Understanding Prosper’s Standing Order:

A standing order is an automatic bidding tool used by lenders, in which the lender authorizes Prosper to place bids on their behalf on loan listings that meet specific criteria.

For example, if you wanted to take $5,000 of your money and invest up to $200 per listing at 7.50% interest in C-graded borrowers, you could spend your time individually seeking these borrowers out and then placing 25 manual bids, or you could create a standing order and have Prosper search them out and place the bids for you.

Every time a borrower creates a new listing, your standing order will check to see if the listing meets the lender’s criteria. If it does, the standing order will bid on that listing on your behalf.

Standing orders are a great way to lower your risk as a lender because instead of one big loan to one borrower, you can create many small loans to many borrowers. Because your risk normally goes down as the number of borrowers you lend to goes up, it is wise to create as many bids as possible. A standing order is just an easier way to do this.

My take:

Manually placing orders has lowered my returns and takes up precious time. Having a system to automatically bid on my behalf has been a wonderful experience. Not only does it seek out ideal loans for me to participate in but also finds those gems that are usually snagged up in a matter of minutes and hours instead of days.

So what is my current criteria? Let me show you, but first realize that my risk tolerance may be more or less than yours and is for example purposes only. (Source: Prosper)

Take a look at my order criteria. I gave it a simple name “ROI >=18% and then allotted how much in money I am allowing the system to bid on my behalf. At the current time I do not have $5,000 sitting in cash in the account, which is fine. As funds are deposited into the account loans will be made if the criteria is met. As the “amount already placed” climbs from $200 closer to $5,000 I will need to raise the ceiling and allow for more bidding room.

Under “maximum bid per loan” you can choose how much capital the bidding system can use for any single loan. Since I am in the early stages of loan diversification I will use $50. As the portfolio grows in value I will increase this amount to $100, $200, $300…and so on.

Collection agency will give you a choice between two companies to manage your loan defaults if they were to occur. I’m not really sure which one is the best, but Penncro Associates should be fine for the time being.

Now it’s time to get into more specifics:

As you scroll down there will be more options for you to ponder. I chose to only lend out to “AA” and “A” rated loans that yield at least 18% annually. Also, if there are any “B” or “C” rated loans offering a minimum of 20% I’d like to jump in on that as well.

These loans must be relatively safe, especially the lower rated ones. So, I decided to have a debt to income ratio no more than 50%.

The loan amount wasn’t on my list of priorities so I left the field open to all loan amounts.

“% Funded” is a key field because once you place your bid there is often a waiting period (few days) where people jump in and bid on loans. In many cases the borrower will not reach 100% of say $15,000 requested because the terms, reason for loan, and/or rate are not attractive enough to lenders. So, if you place a bid early on your money will be tied up for days if the loan is a dud. That is lost time and capital my friends. Instead, I chose to jump in when the party is already going, but has yet to end. If I get in between 50-100% of funding then I will be fairly satisfied of the probability of the loan being successfully funded and case closed.

Now look to “Automatic Funding.” It is that row with the yellow lightning bolt that says include only. This means that once the borrower gets 100% of his money from lenders, the loan closes and the rate stays “as is.” Under normal circumstances, loans that reach 100% can still serve as an active forum for lenders to sneak in and place lower required interest rate bid and win the loan. Of course a bid war helps the borrower because the rate will fall and more and more lender on the fringe requesting a higher minimum rate are knocked out of the picture. With Automatic funding a lender can avoid all of this and hang on to the advantage.

The final two options allow you to make it mandatory for the borrower to verify his or her bank account and home.

I hope this little tutorial has been helpful to those just getting into the lending game. If you have any questions or have some additional advice to give please share it with the Jutia community!