Summary
Prosper, similar to Lending Club and other players on the market, follows a simple premise of Peer-to-Peer (P2P) lending practice. Essentially, Prosper serves as a marketplace to match prospective borrowers with investors. And in the process, it vets each loan and its borrower, assigns them a Prosper Rating, and facilitates the loan purchase and repayment.
I started investing in the loans because I want to diversify my previously stock-heavy portfolio, I wanted tap into the large consumer and SMB loan space, and I like the easy to DIY technology with it’s low 1% service fee.
The benefit of Prosper is that it can leverage its massive trove of internal data, combining it with 3rd party data such as the TransUnion FICO data, to create a robust forecast of the risk profile for each borrower and his/her own. With the large selection, you can very easily diversify.
- In terms of the loan purpose, it’s broken out into:
- debt consolidation (approximately 74.7%);
- business use, such as financing their home-based or small businesses (approximately 1.6%);
- home improvement (approximately 9.0%);
- financing of medical/dental procedures (approximately 2.9%); and
- other (approximately 11.8%).
Performance and risk measurement
It’s been difficult to find detailed performance information. The company prospectus said “From July 2013 – Sept 2018, Prosper issued 1,021,874 Borrower Loans, for aggregate proceeds of $13.3 billion, with an average loan size of $12,974. The weighted average investor yield is 13.75%, the weighted-average borrower rate is 14.75%.” Yield and return are different metrics, as we will discuss later. Still, looking at the return by rating data on the website, it makes sense.
However, if you compare the data above to the historical return data in the Auto Invest tool, there’s some discrepancy. In my case, I created a scenario where I allocated 100% of the funds in AA loans. The Historical Returns in the tool are 3.4%-4.9%. Whereas the earlier data shows a return of 5.41%. The discrepancy is partly due to the different time frames used. In the earlier data, the time frame is 2009-2012. Couple things to note. Many of these seems obvious, so people neglect them. First, make sure you are clear on all the different metrics.
Yield: For Prosper’s lenders, this number is the borrower interest rate for the loan or portfolio of loans, minus Prosper’s servicing fee of 1%. Still, not every borrower is able to comply and pay back fully based on the original yield.
Return: Historical Returns are based on actual payments (other than principal) received by the investor net of fees and charge-offs. This is why this number is always lower than the yield for the same loan rate or vintage.
Charge-offs: The remaining balance of a loan that the lender has not been able to collect based on the original loan term. If an account is charged off by the original lender, a collection agency will attempt to recover the remaining amount. Still it represents a loss of economic asset.
Second, past performance doesn’t guarantee future return. Especially as the economic cycles wax and wane, it impacts the loan riskiness. Additionally, Prosper claimed that beginning in November 2015 they made changes that caused more customers to temporarily end up 1-15 days past due. I found it insufficient to justify the large increase in both 1-30 day and 31-120 day delinquencies. I think for the most part the increase in delinquency is correlated with the increase in economic optimism and greater consumer willingness to borrow regardless of their ability to repay. It will be interesting to see how the delinquency rate would trend in 2019.
Third, also fairly obvious, the higher the yield, the lower the return.
The two graphs below show the cumulative chargeoffs for 36-month loans of loans rated AA and loans rated E. Each line shows the cumulative chargeoffs based on a particular vintage. The idea is that over the course of the loans’ life time, you can see how much and how fast the is the chargeoff. The AA loans have little variance between the vintages, and are all below 5%, whereas the E loans vary widely between the vintages between 13% to 25%. What explains the higher yield of E loans is its riskiness. As to the variation, it’s likely due to the economic cyclical movement we noted before, with loans from 2013 having a lower chargeoff rate than the more recent loans.
Financial suitability requirements
To purchase a Note from Prosper, you must meet one or more of the following suitability requirements. For purposes of these requirements, you and your spouse are considered to be a single person.
- (i) You must have had an annual gross income* of at least $85,000 during the last tax year; (ii) you must have a good faith belief that your annual gross income* for the current tax year will be at least $85,000; and (iii) the total amount of Notes you purchase cannot exceed 10% of your net worth**; or
- (i) Your net worth** must be at least $200,000 (or $300,000 together with your spouse); and (ii) the total amount of Notes you purchase cannot exceed 10% or your net worth**; or
- (i) Your net investment*** in Notes cannot exceed $2,500; and (ii) the total amount of Notes you purchase cannot exceed 10% or your net worth**.
How to invest
Recurring Investment (formerly known as Auto Quick Invest) is an automated loan search tool that allows investors to easily invest in Notes that meet their specific investment criteria by automatically bidding any available funds in their account on.
Auto Invest is Prosper’s automated loan search and investment tool, makes it easier for investors to build their desired portfolio of Notes by automatically investing any available funds in an investor’s account in Notes that match the investor’s specified investment criteria and allocation targets.
An investor using Auto Invest is asked to select (i) a loan allocation target, or target mix of loans based on Prosper Ratings, and (ii) the amount he or she wishes to invest per Note.
Transfer funds. In the beta view, the Transfer Funds option is clearly displayed on the top right. On this dashboard, you can also view your current portfolio allocation vs. target, status of the funds, annualized net return, and a few other important items.
See your loan status. I like looking at the individual note performance. In the screenshot below, you see that despite a yield of 10.54%, given its small principle and short loan lifespan, my absolute return is only 0.4%.
Like!! Great article post.Really thank you! Really Cool.