... $1.93 paid, $0 was removed as a NSF fee and $0.05 was removed as a group reward fee and $0.02 was removed as a fee.

Bottom Line: $3.61 paid, $0.12 deducted (3.3% implied tax)... While the 12 cents doesn't go to federal or local governments, I view it as an implied tax. If you only look at the group reward fee, I had $0.08 removed (2.2% implied tax).

If you read the fine print in the fees section, Prosper states that the actual service fee ($0.04 of the $0.12 deducted this time) actually varies depending on the timing of the loan.

I recommend that lenders be careful and understand that your bid is actually an annual percentage rate (APR) vice an annual percentage yield (APY=what's actually deposited in your account). Your winning bid will be reduced by 0.5% or more to get your APY. will give you an APY in the "loan performance" section. However, I remain suspicious as to whether or not Prosper is calculating the APY correctly. It is not clear as to whether or not they are factoring in the group rewards deducted from lender disbursements to determine the actual APY. IF NOT, THEY SHOULD!!

On another note:
(1) When is PROSPER.COM going to start advertising with commercials?
(2) When is PROSPER.COM going to start offering IRA options?
(3) When is PROSPER.COM going to start paying interest on funds not invested? Come one, even brokerage firms pay a measly yield.

Please don't construe the tone of this posting as anti-PROSPER. I will continue to use it. I may have made a mistake an overlooked a disclosure that specifically addresses "group rewards" fees against disbursements. Now that I know "group rewards" get deducted from the money that is due to me (the lender), I will re-evaluate how much I value the vetting done by groups sponsoring borrowers.

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