Can You Really Earn 20% at Prosper?

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One of the cool things about Prosper is that every lender and borrower has a unique user name. Well, that is not really the cool part. What is cool is that if you know a lenders user name then you can use one of the third party tools to lookup the details of their portfolio.

Not only that, but pulls in all lender data and allows you to run inquiries against it. Today I decided to see who is doing the best on Prosper since their relaunch. I just ran this query in Lendstats. Basically, I was looking for all lenders who have made a minimum of 100 loans with an average loan age of more than 12 months. I figured that should provide me with the top performing lenders since Prosper emerged from their quiet period in July 2009. The top of the list is a lender who goes by the name of flexible-economy2.

A 20.11% ROI on 100 Loans

Now we know next to nothing about this person, but we can find out the details of his/her loan portfolio. Here is a screenshot I took today from their profile page on Lendstats:

Prosper Lender profile on Lendstats

As you can see flexible-economy2 has an estimated ROI of 20.11%. That is excellent considering that most of their loans are nearly halfway to maturity. With an average Prosper rating of D- flexible-economy2 has taken an aggressive approach to their investing, but has been amply rewarded. They have had 12 defaults (a 12% default rate) but with an average interest rate of 32.58% they have still been able to maintain an ROI above 20%.

With the higher interest rates on Prosper it is relatively easy to get a great ROI in the short term. My own account there is only six months old and on Prosper’s last statement they said my ROI was 23.96%. I haven’t provided details of this investment yet because I consider it too young to learn anything meaningful. After a few more months I will share my detailed Prosper results here.

With Lending Club there is no way for anyone to know the details of any other investors portfolio. Prosper makes this data readily available. I think it is great that Prosper has added this level of transparency so any investor can see how the successful investors put together their portfolio. When I first discovered this I spent an hour looking at all the top lenders seeing if I could find any patterns. But that is a topic for another post.

I encourage you to check out this cool feature from Prosper for yourself. Lendstats provides all kind of analysis on these portfolios that can help you become a better investor.

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Dan B
Dan B
Apr. 13, 2011 1:28 pm

Do you have any idea what the margin of error is on a sample size as small as 100? No offense but anyone who cites a sample size of 100 out of tens of thousands risks never being taken serious ever again.

Suffice it to say that you could add or subtract 10% from this number & still be within the margin of error. So let’s not deify this lender just yet.

Apr. 13, 2011 6:45 pm

Thanks for this post Peter. Back in the Prosper 1.0 days many a lender when starting out stated that they were aiming for 10%. No one who invested in 100 loans achieved a 10% return, ucla4life came the closest at 9.6%. But as we all know post-relaunch Prosper is a different animal and now 20% is the new 10%. There was a time when I would have been happy with 10%, but now I’m aiming for 20%. So far so good. I’m above 20% but I only have a 6 month average loan age, so there’s a long ways to go (my user name is lendstats_com btw).

It should be noted that many lenders earning high returns are probably continuing to invest bringing down that loan age. They won’t meet your 12 month criteria. Only lenders who have stopped lending or significantly reduced their lending rate can have an average 12 month loan age on the post-relaunch loans. Flexible-economy2 hasn’t made a loan for 14 months that why (s)he makes the 12 month cut.

Dan B
Dan B
Apr. 13, 2011 9:48 pm

@Ken L…………Why do you say that only lenders who have stopped lending or greatly reduced lending can have an avg. loan age of 12 months at Prosper when the relaunch was 20-21 months ago?? Why couldn’t they?

@Peter…….And my point is that I’m certain you’ll find lenders who earn a 25% return if you lower the number of notes to say 50…………….and if you lower the number of notes to 30 I’m fairly certain that you can find lenders who are getting 30%. All of the above is more than “possible”, it is in fact likely. But looking at a stellar performer with these types of small sample sizes & drawing anything from their results, behavior or loan criteria is not only extremely dangerous but also foolish. Now if you can find 20-30 individuals who are all independently doing 20+% after a year with 100 notes & find that their portfolios have certain characteristics in common, then you can start drawing some conclusions that “might” be illuminating.

Look at this from another angle………….Let’s take as fact that a particular basket of 50,000 notes has a total cumulative default rate after 3 years of 10%. Within this scenario let’s look at 3 hypothetical lenders.

Lender A owned 100 notes & 1 defaulted (an INCREDIBLE 1% cumulative in 3 yrs)
Lender B owned 1000 notes & 20 defaulted ( an outstanding 2% cumulative in 3 yrs)
Lender C owned 2000 notes & 60 defaulted (an excellent 3% cumulative in 3 yrs)
Now what conclusions “should” we draw about the 3 lenders in this scenario?? Who is the better loan picker?
The answer is we cannot be sure. BUT what can we conclude about the individual lenders?

We can conclude that there is a chance that Lender A is the Warren Buffet of note picking but there’s also a good chance that he was just really lucky.

Lender B……… a very good note picker, possibly an excellent note picker & that there’s little chance that his outstanding performance came down to just good luck.

Lender C……… an excellent note picker despite under performing the other 2 since there is virtually NO CHANCE that his excellent performance with 2000 notes is due to just good luck. There’s definitely talent here.

The “flexible-economy2” lender from this post is an example of Lender A.

Apr. 13, 2011 11:08 pm

Dan, I’m assuming the best performing lenders are continuing to increase their investment. If someone lent the same amount every month for 21 months, then the average loan age of those loans at the end of month 21 would be 10.5 months. When considering that people getting the best returns are more likely to increase their investing over time then you can expect that the people getting the best returns would have an average loan age less than 10.5 months even if they started lending from the beginning. So when looking at a 12 month average loan age minimum I think the vast majority of the best performing lenders get excluded.

Reflective-Rupee is the biggest post relaunch lender (3800+loans) and he has been lending heavily since Oct 09, but his average loan age is only 8.7 months. He’s not getting 20% but he is getting 15%. Not bad.

Dan B
Dan B
Apr. 14, 2011 7:49 am

@Ken……I see what you mean. I’m not at all familiar with individual lenders at Prosper. Apart from age of loans, what would you say are some of the possible explanations for the large difference in return percentage between someone like reflective-rupee & Aberdeen? ?

Apr. 14, 2011 11:39 am

@Dan, Aberdeen started lending with the old Prosper. He made 700k in loans during 07 and 08. The returns on those loans are quite bad (like most lenders with the old Prosper). However, he decided to give it a try again after relaunch and since then his returns have been great and actually about on par with RR ratewise and he’s doing it with a more conservative approach. RR and Aberdeen seem to know what they are doing now and both are getting great returns on the post-relaunch loans.

The lender who has lost the most with the post relaunch Prosper loans is im-sharky. He made some very large loans to people who had large amounts of delinquent debt @ relatively low % interest (this was back when Prosper still used the auction and borrowers could choose their own starting interest rate). If you go to his member page at Prosper he states his philosophy on lending and it’s not a good one for earning profits. He started lending at the same time as RR, but stopped lending after a few months.

Dan B
Dan B
Apr. 14, 2011 12:51 pm

@Ken…………Thanks for the detailed response. I like your site btw.

Dan B
Dan B
Apr. 14, 2011 6:17 pm

I can’t learn anything from this for a number of reasons beyond what I’ve already stated. But ultimately I don’t lend money to people who are so maxed out & so out of options that they have no other choice but to take loans at an average of 32.58%. Let’s really let that number sink in for a moment ok………..

But here’s a bigger point. Where do you think this lender’s number will be a year from now? How about after the whole 3 years? How impressive will it look then when he’s at 9% or some other single digit?? You think it won’t happen? Are you sure?

Apr. 14, 2011 8:52 pm

Yeah, 32% is an unreal yield. I got burned in the 1.0 days of Prosper on those hi yield loans, but back then I honestly didn’t know what I was doing. I feel very lucky to have eecked out a positive return from Prosper 1.0. In December Prosper lowered the max lender rate to 31% and I’ve made quite a few loans at that rate and so far (fingers-crossed) I’m doing quite well with them.

If you really want to learn a successful strategy by observing other lenders, I think it is also very important to observe the loss rate. For FE2 his loss rate is 12%. That’s pretty high, with a little bad luck or a little less good luck that loss rate could have been much higher, or the opposite may also be true, but we do not know.

A lender I’ve noticed lately is golffish2,
he’s lending out at a 25% rate and is earning at 22.2% only a 9.3 average loan age but a loss rate of less than 3%. And with 500 loans he’s got a good sample size to work with. To me these numbers say he’s not relying on luck, but a sound investment strategy. This is of course looking at post-relaunch loans only. GF2 did make a lot of loans on 1.0 prosper and earned a modest return, so you can bet he took his lumps while he learned about lending the hard way. That is a big plus in my book. He already knows firsthand what can go wrong.

Dan B
Dan B
Apr. 15, 2011 9:16 am

@Peter…….With only 88 of the 100 loans still performing & 2 years to go I don’t see how he could achieve 15-16%. The next 8 months could be brutal on his default rate & it shouldn’t surprise anyone if he suffers another 12 defaults to go with the 12 he’s already endured.

Yes, I’m well aware that you’re an optimistic Peter……….I happen to know an HR type young female who is looking for a few thousand right now. I’ve already recommended Prosper but apparently they turned her down. Being the optimist perhaps you’d like to lend her the money & take the heat off of me. On the plus side , she does have some assets………..but I’m afraid that spelling that out would violate the PG-13 clause that you’ve already cautioned me about previously. 🙂

Apr. 15, 2011 11:59 am

Since most people are novice investors when it comes to p2p loans, a little leg up never hurts. I have looked at lendstats info on quite a few investors to notice trends. Very few things have really stuck out so far, but I am sure certain patterns will start to emerge. Good post.


Apr. 15, 2011 12:40 pm

lol, I’m with Peter in thinking that FE2 will end up with a very healthy ROI. It has been my experience that the tough-time for ROI is in the 4-20 month range. During that time ROI tends to go down, then after 2 years ROI starts moving up, but only slowly. FE2 is almost through the tough times already so he could be in for a smooth sail the rest of the way. Of course as you have pointed out, it is a small sample set and with a little bad luck fe2 could go spiraling down, but he would need bad luck. At this point for FE2 no luck (good or bad) is as good as good luck.

Apr. 15, 2011 2:49 pm

, with Prosper it actually is a little harder to identify successful lending strategies because of the ‘Prosper Rating’. The ‘Prosper Rating’ is determined by looking at many factors, FICO, loan size, purpose, inquiries, credit lines, delinquencies, etc. We actually do not know exactly how the PR is determined (they won’t tell us) and Prosper is always tweaking it. Their aim is to give each loan the appropriate interest rate based on default risk (which they try to calculate as accurately as possible). If they are doing a good job (and I think they are) it makes it hard for us to determine lender return trends based on credit data because much of it is already factored in to the PR. And as time goes on Prosper will keep improving the PR and it will be harder and harder to determine trends, and lenders will have to look more and more at other things like the description or questions to further help refine the risk factor.

With LendingClub it is much easier for us to find a relationship between credit data and lender return because their credit grade is based only on FICO score and not on other data (I think; please correct me if I’m wrong).

Dan B
Dan B
Apr. 15, 2011 5:40 pm

, Ken………….I stand by my position. Besides these loans won’t be at their half way point for another 6 exciting months, so we shall see. I’d suggest a wager but for some reason no one here seems to be into that……………which I find rather interesting. After all we are all investing in a “high risk” investment. LC’s words not mine.

Dan B
Dan B
Apr. 15, 2011 10:56 pm

@Peter………6 months & then again at the end of the 3 years. I am a long term thinker!

Apr. 17, 2011 1:11 pm

, no doubt everyone should still look at the credit data, but with the way the Prosper Rating is calculated it is getting harder to make correlations. For example, my favorite criteria to look at is inquiries. It looks to me like prosper has pretty accurately priced in the effect of inquiries into the Prosper Rating, so if someone bids on a listing with 4 inquiries chances are that on average the interest rate will make up for the added risk that more inquiries adds. Now I have to base my decisions more on other stuff and less on inquiries. Nevertheless, I still won’t be bidding on many, if any, listings with 4 inquiries any time soon. There are some factors that the Prosper Rating cannot incorporate for legal reasons, like location, or occupation (I think) and there are probably a few others and I’m trying to get to know those better. I also look a lot at people with previous loans and people who are also lending. These factor’s also I think do not affect the Prosper Rating.

Anyway, here’s another lender that I just noticed who is doing a superb job with the post-relaunch loans, sweety075, with a loss rate of less that 2%. It would be interesting to see how she (I’m guessing with that screen-name it’s a she) is doing in 6 months.

Dan B
Dan B
Apr. 17, 2011 6:52 pm

@Peter…….by location I assume you mean outside of CA, NV, AZ, FL, MI, GA, UT etc…………the foreclosure states?

Apr. 17, 2011 7:53 pm

Nice list Dan, is that all of them? I didn’t know Michigan was one.

Dan B
Dan B
Apr. 17, 2011 11:56 pm

I don’t know if it’s complete, it’s just off the top of my head. But yeah I believe Michigan has been on that type of list even before the 2008 crisis……….mostly due to Detroit.