Tuesday, November 07, 2006

Updated Prosper Lending Strategy (A Collection of Tips)

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

Bottom line: I've been lending money on Prosper.com since Apr 2006. Over this time, I've developed a preferred lending style that is discussed below. Some of the tips have already been discussed piece-meal on this blog; however, I feel that it's important to now summarize them in one entry.


(a) Bid 0% on auto funded loans. Reason: Auto-fund loan requests still have the bid-down feature that allows the last bidder (person who first gets loan to 100%) to set a lower interest rate and bump off others who set their lending rates to the borrower's requested rate. If you set your lending rate at 0%, nobody will underbid you. Of course, if everybody bids 0%, then you'll make no money. I'm assuming that at least one person will always bid the borrower's requested rate and thereby prevent the loan from getting bid down to 0%.

(b) Don't unnecessarily tie up your money in bids at the 5-9 day mark on loan requests. The lender's rate will frequently get bid down anyways. It's typically best to bid within 48hrs or less of the loan's closing. There's one exception: Borrowers have the option to accept the current market rate whenever their loan is at 100% funding, regardless of whether it's the 9th or 2nd day of the listing. In these cases, the borrower is either desperate for the money or doesn't have the sense to let the loan get bid down further. Lenders beware! You can get some sweet returns but may be incurring additional risk.

(c) Always ensure you have enough money in your account for at least one bid on the weekend. Reason: Deposits don't get credited to lender's accounts on weekends. This is the lending/borrowing dead zone. You will get less bidding competition on the weekends. Thus, you can potentially lock in some sweeter risk-reward loans if only you have the money to lend.

(d) Don't be scared to bid on loan requests that do not have the bank account verified. Prosper cannot let a loan go to funding until the account is verified. You may tie up your money a few extra days; however, you typically get higher interest rates on these loans.

(e) Don't have your Prosper sixth sense yet? Don't know how to read people. Recommend you review various lender portfolios at Eric's Credit Community. Eric scrapes data from the Prosper website and creates useful borrower and lender stats.
- Lender Stats Table (Ranks lenders by ROI and $ invested to include their bids and holdings)
- Delinquent loans (sorted by group sponsored and non-group sponsored) If you review these, you'll start to develop your Prosper lending 6th sense. You'll also find a few lenders where you favor their lending style thereby allowing you to follow their bids.

(f) Group sponsored loans have a unique feature (sometimes). I prefer to bid on loans where the group leader bids prior to me. That shows me that he/she has confidence in the borrower and feels that the borrower presents a decent risk-reward. Warning: Some group leaders (GL's) autobid on loans for their group. This has less value to me. In these cases I still view the loans favorably. However, I bid w/ narrower % rate spreads b/c I'm somewhat suspicious of the quality of the vetting. Using narrow % rate spreads also allows the lender to more easily bail out of a loan when they see that the GL is no longer bidding. By doing this you have more control and can take action when you see that the GL no longer feels that the loan market rate provides a suitable risk-reward proposition.

(g) Use the "I buy ugly houses" lending strategy to get superior risk-reward loans. Here's my post on the strategy.

(h) In my humble opinion, the following credit grades are roughly equal: AA, A, B, C, D. If you look at Prosper loan performance data, the delinquency rates on these loans all fall within a range of 3-4%. These are very narrow delinquency rates. Thus, you must ask yourself why not bid on the "D" rated individual? You only have an additional 1% (est.) credit late/default risk but roughly an 8% greater interest rate.

(i) The key to identifying and bidding on any loan is looking for what I consider an inflection point. Has the person turned the corner from a credit disaster and is well on their way to financial bliss? Or, are they an "AA" rated individual with a $7600/month mortgage note in California and have depleted their savings?

(j) Consider the implications of the pictures or the absence thereof. Also consider whether or not their decision to autofund is based on desperation or some other reason. For further comments see my postings on the subject (posting one, posting two). Warning: Postings "one" and "two" are not necessarily ground truth. They’re merely observations with an element of conjecture thrown in.

Money Management:

(a) Don't make large lump sum deposits into your Prosper account. Doing so only precludes you from collecting interest on that money in your banking account. Instead it's best to make multiple transfers each week. Keep in mind that 3pm PST is the deadline for submitting transfer requests. Requests submitted after this time incur an extra day of processing.

(b) To get an idea of the best time for bank transfers, you may want to read my post on the subject.

(c) For Small Budget Lenders: If you have a small budget, you can make deposits of as little as $25 (recently reduced from $50). Recommend making $25 deposits when your cash balance and payments in transit add up to $25. This will allow you to have a full $50 to bid in about four or five days.


(a) Don't join a group unless you have a need to borrow money. You cannot get any of the group rewards as a lender.

Advanced Search Filters:

(a) Recommend you set up loan search filters in roughly the same manner I outline in paragraph "3" of the following tips post. I still follow the filter strategy mentioned in this post with one main exception. I now bid on loans with DTI's as high as 60% if:
1) they rent
2) their spouse or life mate contributes significantly to household expenses
3) they own or owe on a mortgage but have significant equity (50% or better) that can be tapped in an emergency.


Finance Junkie said...

Yes, this is same as the last post w/ exception to the title.

Done in this one case to better capture key word searches done on the google/yahoo search engines.

Anonymous said...

This is outstanding information. I wish I had something to add, but it's really quite comprehensive.

I wish you hadn't published (h) of Bidding. It's starting to be a crowded field with those loans. I have had pretty good success with E loans (probably about 25% of my total loans). Oddly my late ones right now are two "C" loans and one "D."

Anonymous said...

This is outstanding information. I wish I had something to add, but it's really quite comprehensive.

I wish you hadn't published (h) of Bidding. It's starting to be a crowded field with those loans. I have had pretty good success with E loans (probably about 25% of my total loans). Oddly my late ones right now are two "C" loans and one "D."

Finance Junkie said...

Thanks lazy man... yeah, it's bitter sweet.

On the one hand, I drive more people to my site. On the other hand, I increase the competition against me on the loans I like.

Finance Junkie said...

GRRR, I went to print too soon.. Just reread my post and found some typos.. They're corrected now. Nothing affecting content. Typos just made the reading a bit to choppy.

Anonymous said...

I would truly like for prosper to establish a loan re-sale mechanism where lenders could "cash out" is they needed liquidity within the 3 year term.

Anonymous said...

I hope for your safety while there, and safe return to your family.

Just heard about Prosper last night, joined today. As a potential lender, I found your information invaluable. I'll probably start small ($500-$1k) in lending...basically money I can afford to never see again (hopefully not though).

I haven't read all of your posts yet so you may have already answered this question, but what have you found to be the best amount to lend per loan and the number of loans to carry?

Also, can or do borrowers pay off their loan within the 3 year period?

Finance Junkie said...

Shannon, please email me directly and i'd be happy to answer your questions in detail.

Short answers:
1) best amount per loan: if you have a significant amount of free time, $50/loan. If you don't have free time, you want to make the most of your time searching prosper and at least double your bid amount. For a portfolio of only $500-$1000, recommend you take your time doing just $50 bids.
2) Amount of prosper loans: No more than 20% of your net worth. However, I'm personally using a 5% limit until Prosper.com is a publically traded company and I can review it's books (financials).