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The Difference Between Seasoned and Total Returns on Prosper

by Peter Renton on August 3, 2012

Seasoned only verses returns for all notes on Prosper.com

When investors login to their Prosper account they are greeted with a box similar to the one above. If you have been investing for more than 10 months then you will likely see two numbers in the Annualized Return box: Seasoned Only and All Notes. What is the difference?

Prosper believes that a note becomes “seasoned” once it is 10 months old. This seemingly arbitrary number of 10 months is based on their research of determining when a loan is likely to become stable – in that the likelihood of a default diminishes. While not all defaults occur in the first 10 months Prosper’s opinion is that this is a good cutoff number to provide for investors.

Here is the official explanation from the Prosper site:

The return that you earn on your Prosper investments is based on the lifecycle of the underlying Notes. Because a Note cannot default until it’s missed five payments, your return for the first four months will be based entirely on those loans that remain current. This can result in a temporarily higher return than should be expected for young portfolios.

As Notes age, you may see initial defaults between their fifth and ninth months – based on our own research, our Note returns show increased stability after they’ve reached ten months of age. For that reason, we define “Seasoned Return” as the Annualized Return for Notes aged 10 months or more. We encourage you to pay closest attention to your Seasoned Return when evaluating the performance of your portfolio.

Seasoned Returns Will Be Closer to Your Long Term Return

I actually like the seasoned returns number because it eliminates the artificial bump that investors get from having a young portfolio. My seasoned returns (shown above) have typically been 3-4% below my total return and I believe it gives me a better indication of my long term returns. My goal with my Prosper account is a 15% return and the seasoned returns number lets me know if I am on track with that goal.

But I do wonder if it confuses casual investors to see two different return numbers there. Lending Club ignores the concept of seasoned returns and just displays the return for all your notes including the brand new notes in your portfolio.

The concept of seasoned returns is consistent throughout Prosper. You look at their home page and they show a seasoned returns number (10.02% as of today) and this is displayed throughout their marketing material. In essence they are trying to give the investor a more realistic expectation of what they can expect going forward. One point to note is that the return numbers on Prosper are not updated every day. They were being updated weekly for most of this year but since June it has looked like they have gone to a monthly update. I would like to see a consistent update schedule, at least on a weekly basis, so investors can see how they are doing.

What do you think? Is having two separate return numbers confusing or do you like seeing the different numbers? As always I value your opinion so please let me know in the comments.

{ 9 comments… read them below or add one }

Michael August 3, 2012 at 9:11 am

The seasoned metric is great! If you are a Lending Club and want to see your “seasoned ROI” I have this feature built into the portfolio analyzer: http://www.nickelsteamroller.com/blog/2012/02/seasoned-loans-for-lending-club-investors/

Just a warning though, my portfolio analyzer will discount late notes so in realty it’s even more accurate than the Prosper Seasoned ROI.

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Peter Renton August 4, 2012 at 1:08 pm

Thanks Michael, that is a great point. Lending Club investors can easily find out their seasoned returns at Nickel Steamroller.

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Neal S. August 3, 2012 at 10:38 am

I agree with Michael’s portfolio analyzer approach. If I understand the Prosper seasoned return calculation, they value a loan at 100% of remaining principal, even if it is in collections. That will tend to overstate returns, even seasoned returns.

It seems to me a statistician could calculate an expected loss for every loan, based on age, Prosper rating and payment record. A seasoned, 10 month old loan with a perfect track record is worth more (as a percent of remaining principal) than a 5 month old loan with a perfect track record, which is worth more than a 1-15 day late loan, which is worth more than a loan in collections.

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Michael August 3, 2012 at 11:04 am

Neal S,
It would be super easy. All they would need to do is develop a loss curve.

Just looking at the current recovery rates on Lending Club you can do a quick polynomial fit:

y = 2E-06×3 – 0.0003×2 + 0.0178x

The highest power is 3 so we get an s-shaped curve. y = loss and x = days past payment due.

Subtract the loss from the gains and you would have an almost exact ROI. I think we all know this would never happen. It would not be advantageous from a marketing perspective but it would also eliminate the ROI jumping all over the place when defaults happen.

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Danny S August 3, 2012 at 2:05 pm

I only invest with LC, not Prosper, and Nickel’s website is the only site I use to determine my returns.

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Roy S August 3, 2012 at 4:35 pm

I don’t really pay attention to the ROI posted by Prosper. It is continually about 1.5% below my NAR using the XIRR function in Excel (12.5% on Prosper to 14% in Excel). For me, anything over 10% is on-target, so by all measures I am performing above expectations.

I don’t think posting two numbers is confusing. The issue is that it is really difficult to measure one’s ROI until after the Note has either been fully paid off or defaulted. In addition, I haven’t seen anywhere that they use different calculations based on the term of the Note. I’m assuming 10 months works for 36 month Notes. But does it also work for the 12 and 60 month Notes? Or do the seasoned returns need to be adjusted based on the term of the Note?

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Karen Slater August 3, 2012 at 6:38 pm

I, too, would like to know what the seasoning period is for a 60 mos. note from Lending Club.

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Peter Renton August 4, 2012 at 1:16 pm

Roy/Karen, Prosper only provides one seasoned returns number they do not break it out between loan terms. I think that 60-month loans would have a different seasoning period. Maybe Michael from Nickel Steamroller can add this in to the portfolio analysis on his site…

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Roy S August 4, 2012 at 2:38 pm

I didn’t mean to imply that they should provide us with different seasoned return numbers. I was just curious if they had a different seasoning period for 12-, 36-, and 60-month Notes or whether all Notes (regardless of term length) were considered seasoned after 10 months.

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