I hope you are all enjoying Prosper Week. Today we are going to look at my lending past. This is ideal timing because I currently have made 98 loans (and with 9 pending verification, it could be 100 by the time you read this). Also, my first loan is a year old.
That first loan is very interesting in that shows where I started. It is a C grade credit score with a 19% debt to income (DTI) ratio. I’m making a whopping 12% interest rate on the $100 investment. All the Prosper lenders reading this right now are probably cringing. I don’t know why I put $100 in my first bid. It gave me no diversity at all. More importantly, I needed to get a higher grade or a higher return. Nowadays, I have to think twice before bidding on a C loan at 20%.
I took two months before placing my next loan on Prosper. I didn’t have the spare income to devote. When I did put in another $200 in my account I made a $50 loan and then bumped it up to $100 again. At least this second $100 went to a C grade borrower with a 10% DTI at a 23% interest rate. Happily both of my $100 loans are current today. From there I made a pretty silly, but entirely reasonable assumption given the data available to me. I calculated that my actual interest rate was the rate of the loan minus the expected default percentage. So as long as that number was high, say over 15%, I put money there. It hurts for me to even look back on those days.
It only got worse from there. I had been introduced to Eric’s Credit Community. There they have rankings of diversified (25+ loans) lenders sorted by expected return (a monstrously long page, that you can get here, if it doesn’t crash your browser). I realized that if I bid on E grade loans with a 29% interest rate, my number at Eric’s CC would be higher. It didn’t matter if the DTIs were over 100%. I was climbing up the charts and it sure felt good. I’m still in the top 50 on that list.
Now if you’ve been reading the other posts this week, you’ll be aware of Jonathan’s analysis. It’s worth looking at the E rated loans which have -9% interest rate return. This is disastrous on every level.
I’ve turned a corner and tomorrow, I’ll show you how I did it.
I’m looking forward to trying out Prosper.com; but I would like to clear up something about the rate of return people think they’re getting.
If you lend someone money at 15%, you’re not actualy getting that rate on your money. You’re doing the same thing that a bank does when it gives someone a mortgage. With every payment you receive, part of it is interest and the other part principle. When you’re principle is returned, it’s no longer earning interest for you.
This may not be new to some of you, but you can’t just make a loan for $500 and then wait for 3 years. At the end of the 3 years, you won’t have made the 15%. In order to get these outstanding returns, you’ve got to keep reinvesting the money as it comes back in.
By the way, nice site.
Lazy Man says
Excellent point Limeade. I make the assumption that as loans are paid off, lenders are using that money and putting it into new loans. I’ve got just under 100 active loans under my belt, so I have almost a continuous $25 dollars in transit into my account from payments of those loans. That stream gets loaned out with all the other money as soon as I get a chance. I suppose there’s some dead money “risk” in here as well.