Prosper.com announced today that they have lowered interest rates across the board for all new loans. You can read the official press release here. I received an email from Prosper this morning with the news – here is an excerpt from that email:
In order to keep up the momentum and ensure our rates remain competitive, we are lowering our borrower rates – particularly for the highest quality borrowers where rate competition is most fierce. Attracting great quality borrowers is critical to delivering strong lender returns over time, and these changes will ensure we can do that while continuing to deliver fantastic risk adjusted lender returns.
The higher grade borrowers will get the most benefit but every new borrower will now be paying less for a Prosper loan. The new rates are very low, starting at just 4.99% for a AA rated loan, an amazingly low figure for an unsecured loan. For comparison here are Lending Club’s interest rates; they use a different rating system so we can’t really compare apples to apples but we can say that Lending Club’s interest rates range from 5.42% to 21.59%, a much tighter range than Prosper’s 4.99% to 31.99%. Here is the link to the page with Prosper’s new rates and below is a table that shows the differences between the old and new rates.
|Prosper Rating||Term (yrs)||# Previous Prosper Loans||Old Rate||New Rate||Difference|
As you can see Prosper has lowered borrower rates by about 1.5% on average, quite a significant move. Of course, one has to wonder why make this move now? We can probably guess the answer to that. Regular readers will know that Prosper changed their lending model a few weeks ago and since that time the number of loans available has dropped dramatically. I have checked the listings almost daily since the change and they have been averaging about 20-25 loans available to invest in at any one time with the bulk of these loans the risker, higher yield loans.
Will P2P Lenders Invest in These Loans?
The big question is now, will anyone want to invest in a 4.99% one year loan. With the 1% loan servicing fee that means a return of 3.99% for investors. A federally insured 1-year CD can yield 1.4% today according to bankrate.com. Will investors want to take the extra risk for another 2.6% return? Prosper obviously thinks they well.
Here is my take. There are many automated investing plans on Prosper and these people never even look at the loans they invest in. I think Prosper is counting on these automated plans to invest in these low interest rate loans. The investor who looks at each individual listing and cherry picks the loans they want will likely shy away from such a small return. Right now there is an oversupply of investors on Prosper and not enough loans. This move should increase the supply of loans available. But I have to wonder this: will investors be happy with their returns on money invested today come 18 months or two years down the road?
Prosper clearly had to do something to increase loan supply and this was probably the easiest move. I hope it works out for them and all their investors because it will certainly work out well for the borrowers.