Apr 22 2008
Prosper Results
How much money can you make at Prosper.com? Is it a good investment option?
At this point I consider www.Prosper.com a high risk, low return investment. Normally, high risk has some potential for high return, but after reviewing the information below, you may wonder about Prosper. I’m sure you’ll find other sites and blogs claiming Prosper is a great financial investment. But that’s not my experience.
If you’re thinking of investing in Prosper.com and think you can out-perform the statistics, consider the following data from Prosper’s portfolio plans. The results are based on 15% interest rate loans but no other conditions were included.
| Credit Rating | Estimated Loss | Adjustment | Service Fee | Estimated Return |
|---|---|---|---|---|
| AA | -3.65% | -0.19% | 0% | 11.16% |
| A | -6.11% | -0.38% | -1.00% | 7.51% |
| B | -10.63% | -0.71% | -1.00% | 2.66% |
| C | -15.55% | -1.23% | -1.00% | -2.78% |
| D | -17.92% | -1.60% | -1.00% | -5.52% |
| E | -29.69% | -2.87% | -1.00% | -18.56% |
| HR | -45.24% | -4.30% | -1.00% | -35.54% |
.
What does this mean? If you bid on a loan at 15% interest for a borrower with a B credit rating, you could expect a return of 2.66% based on the average results for all B credit ratings.
How did it go from 15% to 2.66%? The estimated loss for B credit ratings is 10.63%, and when we subtract the adjustment and service fee, we end up with 2.66%. If you expect anything better, you’re being optimistic.
What makes the scenario worse is that it’s not easy to find 15% loans from borrowers with AA and A and even B credit ratings.
Another scenario
As of 4/21/08, 13.94% of all Prosper’s 21,334 loans are 1+ month late or have already defaulted. (Let’s conservatively assume that 1+ month late loans will eventually default).
If you invest $2500 in 50 loans for $50 each at a rate of 20%, then based on Prosper’s overall loan stats, you will have 7 loans default (13.94% Prosper default rate x 50 loans = 7 bad loans). Of course, this is hypothetical as the actual default rate depends on many other factors.
| Summary Data | |
|---|---|
| Investment Total | $2500 |
| Number of Loans | 50 |
| Loan Amount | $50 |
| Interest Rate | 20% |
| Loans that will default | 7 |
| Good loans | 43 |
What’s your net income?
Income: 43 good loans x $50 x 20% = $430
Loss: 7 bad loans x $50 = $350
Net: $430 - $350 = $80
Rate of return: $80 / $2500 = 3.2%
You can get online savings accounts with rates better than that. But this is a very optimistic scenario; you probably won’t get an average interest rate of 20% from borrowers with good repayment history at Prosper. If you average anything less than 15%, you’ll probably lose money if you wait long enough - based on Prosper’s own data.
For now, I’ve stopped prospering at Prosper.com.
