Saturday, August 19, 2006

Ten Lending Tips

Here's a run down of a few tips I think the beginner should consider when bidding on loans at

(1) Let others do the dirty work... Don't bid on non-automatic funding loans greater than 4 days from the loans closing date. You ask why? Picture yourself with your typically bidding increment (only enough for one loan). You find a loan that you like at 7 days from closing... you bid on it. But you then find an even better loan that's 2 days from closing. Unfortunately, most prosper money transfers take four or more days to complete... And thus, you won't be able to bid on the better loan. Ideally, you would have bid on the loan 2 days from closing, then transferred more money in to bid on the loan closing in 7 days if the interest rate is still to your liking.

(2) Don't keep significant amounts of money in your account. Prosper, hasn't gone out of its way to give you any interest income on your deposits. Don't let them and their partner Wells Fargo make interest off of your funds if you can avoid it. I recommend keeping a minimum of one bidding increment in your account for the weekend. The weekend is the funding dead zone. Prosper doesn't deposit money in accounts during the weekend. This creates what I believe to be one of the few periods where you get less competition bidding on loan applications.

(3) If you're not on a fixed income, don't worry about the loan applicants credit grade. In my opinion, credit grades are static and are an indication of the past, not the future. I think it's best to look at the actual credit characteristics: "debt-to-income ratio (DTI)," "current delinquencies," "delinquencies in last 7 yrs," "public records," and "number inquiries in last 6 months."

I GENERALLY stick with loan applicants with:

a) DTI less than 40%
b) Current delinquencies equal to zero, sometimes one if they have a good explanation
c) number of inquiries in last 6 months less than 7 and prefer those that have 3 or less.

(4) When searching for loans to fund, USE THE ADVANCED search feature, specifically the "auto fill" rates field. I typically use 3 searches.
a) any loan funded to 51%
b) any automatic funding loan with a 13% risk adjusted return, 33% funded and a few other settings
c) a 13.17% risk adjusted return screen, then modify the DTI to read 40%, the "current delinquencies at 0 to 0," and "o to 7 inquiries in last 6 months."

(5) I generally don't recommend bidding on business loans where you feel that the loan interest rate is greater than the owner's profit margin.

(6) I generally prefer to bid on group sponsored loans where the group leader bids on the loan. This can be a good indicator as to whether or not the person who vetted the loan applicant feels that the applicant offers a suitable risk-reward proposition for lenders. Additionally, I had once did an analysis of delinquent loans and found that roughly 75% of delinquent group sponsored loans did not receive a bid by the group's leader.

(7) I personally avoid those loan applicants that plead or ask emphatically for help, are looking for charity or asking in so many words for somebody to bail them out of a particular situation.

(8) Automatic Funding loans are my preference, they tend to be the best for people that don't like keeping their money in's zero % interest bearing accounts. When bidding on these types of loans, recommend you put zero % interest as your minimum interest rate that you'll accept. applies the reverse dutch auction bidding style to these types of loans too. I know it's absurd, but i've been outbid before on an automatic funding loan (fixed interest rate loan), simply because I entered the fixed interest rate and somebody came behind me and underbid the interest rate.

(9) Check out the site called Eric's Credit Community. Some pages take a long time to load; however, you can look at current late loans and lenders portfolios and determine trends where people may have an increased likelihood of paying late and a few other interesting tidbids.

(10) If a borrower has made multiple listings, read all of the prior listings. This seems like common sense. Borrowers may completely change the reason for their loan request between listings or include only in one listing details on their income and delinquencies.

Once you've looked at all the prior postings, don't hesitate to ask questions of the borrower. Frequently, you'll get more information than what you asked for.

Finally, consider checking out the borrower's group leader's website (if they're sponsored by a group and it has a website). These sites sometimes provide even further details that can help you make an informed decision. Here's an example of some group leader commentary.

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