Saturday, August 30, 2008

Updated Prosper Lending Strategy / Tips Prefaced By Comments on Prior Lending Failures

This post is nearly two years in the making. I haven't posted about my Prosper lending strategy since November of 2006. My November posting hit the mark and was my best collection of tips up till late 2006. If you have a short attention span, look at my prior November 2006 posting first and come back to this as time permits. In today's posting I tell you my search criteria and include several new tips at end.

In November, I was near the peak of my stupidy with LENDER RISK TAKING. Prior to this, I had made 78 loans and all of them were performing (non-late), giving me an average portfolio interest rate of 17.8%. Around the time I hit 78 performing loans, I was also “volun-told” that I was being ripped from my desk job in Tennessee (just bought a house there) and deploying to Afghanistan. I coped with some of my disappointment surrounding the deployment by throwing a lot of money at something that made me happy in the past, prosper lending, where I previously enjoyed great success. I got cocky, took on a number of high interest rate loans and shifted my average loan portfolio interest rate to somewhere between 21.5 and 22%. For awhile, money was coming in and I was very happy with most of the high interest rate loans. Soon afterwards I was hit with an onslaught of non-performing loans. Realizing this, I was overcome with disgust and started to withdraw funds from my prosper account.

I returned from a very rewarding tour in the middle-east in October of 2007. Now, I would even consider volunteering to go back.

I started lending again on in February 2008. So far, my lending has been restricted to reinvesting returned principal and interest payments. Since Feb 2008, I’ve originated 20 performing loans with zero late ones. The following are general characteristics of my recent 20 loans:

-Inquiries over the last 6 months: 1.6
-Average debt-to-income: 23.2%
-Average interest rate: 15.3%
-Average credit rating: Between A and B, more closely to B. Zero E, HR and NC loans

I’m focusing on a narrow range of borrowers. Here’s my search criteria

Credit grades and minimum rates: AA (10%), A (10.5%), B (11%), C (11.5%), D (12%)

Debt/income ratio: 0% to 50%

Loan amount: $0 to $25k

% Funded: 33% to 100%

Inquiries in last 6m: 0 to 5

Occupation: Civil Service, Doctor, Military Enlisted, Military Officer, Nurse (LPN), Nurse (RN), Nurse’s Aide, Pharmacist, Police Officer/Correction Officer, Postal Service, Principal, Professor, Teacher

I’m now focusing on the above occupations because I feel these jobs are more protected in harsh economic times. Does anybody else focus on other occupations and why? Of my last 20 loans, I’ve deviated from the above search criteria about 25% of the time.

Sometimes, I also give preference in cases where a borrower’s friends are also bidding on the listing.

Finally, here are few new tips in addition to those I listed in November 2006:

-The value of any new lending strategy can only be determined once you have originated a significant number of loans (at least 30) under that strategy and the loans have had time to mature (>12 months). DON’T assume early success as a reason to assume more risk. In my opinion, borrowers may not have yet had an opportunity to fully utilize the money you lend them in the first few months after the loan is made.

-Most lenders can easily understand the importance of screening for current/past delinquencies and debt-to-income, but also consider a borrower’s bankcard utilization percentage. Think of it this way, do you want to lend money to people that may only be borrowing to increase their spending / consumption? Whether they say it or not, some people with high bank card utilization rates have problems with spending and may be originating a loan to pay off credit cards, only to continue building high credit card balances. Also, people that have high percentages are waiting until the last minute. Do you want to loan to somebody that isn’t proactive? Looking at bankcard utilization rates are not useful though when you’re considering new college graduates, divorcees who assumed the ex-spouses’ debt or people with small lines of credit.

-Spreading your risk across multiple listings is the key to any diversification strategy. But you “shoot yourself in the foot” when you invest all of your money over a short period of time. Think of it this way, are you taking advantage of your instincts / gut feeling when you lend money every day on Prosper? I highly recommend you take your investment capital and spread it out over longer periods of time. This way, you can exercise due diligence in using search criteria, asking borrowers questions, generating “watch lists” of preferred listings and finally loaning to an individual that you feel confident in. At the peak of my lending stupidity, I was originating new loans on the rate of one every day or two. Now, I’m doing one new loan about every 6 days.

-This is common sense, but you must believe in the borrowers’ story and they convinced you in their ability to repay. If this doesn’t happen, there is little value in the credit rating associated with the listing.

-If you're into statistics, consider looking at for studying average and individual lending statistics. This site is a little better than Eric’s Credit Community.

Finally, if you chose to read this far, you skipped the first paragraph option of clicking straight to my November strategy posting. If you've came this far, I recommend you read my November strategy posting.

No comments: