Prosper Raises Loan Servicing Fee
Prosper.com raised their loan servicing fee from 0.5% to 1% on loans with credit grades B or lower.
This change by itself has not caused me to reconsider using Prosper.com but doubling the servicing fee has to figure into my ROI calculations for these higher risk borrowers and will certainly tip a lot of borderline loans into my “do not fund” category.
You can see Prosper’s full fee list here.
In investing it is tempting to chase. Chasing is placing an emotional attachment on an investment that is declining in some way.
A recent experience on Prosper reminded me of this principle. A loan for a borrower with C credit came up and I thought the borrowers profile indicated an improving credit situation and the rate was quite attractive. The rate kept going lower and lower. It finally crossed the point at which some of the solid B loans I participated in were closing. It was clear there was some chasing going on in this loan. I know this feeling. When I first came across the loan it was a great deal with a lot o promise. I have a feeling a lot of people saw that and kept chasing the opportunity long after it stopped being a good opportunity.
The same thing happens in the stock market. We discover a great stock. We invest and feel great, but then something goes wrong. It could be anything: A change in the market, bad management, a butterfly in Japan flapping its wings. The story is different. Our original thinking is no longer valid. Unfortunately the stock is from $70 to $50 and it is such a great deal. Don’t do it. If the story has changed for the worse move on.
You want to put your money in good stories, not continue to invest more and more money I bad stories. Don’t chase.
Two of my loans on Prosper have been hanging out in the menacing late category for a few weeks now. I now find that the late loans have been resolved and the loans are back to being current.
This is definitely an encouraging sign. So far I’ve run into about a half dozen late payments and to date every single one has been cured. This pattern is pleasant; we will see how long it lasts.
It's now been almost a quarter since I began using Prosper.com. Overall the Prosper experience has been lucrative. My portfolio currently has a risk-adjusted return of over 10%. That certainly beats what you can get currently with both money market accounts and CDs both of which currently will return you around 5%
First let me say that I now have over a hundred active loans. Most performances been good to give you a flavor of what I've experienced so far I've had four loans go late. Two of these loans have already been remedied and brought back to being current. The other loans are currently less than 15 days late. We'll have to wait and see how those go.
I've also experienced to early payoffs. While this is to be expected, it must be calculated in the amount of time needed to deal with Prosper as an investment.
I had originally planned to deploy a whole is my money into loans within the first month of using Prosper. It is still three months later and although I'm very close now, I still haven't deployed all of my capital. While there are many loans on Prosper loans that meet the quality and risk-adjusted return metrics that I'm looking for are just not available in large numbers.
There's great opportunity with a place like Prosper to use extra information to boost returns. Unfortunately there are some structural things that are currently preventing full utilization of the site. It is important to be able to match your criteria, whatever they are, to be desired rate of return. For example, if you thought that borrowers with spotless credit who are homeowners deserve loans at 7.9% you can go filtered through all of loans by hand and find these. You can even set up a standing order with limits on percent funded. The problem is that you end up tying up tremendous amounts of money in standing orders, only to find a good percentage of them losing at or near the end since many of these loans may reach 100% funding only a few days in to there posting.
As I and many others have previously argued Prosper needs to address the issue of money not participating in loans. For example, I mentioned above that my risk-adjusted return was over 10%. That's only true of the money is actually deployed in loans. If you look back over the past quarter at the overall amount of money sitting in my Prosper account the actual risk-adjusted return is significantly lower because not all of my capital has been deployed into loans.
I know this is been raised over and over and over again. But Prosper needs to provide interest on funds that are not yet invested. In addition Prosper should add a feature allowing you to specify the amount of time remaining on a loan as one of the criteria for standing orders. This will allow you to bid on many loans, while not having money tied up for eight days only to find out that it's not didn't quite meet competitive bid on the particular loan.
Prosper.com is still a promising place to a boost returns on your cash. Prosper has been very aggressive in making changes to their platform to improve customer satisfaction on both a lender and the borrower side. I do have to consider the amount of time and investment takes to achieve the return. Right now, that's my biggest issue with Prosper. I certainly hope they come around on this issue because it is a promising and innovative platform. In the meantime I'm looking out for the launch of soap in the United States. It seems they're likely to have far less information available to investors. At the same time, they seem to make it extraordinarily easily easy to deploy capital. Who knows maybe Zopa's entry into the US market will give Prosper the motivation it needs to make some of these changes.
Good luck!
I’ve been using Prosper.com for a few months now and I thought I would update you on my progress. I have about 90 active loans in my portfolio. All of the loans are current. One of the loans was a few days late but is now caught up.
I just ran a performance report (which you can do too from the performance tab) For loans originated in May, June and July and found that in grade AA-D there were no defaults and 53 lates out of about 1300 loans. The reason I chose loans so far back is that there is no chance a loan originated in the last few months can be in default.
We still don’t have enough data to say what additional risks we assume with prosper but I can make a few observations:
- The issue of whether defaults will be higher or lower than the industry statics provided is still an open issue, and will be for at least another year. You should increase the interest rate you are willing to accept to take this into account.
- I’ve been trying to deploy my capital for over two months now and I can’t find enough loans that meet my criteria. Don’t be tempted to over invest in a single loan. Don’t lower your credit standards. You will pay dearly for this. Trickle your money into your Prosper account as needed since they pay no interest on money that is not invested.
- I can tell you I have received about a hundred payments with one late payment that was brought current in a few days.
- The lower you go in the credit score grades the more risk you are taking on. Plan accordingly.
Is Prosper.com riskier than your banks money market account? Certainly! Can you make a higher rate of return? It seems so.
Good luck!
Free markets work to reduce friction. When I talk about friction I’m referring to the something that adds a burden that is outsized to the value provided. An example of this was the previous bid system in the stock markets. Bid and ask increments were forced to be a quarter or even sometimes a half dollar apart. Did the market maker really provide a quarters worth of value per share? Did he provide 50 dollars of value when you traded 100 shares? No! High cost with low value. Friction. Of course this system was recently replaced by penny increments reducing the friction and leaving more money in the hands of buyers and sellers.
The same thing applies in the personal credit market. Two years ago I was opening a checking account when rates were a bit lower than they are now. The bank I was at charge over 20% interest on its credit cards. The clerk asked me if I wanted one of their savings or money market accounts. I asked what the rate was and threw out a guess of 1.5%. The clerk laughed and responded “Isn’t that cute”. The actual rate? 0.2%. Ouch. That’s a whole heap of friction.
I think that a wave is about to break over the personal credit market that sands this high friction surface to a silky smooth finish.
I’ve been writing about Prosper.com’s peer to peer lending model for a while now. It is very clear to me that given the disparity between the rate consumers receive on their money and the rates that financial institutions charge consumers that there is room for a profit in between the extremes. Prosper is already knocking the rough edges off the personal credit market. The spread between the borrower and lender rates is around 1-2%.
Zopa, a UK P2P (peer to peer abbreviated for all you folks not in touch with your Web 2.0 slang) company, is moving into the US market. Zopa’s model is different than Prospers. More detail on that later. What you should know is that it will put more pressure on the margins in personal lending and that should ultimately be good for us all. Lower rates for consumer borrowers. Higher rates for consumer lenders. I’ll take it.
I often want to vary the amount I’m willing to invest in a Prosper loan based on the final interest rate. I do have a life to live so I can always be there to place a last minute bid.
What do I do?
I split my bid into multiple bids. Say I see a promising loan at 12.5% with two days left. If I can beat 12% with this particular loan I’d like to invest 200 dollars. If I can only get 11% I still would like to invest 70 dollars.
I place two bids, the first bid for 70 dollars at 11% and the second big for 130 dollars at 12%.
This works well when the time period is very short as the interest rate is not likely to change by more than a couple of points. It is far less useful 5-10 days out as the rate may change by over five points.
The reason is the Prosper minimum of $50 per bid (and the fact that I am not a billionaire). You could place 12 bids at 0.5% intervals and go away to Hawaii for a week if you had enough money that you were willing to risk 600 dollars on one loan. Granted this is a pretty extreme case. But I do find myself wanting to bid 50-120 dollars based on the final rate in three or four steps and this can’t be done.
So, to the folks at Prosper, how about a bid add on feature where you can bid additional amounts at a higher rate on a listing where you already have 50 dollars invested at a higher rate?
For everyone else go ahead, use bid splitting and enjoy your time away from the computer!
If you have time read my other entries on Prosper.
Prosper just sent out a newsletter with some new features that they’ve been running with for a while. If you want to know a bit more you can check out their site or my previous articles on starting, saving time and cancellations.
One key feature is the group rating. It attempts to provide a summary of the success of the group at avoiding the delinquency. So far I haven’t found groups very useful in deciding when to lend or not. The only time I’ve found them useful is when they save me the legwork of validating documents for risky loans. Unfortunately it seems like most group leaders are doing minimal vetting. I’ll be keeping an eye on this feature and I think it will serve as indicator of the group’s meaningfulness. Presumably an average group is not doing much vetting. A below average group is doing a bad job of vetting and an above average group is doing a good job of vetting. I can defiantly see this helping me make a call for or against a loan in a close case.
Another promising feature is the new account statements. It seems like both the detail and readability of the statements has improved.
Prosper has a lot of room for improvement but I must say I’m encouraged to see that there is a fairly frequent stream of improvements.
As you may know if you read this blog regularly I’ve been putting some of my capital to work at Prosper, a person to person lending site.
I’ve pointed out some of the risks of Prosper before.
I thought I’d share with you another risk that hadn’t occurred to me at first, that of cancellations. With the loans I’ve bid on over the past month or so two have ended up being canceled due to Prosper being "unable to verify certain information relating to the listing'. The downside to this in both cases my money was tied up from the time I bid through the time left on the loan and then through to the time that Prosper decides the loan can’t be funded due to bogus, fraudulent or unverifiable information.
I am happy that Prosper carefully vets the loans before funding. This helps me as a lender avoid borrowers that may skip or be less than forthcoming with there information.
But Prosper; please make the money in our accounts interest bearing! This will definitely help me feel better about having money sitting around not in a loan. Keep in mind that I want to deploy this money to loans. I just don’t want to do so foolishly.
For more on Prosper read about saving time on Prosper.com.
One way to save time on prosper is to ignore listings that have more than two or three days left. These three to ten day listings can waste a lot of time for many reasons including:
-The rates often have not been bid down meaning that you may end up bidding on listings that ultimately you will be uninterested in.
-Borrowers often withdraw requests for varied reason including changing group affiliation and noticing that they are not getting attractive bids.
During this time your bid money is locked up, not earning interest and not available for other, more interesting offers.
So what until the last few days before placing your bid, you’ll get to spend more time analyzing fewer listings.
I signed up with Prosper.com recently. Prosper is a social lending network. The idea is that people with money to lend can get in touch with people that need to borrow. Prosper handles the legalities and administrative aspects.
This disintermediation (fancy word for cutting out the middle man) should result in better rates for both borrower and lenders.
There are some significant risks that make Prosper speculative at the moment. The two key items that cause me the most concern are the lack of history and the limited supply of borrowers.
Prosper has been operating for less than a year which means that there is little information to correlate credit scores to actual default rates. This I important because proper is not a car loan or a credit card. It will take a few years to build sufficient data to make reliable judgments.
There were over 500 loans originated last month and it looks like they’ll top 700 this month. This might seem like a lot, unfortunately it is not enough for diversification purposes. To limit risk I want to split my investment among many (over 100) loans with the same set of characteristics. There is no way I can do this.
Prosper is clearly in the speculative category for now. I am very interested in the value services like this can provide. I’m happy to earn a better interest rate than I can get at EmigrantDirect while helping someone else get a better rate than they can get with Visa. For now I will only be putting a small slice of my money to work here.
I’ll keep you up to date on what I learn and how well things work.