Prosper and high-risk loans
June 26th, 2007 | by mbhunter |Jonathan over at My Money Blog posted on the possibility that returns on Prosper.com will drop as defaults increase. (Prosper.com is a site that facilitates person-to-person lending, giving borrowers a competitive rate by pitting lenders against each other auction-style.)
Up until a couple of months ago my loans were performing well, but two of my 26 loans have gone to collections and one other one is late. I’m glad that I didn’t aim for high returns by going for high-risk loans; I have nothing below a C credit rating and almost 80% of my loans are to borrowers rated A or AA. (One of the ones in collections is AA!) If I’m getting hit with the threat of defaults, I can only imagine how lenders heavily weighted in E and HR loans are hurting.
What this tells me is that either (a) I’m below average at picking out good loans or (b) the default rates quoted by Prosper.com are optimistic or (c) the economy is souring so quickly that the default rates quoted by Prosper.com were accurate at one point but aren’t anymore.
In any case, here are some strategies I’ve adopted in light of this shifting sentiment:
- No more high-risk loans. In fact, I’m not looking at any loans for borrowers below an A credit rating.
- No more lending to people who want to re-invest in Prosper.com. The only way they’ll make money is by taking on high-risk loans, and that’s a losing battle.
- No more new money. I’ll re-invest what I have in there now, but I’m not putting any more money into it.
In addition to lower overall returns because of increased defaults, I see the following as possibilities:
- AA loans will be bid down a lot short term. Which is good for the borrowers, not so good for the lenders.
- Final rates will rise later. Once lenders realize that defaults are happening more often than they thought, they won’t bid down the rates so much. This will offset the higher default rates.
- The number of bids per member might go down eventually. Just like marginal homeowners will get foreclosed on, marginal lenders will take a loss and move on. Bidding on high-risk loans requires due diligence, and probably more than just due diligence, to be profitable. There will be a shakeout.
I’m getting a little choosier on my loans, let’s say. 
Any other similar experiences with Prosper.com? Or different ones?
8 Responses to “Prosper and high-risk loans”
By Joseph Quientus Chen on Jun 26, 2007 | Reply
I took on a majority of C-grade and below loans. I have two in default, but so far the interest has paid for the “lost” loans. So right now, I’m split even but with two borrowers late. One 15 days and the other is a month. So far, over time, taking the higher risk loans seems to hedge the risk of defaults from a few people. I have also taken on AA and A borrowers, but with the return so low — compared to the equities market, I don’t bother.
By tycoon on Jun 26, 2007 | Reply
I look at defaults over the past 7 years and steer clear of those that have any history of missing payments.
By Jonathan on Jun 26, 2007 | Reply
It’s very interesting how much deep analysis can be put into Prosper.
If you’d like to share, what is your ROI so far after fees and defaults? Does Prosper calculate this for you? (I’m not a lender, so I don’t know.)
By dimes on Jun 26, 2007 | Reply
I’m a cynic, but I’d be wary of anyone who needed a loan from Prosper. From what I’ve seen the interest rates are damned high, and I’d wonder why I should fund someone who seems to be a bad risk. And if they’re not a bad risk, why don’t they have a credit card or some other means of finance? Why resort to person-to-person loans?
By tycoon on Jun 27, 2007 | Reply
Check out lendingstats.com
By J at Home Finance Freedom on Jun 28, 2007 | Reply
Hello. I have been writing about the snowballing defaults (and tried to comment on My Money Blog with no luck) and concluded that accurate returns should be tracked as follows:
“Therefore, perhaps Prosper profits should be tracked by making the loan, recording a -100% return (100% loss), updating to a -97% return after the first payment, and so forth.”–my 6/26 article
Thank you.
By RANDY on Jul 21, 2007 | Reply
NOT EVERYONE HAS GREAT CREDIT AND ALOT DO PAY OFF THE LOANS. YOU SHOULD ALL START THE SNOB DUDES LENDING CLUB AND LOAN TO EACH OTHER SO U CAN ALL SIT AROUND AND BITCH!!!!
By RANDY on Jul 21, 2007 | Reply
IF YOU WANT A SECURE INVESTMENT STOP TRYING TO LEND TO STRANGERS.
GO IRA,S BONDS… BUT IF YOU JUST WANT TO LOAN TO HIGH RISK AND REMEMBER HIGH RISK ARE PAYING HIGHER RATES………………………………………………….
GOES BOTH WAYS BOYS!!!