On Prosper there is one selection criteria that I had all but ignored until recently: previous borrowers. These are people who are on to their second (or third) loan with Prosper. When I dug into the numbers on Lendstats I could see they may be the very best group of borrowers for investors.
Now, I am not just talking about all previous borrowers. I am talking about those that have consistently made on time payments for many months or years. It stands to reason that someone who has always made on time payments would be a good bet for a new loan. The numbers confirm that assumption.
Filtering the Prosper Loan Database
Take a look at this table. I took all the loans from Prosper 2.0 (post quiet period: July ’09 to present) and added several filters to see the impact on the ROI.
|All loans||Inq - 1, DQ - 1||C-HR Loans||C-HR PB Loans|
|Avg Interest Rate||19.1%||17.7%||26.6%||26.5%|
|Avg Loan Age||9.3||9.3||8.7||8.7|
Let’s take you through each column. The first column is for all loans originated from July 1, 2009 through May 2011. As you can see there has been a total of 10,456 loans giving an estimated ROI of 9.8%. Then in the next column I added two filters, a maximum number of inquiries of 1 and a maximum number of current delinquencies of 1. We want to filter out those people who may be out shopping for a lot of credit and also those who may be starting to get into financial trouble.
Then to bump up the interest rate and ROI I took that same group and just looked at all the loans for borrowers with a Prosper Rating of C and below. You can see that the estimated ROI jumped from 10.1% to 15% but defaults went up as well.
Default Rates Under 1%
Now, here is where it got interesting. When I included only good previous borrowers (PB) you can see the ROI jumped dramatically. By good borrowers I mean those people who have had at least 24 months of payment history on their previous loan with a maximum of one late payment. Here is a link on Lendstats to that query. What surprised me most was that the default rate dropped from 3.7% down to 0.9%. Before someone says that these loans are still very young and defaults will likely rise, I do realize that. What interests me most is how much better good previous borrowers are relative to the loan pool as a whole. This is why I believe they are good loans to invest in.
After doing this analysis I have setup a new automated plan on Prosper to find every loan that meets these criteria. I am so confident that this is a good way to go I have bumped up my investment per loan to $50. But you don’t need to take my word for it. Explore the numbers for yourself. Ken from Lendstats has several new filters (PB12, PB25, PB36) based on length of payment history of previous borrowers. Or you can make up your own filters like I did.
Unfortunately Lending Club does not offer this as a selection, so we can’t chose loans based on previous borrower history there. Although I am guessing they will add that at some point. I certainly hope they do.
Anyway, I will be curious to hear what others think. Have you been investing in previous borrowers on Prosper? If not, do you think it is a good idea? Let me know in the comments.