Category Archives: P2P Lending

Am I going to prosper with Prosper.com? (Aug ’15 Update)

It’s been a while since my last post, but checking in with my Prosper account (now having gone through 172 notes), some very interesting observations I’ve made when focusing on notes where borrowers have NEVER had previous delinquencies.

(Would’ve loved to make an infographic for this, if not due to lack of time!)

Out of the collection of 172 notes, so far:

=== The stats ===

Seasoned Only return: 7.58%
All Notes: 7.46%

Defaults / Charge offs:
(1) Default, grade A
(6) Charge-offs
– (1) Grade AA
– (3) Grade A
– (2) Grade B

Lates:
(1) <15 days late, grade A
(1) 15-30 days late, grade AA

Paid off / On Time / As per Terms:
(14) Grade AA
(14) Grade A
(6) Grade B
(3) Grade C
(1) Grade D

Current:
(30) Grade AA
(47) Grade A
(31) Grade B
(9) Grade C
(7) Grade D

=== Observations ===

1. Proportionally speaking, since most of the portfolio is Grade A, it make sense that there are more Grade A charge-offs and lates.

2. What’s interesting is that the % of lates / defaults for Grade B/C/D isn’t higher (at least not yet, as most “C” and “D” notes are about 9.7 months old.)

3. If trends hold, my hypothesis of selecting only notes with borrowers that have no previous delinquencies may be the filter needed to be used to target higher returns by focusing on grade B/C/D notes – while minimizing risk.


This topic will be revisited in another 3 months, around November, when more of our C & D graded notes would be about a year old!

Research: What does a “likely-to-default” borrower’s profile look like on Prosper? (If such a thing exists)

Hi everyone,

As a quickie update to my previous Prosper.com post, I had a quick chance to review / look at my notes that have been charged off, in collections, or in bankruptcy.

Let’s start with the facts:

1. As of today, out of the (162) notes I own, (104) of are older than 16 months, and (5) are in the charge-off/late state.

2. Of these (5) charge-off/late notes:
– (2) are “AA” rated by prosper, at 5.99% and 7.49% yield
– (2) are “A” rated by prosper, at 11.19% and 12.34% yield
– (1) is “B” rated by prosper, at 14.19% yield

More specifics:

Loan #97206 – “A” rated
Business Loan
Credit Score: 720-739
No delinquencies
81% bankcard utilization
Employment length 10y5m, self-employed
Issued 8/2013
last paid 11/2013
1st late in 11/2013 (3 months from issue)
(attempted payments, but failed)
chargeoff in 4/2014

Loan #97548 – “A” rated
Business Loan
CS: 700-719
No delinquencies
33% bankcard utilization
Employment length 2y4m, accountant/CPA
Issued 8/2013
last paid 11/2013
1st late in 12/2013 (4 months from issue)
(never paid again)
charge off in 4/2014

Loan #99676 – “B” rated
Debt Consolidation
CS: 660-679
No delinquencies
78% bankcard utilization
Employment length 29y5m, Clerical
Issued 8/2013
Last paid 9/2014
1st late: 10/2014 (14 months from issue)
(Bankruptcy filed)

Loan #97925 – “AA” rated
Debt Consolidation
CS: 800-819
No delinquencies
25% bankcard utilization
Employment length 2y1m, programmer
Issued 8/2013
Last paid 10/2014
1st late: 11/2014 (15 months from issue)
Late / in collections

Loan #97032 – “AA” rated
Debt Consolidation
CS: 840-859
No delinquencies
25% bankcard utilization
Employment length 5y, attorney
Issued 7/2013
Last paid 11/2014
1st Late 12/2014 (17 months from issue)
Late (31-60d)

3. The group of (104) notes were all purchased on / around July or Aug 2013, so about 19 months have passed since the start.  This means that a 3 year loan’s life is about 1/2 (52%) over, or a 5 year loan is about 1/3 (32% over).

4. All of the my (104) older notes are rated AA, A, or B by Prosper.  I never got into the C & D loans in the my first foray into Prosper.com.

===

So, all the facts being said – is (5) notes in collection out of (104) “older” notes issued (making it about 4.8%) so far a good, ok, or bad result?

From Propser’s website, the expected loss of principal for the various ratings are (at the time of issue):

AA – 1.24-1.99%
A – 3.49-3.99%
B – 4.74%

So, simple arthimetic would indicate that either my sample size of (100) is still too small, or that Prosper’s “estimated loss” numbers can’t truly be trusted as they may be underestimating of the expected loss. (i.e. how were these numbers derived in the first place?  Does it vary over time, or by buyer’s stats & numbers?)

In addition, I found this interesting article, which seems to indicate that 5% is the expected default rate of loans:
http://www.lendingmemo.com/lending-club-prosper-default-rates/

Based on the above, and since I got back “average” results of a 5% delinquency/charge-off rate – some interesting conclusions can be drawn, which warrants further investigation & research:

A. A very high Credit Score doesn’t seem to guarantee repayment.

B. Lendees with low bank card utilization don’t  guarantee repayment either.

C. I did not look at past delinquencies at this stage, and surprisingly, all of these “bad notes” have ZERO past delinquencies on file.

===

Some interesting follow up questions come to mind when revisiting this in the future, as the C & D notes grow older and the original (104) notes get closer to their maturity:

1. Since my second round / reinvestments and the additions of C and D rated loans didn’t start until April 2014, what will be the % default by August 2015 (another 16 months after the start of those notes’ purchase)?

2. Adding in the variables of “no previous deliquencies” did not seem to have any affect on AA, A, and B rated notes from the expected result. Will this trend be the same for C & D notes, to at least minimize the expected higher levels of default?

3. Do most defaults occur early in the life of the loan (as shown by the 1st lates being in 3-4 months from issue on the “A” rated notes”?  Or, do they occur in the middle, or end, or is it just random?

===

It’s fairly obvious to anyone that the key to success on Prosper is to find, identify, and skip the loans that will default – but what characteristics should be looked at, besides the obvious numbers like FICO score?  Clearly, the 5% expected loss really weighs down on on the final result. (That is to say, if the loss was actually 0%, the expected return would be around the 7.5% we’ve been getting + 5% = making total return around 12+% – handily beating stock market / mutual fund returns).

Obviously, 0% loss won’t happen – all we can do is reduce / mitigate it!

Let’s revisit this in the summer time, and we’ll see what happens then!

Am I going to Prosper with Prosper.com?

It’s close to 18 months to date since I’ve joined Prosper.com and started Peer-to-peer lending. My hope was to be able to get a better return than what I would be getting from a typical bank deposit, but with not as much potential violatility as stocks. It was also an experiment to see what problems, difficulties, etc. may come up durng the process.

Surprisingly, things have been pretty smooth, and I’ve been able to generate about 7.4% seasoned returns, or a 7.7% overall return. So, I felt it was time to share in my experience, some of the strategies I deployed, and hopefully, others can benefit, or can suggest improvements in my methods!

Q3 2013-2014 Prosper.com returns
Before jumping in head first, I did read others’ experiences and “best practice” strategies. From the info, I concluded that:

1. To be successful with P2P lending, you generally need to split your original investment between (100+) loans. From each of these loans, you would be given a “Note.” Knowing that most notes will not default – but not knowing exactly which notes will default – having a larger number of notes will help minimize the overall risk of loss.

2. Higher risk does not mean higher return. The general problem is that as risk increases, the chances of a loan default also increases. It’s best to stay in the A or B grade loans, or with select C or D loans only if it meets certain characteristics (more on that later). E or HR are generally not worthwhile – they are likely lendees that have been rejected by banks, have too high debt-to-income ratios to be considered for a bank loan.. long story short, the risk is too high to be considered. (i.e. you’ll likely lose money)

3. Keep reinvesting the funds as loans are paid back. Did someone pay back the loan? That’s great – but it’s also time to reinvest those funds!

Armed wth the above knowledge, I took a small sum of $3500, and as a experiment / test – set to lend out (100) $35 loans. Surprisingly – the process was pretty simple and painless!

Using the built-in Prosper search engine, I was able to narrow down the potential loans to only AA to B class loans.

From here, I sorted by the amount of interest offered, purchased the highest interest loans from the AA, A, and B classes. After about an hour or so – I was the proud owner of about 100+ Notes!

List of my Prosper notes

After that – there’s honestly not much to do. As per #3, check in every so often, reinvest what’s been paid back – and repeat!

So after about 18 months, what do I like about the Prosper and P2P lending experience? Pretty much everything! Some huge pluses:

1. Filings during tax time is pretty easy – you get handed a SINGLE 1099-OID to handle ALL of your notes! Unlike individual stocks / mutual funds, all transactions, earnings, etc. is tracked with a single entry into your favorite tax software. Simple.

2. Since Prosper is all web-based, you can check progress, buy new notes, etc. at any time! I usually do ths during my weekend downtimes, when there’s a boring movie on, or nothing else better to do. It’s nearly passive, and…

3. Compared to the return rate that someone gets at the local credit union (an outstanding 1% /s) – the additional (minimal) effort is well worth while.

Now, some of the minuses (which I felt were small):

A. Any gains are taxed yearly via the 1099-OID, so it doesn’t enjoy tax deferred compounding like stocks / mutual funds. However, I see Prosper / P2P as an alternative to CDs, savings, or money market accts – all of which are taxed yearly anyway.

B. Any money put in are usually put away into 3-5 year notes, so if the cash is needed shortly, CDs, money market, or savings accts would be better. However – Prosper has an integrated “Note Selling” market – so that if you need to liquidate, it’s always an option. With proper planning, this shouldn’t occur.

Since the start, I’ve added some criteria to narrow down the loans I will lend to / notes that I will buy, to, namely, minimize risk of default, as follows:

– Credit score between 620 to 990
Statistically speaking, folks with fair-to-high scores are more likely / more incentivized to pay on time keep their scores high. The lower the score, the less likely timely payments will occur.

– Accept C and D loans
C and D loans offer much higher interest. As an additional variable in this experiment, I’d like to see if C and D class loans will fare better in net total returns (defaults included), then simply going after AA, A, and B class loans.

– Deliquencies = 0
To further minimize risk, I’m only viewing loans / purchasing notes from folks that have 0 deliquences. Chances are – if they’ve missed other loans, they’ll likely late (or just not) pay yours too.

– Bankcard utilization < 90%
A 90%+ utilization usually indicates all other credit lines are tapped out. Chances of an imminent late payment / default is quite high, with just my gut feelng. It’s another setting I’m adding in for risk mitigation – let’s see if it pays off.

So far, all is well with these new loans – but to be very frank, not too much time has passed at all (i.e. less than 3 months) since I’ve implemented these changes, so I will write again around Q3-Q4 of this year with the results, regarding:

– Net Results from Q3 2014 (since changes were started) to Q3-Q4 2015
– For loans that defaulted, what were their common characteristics? Maybe C & D loans are still a bad risk, regardless of credit score, and having no deliquencies?

Stay tuned!

~ Steven W. C.