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A Look Back at Prosper 1.0 – How Relevant are the Numbers?

by Peter Renton on February 13, 2012

Prosper launched with great fanfare back in 2006. For the first time in this country individuals could act like a bank and earn money from lending to their fellow Americans. Little did anyone know what would happen over the next three years.

It sounded like a great idea at the time I am sure – let the crowd decide what interest rates to charge and allow subprime borrowers to take out loans. But with hindsight we now realize it was a shaky premise. Even before the financial crisis hit Prosper was dealing with default rates well above their expectations. When Prosper closed down for their quiet period in October 2008 most investors were losing money on their investments. This first iteration of Prosper from 2006 until 2008 is what we call Prosper 1.0.

All Prosper 1.0 P2P Loans Have Matured

The last loan issued in Prosper 1.0 was in October 2008 so all of those loans have now reached maturity (they only issued three year loans). When we look at all Prosper 1.0 loans on Lendstats we see that Prosper issued 28,936 loans with 18,480 fully paid off and 10,456 loans that defaulted. This represents a default rate of 36.1%. In absolute dollar terms the performance was a little better (because most borrowers made some payments) – total dollars loaned out was $178,560,222 and total dollars written off was $46,671,123 – a loss rate of 26.1%.

It may surprise you that (also according to Lendstats) many investors actually made money. If you look at all 4,450 Prosper 1.0 investors who invested in at least 100 loans 858 investors had a positive return with the best ROI at 9.8%. How did these people make decent returns when most investors lost money? They avoided the higher risk loans. There is a table from Prosper’s statistics page that gives some detail behind the numbers but below is a chart based on data from Lendstats that breaks down ROI by loan grade.

As you can see the best returns on average were for those investors who stuck with the higher (AA, A and B) grade loans. In fact the graph is pretty much linear – the more risk you took the worse your returns were.

What is fascinating to me is that in Prosper 2.0 the exact opposite is true. Investors have been rewarded for taking more risk and those who stuck with AA loans have actually done slightly worse in 2.0 than they did in 1.0. The chart below shows the ROI on Lendstats for loans that originated from July 2009 until the end of December 2010. We should note that these loans are not mature – they are around 20 months old and so their final ROI will likely be somewhat different. Regardless of the final numbers I think it is safe to say that the relationship between risk and reward for investors completely shifted with Prosper 2.0.

Comparing the Loan Data for Prosper 1.0 and 2.0

When you take a few minutes to look inside some of the loan data on Lendstats of Prosper 1.0 and 2.0 you can start to see why these two time periods are so different. Back in Prosper 1.0 credit underwriting standards were much less stringent than they are today.

Prosper 1.0 (2/06 - 10/08)Prosper 2.0 (7/09 - 12/11)
Number of loans 28,936 18,914
ROI-4.67%9.26%
Interest rate17.29%20.42%
Loan size $6,171 $5,867
Number of inquiries2.91.0
Current delinquencies23%14%
DTI39%24%
Revolving debt $19,667 $18,714
Minimum credit score520640

You can see that on average we are looking at a very different group of borrowers today. Look at their credit data: they have less credit inquiries, a smaller percentage have current delinquencies on their credit report and they have a lower debt-to-income ratio. At the same time they are paying an average of 3% higher in interest.

Probably the biggest difference is that the credit scores minimum has changed. In Prosper 1.0 there were 3,448 loans issued to borrowers with a credit score below 560 and these people defaulted at a rate of over 60%. In Prosper 2.0 the minimum credit score is 640 (for new borrowers) and this factor alone has lead to far fewer defaults.

What Can Investors Learn From Prosper 1.0?

On Prosper 1.0 there were over 50,000 investors and the vast majority of these people lost money. On Prosper 2.0 there are currently over 22,000 investors so it is clear that most 1.0 investors have not come back and invested in 2.0. When you look at the total number of investors who have ever invested in a Prosper loan that number is now over 60,000 – so Prosper has gained around 10,000 new investors since relaunch and 12,000 Prosper 1.0 investors have made a new investment in 2.0.

It is clear that many investors have not forgiven Prosper for their mistakes in 1.0 and that is understandable. I think the real lesson here for investors is to be cautious when starting a new investment. When Prosper began p2p lending was so new that there was simply no track record and with no track record it stands to reason that it was a high risk investment.  While an investment in Prosper loans is certainly not without risk today, there is at least several years of historical return data to analyze now. But If you look too deeply into the numbers for 1.0 you risk coming to some incorrect conclusions.

I know many investors are still sitting in the sidelines waiting to see what will happen with Prosper. Will they keep growing? When will they become profitable? Will these good returns maintained? When these investors decide to invest and start analyzing the Prosper data I think they should give far more weight to the Prosper 2.0 numbers.

I am interested to hear what others think. Were you an investor in Prosper 1.0? Did you change strategies when investing in 2.0? Please leave your thoughts in the comments.

{ 54 comments… read them below or add one }

Peter Renton February 22, 2012 at 3:54 am

@Chris, Thanks for letting us know directly. I know for me I have had more AQI notes come through in the last few days so the changes seem to working. I will have a post out about this change later today.

Reply

Commenter on Prosper.Com February 22, 2012 at 10:12 pm

I am being screwed over by Prosper because they refuse to simply do something small as there is no money in it for them, therefore they have absolutely no motivation. I have created a change.org petition in hopes of drawing some attention to the matter. Please consider checking it out and signing it. Thanks. http://www.change.org/petitions/prosper-marketplace-inc-prospercom-san-francisco-ca-94104-forward-settlement-offers-from-defaulted-borrowers-to-the-lenders

Reply

Peter Renton February 23, 2012 at 2:57 pm

@Commenter, Well to say you are “being screwed over by Prosper” I think is a little harsh. How much money are we talking about here? I imagine it would a very tiny percentage of your portfolio.

Having said that, you do make a valid point. If a borrower has defaulted and wants to repay their loan they should be able to do so and the lenders should receive the money. I just don’t know of any instance when this has happened but it sounds like you have seen this first hand.

Reply

Roy S February 23, 2012 at 7:40 pm

@Commenter, I am trying to figure out what your complaint is about. I would think that it would be in Prosper’s best interest to recover as much of investors’ principal from defaulted loans as possible. Not only does it keep their advertised ROI higher, but investors can then reinvest in other loans (creating another revenue stream) and Prosper takes their 1% servicing fee on top of it. It seems to me that it is in Prosper’s best interest to try to collect whatever money they can from borrowers.

Really, from the way everything you have written it seems that you are not a lender, but a borrower. If I am right: The only real power Prosper has is the threat of reporting your default to the credit bureaus. You should know that a settlement will also adversely affect your credit, though not as much as a default/bankruptcy.

One of the unfortunate things about the current set-up is that the system is not as “social” as I would prefer. I know that barrier is there to protect both the lenders and borrowers (as well as Prosper), but it becomes just as impersonal as dealing with banks. From an investors end, we can only hope that both Prosper and the borrowers show good faith when the unfortunate scenario of late payments and defaults arise. But I have know knowledge of what happens once a Note goes late. I have seen how LC has a comment section with more detailed information and payment plans, and I do wish that is in the works or is on the list of changes Prosper plans on implementing in the near future.

I wish you luck in getting your issue resolved. Unfortunately, I must decline signing your petition as it is too vague for me to understand the exact issue you are dealing with and my lack of knowledge/experience with what I think I understand to be your grievance.

Reply

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