For example, how many of these loans have historically defaulted? Generally, the higher the credit grade, the higher the return. However, when creating a portfolio plan in Prosper, you can easily score a higher return with a lower credit grade by adjusting constraints such as the debt to income ratio, loan amount, now delinquent, delinquencies in the last seven years, annual income, employment status, etc.

One of the many new features with the customizable portfolio plan creator is a neat little section off to the right when you add a “slice” to your plan. For starters, it will allow you to place the minimum bid rate you are willing to achieve on any particular loan.

Okay, so this isn’t anything new — we’ve seen this before using Prosper’s old standing order function. What is important is the fact that Prosper has been around long enough that they now have a realistic grasp as to what the loss on ROI will be given historic loans made that fit your specific criteria. It takes many months and loan samples before realistic returns can be projected.

With this data, Prosper can now calculate the following:

–Estimated loss due to default
–Adjustments likely to be made over the course of the loan
–Reduce return on investment for servicing fees.

Then, once you have your lending criteria defined, you can click on the “calculate” link to find out what your estimated return will be. (See chart below)

Now, lenders can go back and mess around with numbers and constraints to see how the returns will adjust. For example, I tend to see the estimated return rise significantly if the borrower has no delinquencies, is employed for at least two years, and has a debt to income ratio below 50%. Of course there are other important factors that will increase your projected return. I have enclosed my own personal lending criteria as a guide to get you started.

If by chance you tweak the constraints to allow for a higher return without adjusting the minimum bid rate, please let me and the rest of the Jutia Group readers know, we’re all in this to make money together and perhaps you found something I overlooked!

Personally, I will only lend to borrowers with credit grades of AA, A, and B. I’ve had some poor results with those who tend to fall closer to the subprime borrowing mark.

Overall, lenders now have the ability to chart a path toward realistic returns. No longer can lenders expect to lend to someone who is willing to pay 20%+ interest and expect that in general they will honor their obligations and pay them in a consistent manner. Defaults can really kill your return. With the calculator tool, discussed above, we now have the knowledge and ability to make better lending decisions.

Wishing you many profitable loans,
Stephen Oakes

Perhaps like you, I didn’t have the time of day to search through the thousands of borrower listings that had the potential to be lent to. For about a year, I had used the standing order option to basically automate all the lending and bid on behalf of my own personal lending constraints. This was a great way to continually find the best deals – even while I was asleep at night. Every month, money would come into my account in the form of principal and interest payments, and then the standing order would re-lend everything out again. It was a great cycle of wealth just sitting on autopilot.

Then one day – poof! My standing order option was gone. Maybe I missed the memo, who knows. But what on earth had happened to the standing order? Well, I got in touch with my contact over at Prosper HQ and found the answers I was looking for.

What was a desperate situation turned out to be even better than I imagined…

I was told that the standing order function was basically rolled right into their Portfolio Plan option. It’s a simple tool that allows you to build your own lending plan (similar to a typical standing order). Or, you can choose to have Prosper build a portfolio for you based on your risk tolerance.

Either way, the added functionality will and has already begun to empower Prosper members like never before. In my next post, I’ll be going into great detail as to how you can set up some of the best portfolio plans and discover your true rate of return.

Stephen Oakes

Chris Larsen, CEO of Prosper, recently called me to discuss his company and some of the exciting new developments in the works.

Following the conversation, I thought a bit about my first impression of Chris. I can tell you first hand, the guy is a straight shooter who knows the lending business inside and out. What separates his company from the typical establishment is his love for the individual and community.

“Peer-to-peer borrowing/lending is the purest form of capitalism,” said Larsen.

That’s why after founding E-Loan in 1996, he chose to focus on an entirely new approach to lending. After taking E-Loan public in 1999 and watching it become a great success, he decided it was the right time to sell the business in 2005 and create what is now known as Prosper.

“I was frustrated with what E-Loan couldn’t do,” said Larsen. “On one hand people were getting better rates and service, but on the other hand you still had big banking and the well dressed suit type calling shots at the other end of the table.”

So, with Prosper, Larsen saw an opportunity to challenge conventional wisdom. He knew that if the average Joe could become a lender and essentially make higher fixed income returns, it would be an instant hit. Business is booming, and Prosper has plenty of cash on hand to keep the ball rolling.

His critics aren’t laughing now…

Larsen has about 440 small loans in which he lends money out to various borrowers. He admits the whole lending process can be quite addicting and that initially his lending activity was driven by high return on investment — stemming mainly from lower credit grades.

“In addition to high ROI, I look at the borrower’s delinquency history and if they are connected to a respectable group within the lending community. With the right endorsement, I’ll lend money out to those with poor credit ratings, even HR (the lowest credit rating given to a borrower).

The great thing about Prosper is that it’s a wonderful tool for building wealth and connecting with other individuals in the community. There is a learning curve, and it takes time to become a seasoned lender. Everyone has their own risk tolerance and investment philosophy. Many people adjust their strategies as market conditions change.” – Larsen

When asked what his biggest blunders were in becoming a lender on Prosper, he responded by saying that he initially only looked at ROI and the story people were telling in their profile.

I expressed my concern about the security of funds and loans made within the Prosper account. He assured me that there was nothing to worry about.

In fact, given the unlikely event that Prosper were to cease operations, the loans made would be transferred over to another managing entity. Also, the money in lender accounts are FDIC insured and are currently backed by the trust account Prosper has with Wells Fargo.

My Prosper Interview with Chris Larsen:

S.O. – Could you please introduce yourself and how you came up with the idea for Prosper?

C.L. – Chris Larsen, Co-Founder and CEO of Prosper. The idea behind Prosper really stems from my experience as co-founder of E-LOAN. At E-LOAN, we were able to fundamentally change the mortgage, home equity and auto lending process and experience for the benefit of consumers. By putting people in control of both sides of the transaction – the lending side and the borrowing side – Prosper takes the idea and vision behind E-LOAN to the next level. In many ways, Prosper is really the Web 2.0 version of E-LOAN.

S.O. – What new features are you currently working on at Prosper?

C.L. – Right now we’re really focused on improving and simplifying the borrowing and lending experience on Prosper. In terms of features… there are a number of things in the pipeline that we think the Prosper community will like… particularly lenders.

S.O. – Do you think growth will be slowed with current sub-prime lending fears?

C.L. – We actually think the environment is constructive to the Prosper marketplace. As consumers are being hit with the evaporation of introductory credit card rate offers and home equity loan options, Prosper is becoming an even more attractive financing alternative, particularly for more creditworthy borrowers. At the same time, lenders on Prosper are steering their bids toward borrowers in the higher credit categories and being far more cautious about chasing higher rates offered by subprime borrowers.

S.O. – Can we expect to see lending beyond the $25,000 limit?

C.L. – There’s really nothing stopping us from raising the limit; but at this stage, we think the $25,000 limit makes sense from a market liquidity perspective.

S.O. – Are there any plans to provide lenders the option to invest in secured loans?

C.L. – We don’t have any near-term plans to expand the marketplace to include secured loans… but down the road it is something we might experiment with.

S.O. – Have you met any resistance from the traditional banking brick and mortar establishment?

C.L. – We’ve actually received a pretty warm reception… one of fascination and interest. In fact, the FDIC had us present at their inaugural committee meeting on economic inclusion.

S.O.- With other players entering the peer-to-peer U.S. market (Zopa, Lending Club, Loanio, etc.); what do you think will provide Prosper the edge in regards to market share?

C.L. – Certainly being the largest marketplace in terms of liquidity, volume, performance data and VC backing has its advantages; but we don’t really think about other peer-to-peer players as competition. New players entering the market should help validate and build the people-to-people lending market as a whole.

S.O. – Is Prosper available only in the U.S.? If so, are there any plans to expand into other markets?

C.L. – Currently, we’re only in the U.S.; however, last month we announced an agreement to form a joint venture with SBI (formerly Softbank) to facilitate the launch of Prosper in Japan and explore other Asian markets.

S.O. – Do you foresee going public with Prosper anytime in the near future?

C.L. – We get this question a lot… but in all honesty, it’s really not where our head is at right now. We’re really focused on continuing to build the business and having raised $40 million, we have plenty of money in the bank.

Special thanks to Chris and the Prosper team!
Stay tuned for more…

Well, the response just came in and I was shocked to discover that they do in fact have these options built in. the problem was that all of their search windows were already expanded. However, the more options section was not automatically expanded. So, I figured that was all I had to work with.

In the chart below you will notice the section I overlooked time and time again.

Here’s an expanded view. The picture had to be minimized to fit on the site. I simply wanted to illustrate the closed and expanded format.

With these options I expect less delinquencies coupled with slightly lower rates — which is fine.

I started paying attention to the title of the loans that borrowers create when trying to attract potential lenders. It seems that hyped up titles can give clues as to the nature of the borrower.

I can’t tell you how many times I’ll received some type of bogus advertisement in the mail and everything just explodes off the page. One word immediately jumps in my mind — SCAM.

All the letters are capitalized, exclamation points are everywhere, and usually when something appears to be fluff — it is.

Here are some titles to the loans considered late in my portfolio:

–RELIST-PLEASE HELP-LOAN FOR GRANDDAUGHTER-SHOOTING VICTIM (C-credit)
–Firefighter wants to pay off debt & pay for son’s dental! (C-credit)
–Life Change!! (C-credit)
–Please help with Business Expansion!!! (B-credit)

Now, this may be just coincidence, but what if it’s not. I know this is not the case with every loan, but it may be wise to reduce your risk by paying special attention to titles with high risk of default.

It wasn’t too long ago that I hinted my concern for these lower credit borrowers. In response I have begun lending to only AA, A, and B borrowers. In the graph below you’ll notice that of my 66 loans, only 57 are current.

In the past month alone eight out the nine late loans are “C” rated borrowers.

I also give you a picture of my current portfolio distribution. Obviously I invested heavily in the “C” range, which accounts for a little over 50% of my entire portfolio.

The fact that many of these “C” rated borrowers were late had me worried, so I decided to go on a little fact-finding mission to see if there was a common flaw in each of these loans. Remember that for all of these loans I used a standing order with specific lending constraints/criteria and did not personally select which loans to lend money to.

Here are the five loans labeled as being one month late:

Late Loan One
-One current delinquency***
-56% debt/income ratio
-Bank account not verified***
-Employed one month***
-Bankcard utilization (12%)

Late Loan Two
-Two current delinquencies***
-5% debt/income ratio
-Bank account and home verified
-Employed nine months
-Bankcard utilization (0%)

Late Loan Three
-Four current delinquencies***
-20% debt/income ratio
-Bank account and home verified
-Employed five years & nine months
-Bankcard utilization (0%)

Late Loan Four
-No current delinquencies
-20% debt/income ratio
-Bank account verified
-Employed three years & five months
-Bankcard utilization (89%)***

Late Loan Five
-No current delinquencies
-35% debt/income ratio
-Bank account and home verified
-Employed five years & one month
-Bankcard utilization (18%)

Note: *** Represents Unfavorable Statistics

It seems that the underlying trouble with these loans stems from the fact that these borrowers either have a history of delinquency or carry too much credit card debt.

Perhaps Prosper will build their standing order screen to include those will no current delinquencies. I believe this function alone would reduce all late loan by half. Lending to those who actually care about their credit score makes sense.

Any thoughts?

This site appears to be completely independent of the main site Prosper, yet it tracks every user on the site and also tracks the explosive growth the site has experienced since inception. If you are new to this site there is no need to create a user name or password. On the main index page you can click a link near the pie chart which will take you to an area where you can insert your Prosper screen name. Once you enter this information and click to proceed further you will then see a pie chart of your own lending activity.

So by now you’re probably thinking just what exactly do these charts display?

On the pie chart you are given a breakdown of all the loans you have made, which ones are current, late, defaulted, etc. Each section being broken down by a different shade of color and in direct proportion to the value as a percentage of total loans made. Furthermore, there is an easy to read breakdown of each loan which shows the current payment status, interest rate, and borrower risk rating.

This site is not just about graphs though.

You can research different lending strategies, see what other prominent and more experienced members on Prosper are doing with their money, and even see the amount lent out by the top ten lenders on Prosper which range from approximately $100,000-$900,000.

So, if you are still cautious on joining Prosper think of those who have en enormous amount of wealth and confidence tied up in personal lending site that is growing by an average of 450 members per day.

Personally, I have been a Prosper member for about two months now, made 32 loans at $50.00 each currently earning an average of 19.7% interest rate, and have had a very positive experience to date as all loans are current in their payments. I find it to be a great tool that compliments my investment portfolio and provides a stable flow of passive income.

Why Prosper.com Will Succeed & Why Prosper.com Will Fail by Justin McHenry over at Zen Personal Finance.

Apparently Mr. McHenry is taking the approach of a skeptic who is caught on the fence. I appreciate his honesty in admitting to not knowing whether or not Prosper will be a hit here in the United States after following the lead of a similar British business model named Zopa which has been a smashing success.

Although it is more enticing to read an article where the author makes a black and white argument, you walk away feeling like the ball is in your court, but that the jury is still out. Besides, why would one person sway your decision without viewing the evidence yourself?

I personally enjoyed reading through the comments of those who have tested the system and can bring their experiences to those who may still have their doubts. Many of my recent posts have been on Prosper because I want to find answers and experiences that I can share with you.

Let’s hope the niche experiment known as Prosper.com lives on. Live well and prosperous!

Who can borrow?
Any adult US resident with credit score of 520 or higher can create a listing for a loan on Prosper. After passing identity and fraud checks, borrowers can request unsecured loans from $1,000 to $25,000 at rates they select.

Who can lend?
Any adult US resident can lend money to others on Prosper. After passing Prosper’s identity and fraud checks, lenders offer money to borrowers at rates they select.

Why is this safe?
Ensuring that your data is private and secure is our highest priority. Our rigid privacy policy protects your personal information, and our secure servers make sure it’s protected from theft.

How much does it cost?
We charge borrowers a 1-2% loan origination fee, and lenders are charged a 0.5-1% annual servicing fee, depending on the borrower’s credit grade. (Source: Prosper)

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!

I made eight loans at $50.00 each with an average annual interest rate of 16.90% to test the system. All loans are current as the (AA-C) borrowers seem to be having no difficulty thus far in paying their debts. Next on the agenda are five more winning bids for loans that are currently in the approval process at an average interest rate of 17.78%.

Initially I set out to only loan to (AA-B) borrowers but decided to lend to C rated candidates if they had a low debt to income ratio and could easily afford to pay down the debt.

We’ll see how everything progresses in the months to follow and so far it has my two thumbs way up.

Good Investing…

Here is a post on the topic at Investor Geeks:

“My risk-adjusted return at Prosper is about 10%, BTW. 80 loans currently. No defaults, had a few lates though, and several people have paid me back in full already.”

Also, you may want to visit Tired But Happy This is a personal story of someone who is writing in detail about their own experiences in using Prosper. Here’s a sample:

“My fourteen loans total $689, and return an average interest rate of 12.26%. So far, I have two borrowers make late payments.”

If you have any experience in using Prosper please send your comments this way!!!

Good Lending…

Looking for a way to consistently make 10% or more on your money? I recently stumbled across Prosper, a site built to provide individuals with the tools to become a lender and/or borrower of funds.

The process cuts back on the high personal loan rates for the borrower. At the same time, it provides lenders with a forum to receive passive income in the form of interest payments on the loans they make.

The best part is that you can diversify your investments, if you are a lender, so that you are protected in the event someone defaults on their payments.

Also, you can choose who to lend your money to. Screen out applicants by their risk grade, or the yield you’d like to make, and read up on the borrower as well.

Brilliant!

I have already signed up and plan on testing the waters by making my first loan for about $50. If everything goes as planned I will begin diversifying my risk by lending to more people in increments of $50 per person.

This is a great way to diversify any investment portfolio, especially if you have a need for passive income.

More on this topic soon!

About Prosper:
Prosper, America’s first people-to-people lending marketplace, was created to make consumer lending more financially and socially rewarding for everyone.

The way Prosper works is intuitive to people who have used eBay. Instead of listing and bidding on items, people list and bid on loans using Prosper’s online auction platform.

People who want to lend set the minimum interest rate they are willing to earn and bid in increments of $50 to $25,000 on loan listings they select. People who lend can easily diversify using “standing orders”, which automatically make many small loans to different borrowers.

In addition to criteria commonly used by institutional lenders, such as credit scores, people who lend can consider borrowers’ group affiliations. Groups on Prosper are critical to bringing people together for the common goal of borrowing at better rates. Groups earn reputations according to their members’ repayment records. Groups with successful repayment histories should attract more lenders offering lower rates.

Borrowers create loan listings for up to $25,000 and set the maximum rate they are willing to pay a lender. Then the auction begins as people who lend bid down the interest rate. Once the auction ends, Prosper takes the bids with the lowest rates and combines them into one simple loan. Prosper handles all on-going loan administration tasks including loan repayment and collections on behalf of the matched borrower and lenders.

Prosper’s rigid privacy policy reflects co-founder and Chief Executive Officer Chris Larsen’s longstanding history as an advocate of stringent consumer financial privacy protection laws and practices. Prosper does not sell, rent, or share members’ personal information with third party marketers. Prosper members are in control of how much personal information—if any—is revealed on the website and with other members. Prosper’s security and identity verification systems are state of the art, and consistent with those used by banks, brokerages and institutional creditors.

Prosper generates revenue by collecting a one-time 1% fee on funded loans from borrowers, and assessing a 0.5% annual loan servicing fee to lenders. Backed by Accel Partners, Benchmark Capital, Fidelity Ventures, and Omidyar Network, Prosper has raised approximately $20 million. Prosper’s marketplace platform is patent pending. (Source: Prosper)