Archive for the 'Interest Rates' Category

Prosper.com Results for 2010 and 2011

I recently posted my results from Prosper.com which hold micro loans from 2009, 2010 and 2011.  I also posted a bunch of links on Prosper.com I had found interesting.  Based on feedback from a commenter, here is a more recent list of links:

  • Prosper.com Official comments on 2006 loans (January 2010) – Basically an open letter on Prosper’s blog that argues against The Big Money article on Prosper.com that claims “39% to 54%” losses.  This has a great chart that shows the drastic improvements in loans originating in Q3 2009 (which is about when I got started).
  • Prosper.com Comments from Report Your Complaint.com (June 2010) – Not a happy customer and the commenter’s are pretty negative as well.  No comment though on the years and types of loans they were investing in.  I will note, I have a feeling a lot of people invested heavily in C, D and E loans.
  • Prosper.com Boasts of Lower Loan Loss Rates (September. 2010) – Summary of a press release and results in the next bullet.
  • Prosper.com actual results (all loans) from July 2009 to June 2010 – (June 2010) – This is a really good breakdown and essentially shows an average return of 10.43% (almost exactly what I am seeing on my portfolio).
  • Prosper.com Results for 2007-2010 loans (Nov. 2010) – This person posted his full term results for loans originating in 2007 and reinvested through 2010.  He only saw a return of about 1%.  However I will note, he didn’t diversify enough IMO (investing 5% of his capital into each loan) and he focused too heavily on lower quality borrowers with 30% invested in E or lower and 45% in A or higher.
  • Prosper.org – Prosper.com / LendingClub.com Forum and Community (Active) – Ran across this, looks like a really good community, wiki and more.  The forum has a recent post with people providing their ROI, if you want recent results you are looking for “post quiet period results” (June 2009).  Here are two I found: 15.8%, 8.43%.  Results with an average age of 300-400 days will show you loans originating in 2009 after the quiet period. On portfolios with average ages of 800-1000 days you will see the returns are much lower, usually 1-4%
  • LendStats.com (Current) – Probably the single best place for real-time up-to-date stats on most P2P lending sites.

After looking at more recent results and figures, I think it is obvious that loan quality definitely improved after June of 2009 quiet period and re-launch.  Of course so did the overall economy.  Finally, it is very important to diversify your portfolio.  Since I started with an initial $2000 investment, I have never invested more than 2% of my total portfolio in any one loan.  Most of the reviews I have read are from people that are investing 5%, 10% even 20% of their capital in individual loans and they are upset with poor results.  This is just nuts.  With 5-20% of your capital in a single loan, one or two defaults can wipe out all the interest you have gotten and one or two more can give you negative returns.  My advice, if you are only going to invest $1000 or $2000, limit yourself to NO MORE than $25 per loan; no matter the score.  A big mistake is to say put $25 in a bunch of E loans and then $100 in a AA loan thinking it is “safe”.  You could get lucky, but the interest in the AA loan won’t offset the losses in the E loans and if the AA loan defaults your screwed.

Cheers,

invest, investor, investing, lending

This posting is provided “AS IS” with no warranties, and confers no rights.

Prosper.com – Good links to read

Having recently gotten more active in Prosper.com and blogging about it here and here, I wanted to do some digging around the web and see what others are saying.  The following are some of the better articles I have read:

  • Why Prosper.com will fail (June 2006) – Obviously, 5 years later Prosper has not failed, but its an interest read.
  • Why Prosper.com will succeed (June 2006) – Written by the same guy as above, another good read.
  • Wikipedia (Current) – The section on “Cash position and going concern status” is particularly interesting.  Long story short, Prosper is operating at a loss and plans to raise additional funding.  This is definately should be a concern to lenders.  This of course is one of the risks I raised in my previous post.
  • Prosper Blog note on the sale of bad loans (May 2008)
  • Google Chrome Extension for Prosper.com (January 2011) – I found this interesting.
  • Prosper.com Review Circa 2007 (March 2007) – One thing I have seen time and time again is that the overall quality of Prosper.com results have improved in recent years.  If you were a lender in 2006, 2007 or 2008 you probably lost money or broke even.  More recent loans seem to be doing better.  Of course all hell was breaking loose in 2007-2008 in the world of finance.  Time will tell if my 2009-2011 loans perform better.
  • Lending Club Review (Sept. 2010) – It is interesting to read how others are doing on Lending Club.  This post covers tips on loans to avoid.

Cheers,

When is 3.99% not 3.99%?

When its actually 7.8% of course!  As a follow-up to my previous post on 0% balance transfers.  I figured I would at a deeper look at the other side of the offer: 3.99% for 18 months.  Now, if you are transfering a balance from a credit card that is at 29% interest, 3.99% sounds like a sweet deal.  But before you get too excited you need to read the fine print and understand how the transfer works.

For this example, lets assume we transfer $6500 to the new card and we plan to pay the balance off entirely during the promotional 18 month period.  You might the payment and interest schedule to look like this:

 

Unfortunately, that isn’t how it works.  This is because the 3% transfer fee is applied on the “transaction date” so your starting balance is actually $6500 x 1.03 or $6695.  This is a fee of $195 that is financed along with the rest of the balance at the 3.99% rate.  So not only do you pay interest on the balance, but you are charged a transfer fee and you have to pay interest on the fee.  The result is that you will pay an additional $8 in interest over those 18 months and your total payments above your original balance will be $213.37 in interest and $195 in fees, or a total of $408.37.  Plus, to pay off the balance in 18 months your monthly payment has to be $384 instead of $373 or $11 extra a month.

When you take these factors into account, the transfer (assuming you pay it off entirely in the 18 month period) is effectively being financed at an 7.8% interest rate.

The question is, is transfering the balance a good deal?  I believe the answer is “yes with an if”.  Yes, if:

  • You are transfering from a card with an interest rate of greater than 7.8%
  • You pay off the entire balance within 18 months
  • You are never late on the payments (if so, they jack up everything and the savings are gone in a flash)

Here is the full breakdown with fees:

Cheers,

This posting is provided “AS IS” with no warranties, and confers no rights.

When is 0% APR not 0% APR?

Why when its 6% annualized of course.  I just got this offer in the mail the other day:

As you can see, they are offering me zero present interest on all balance transfers, through October 2011. This basically equates to 0% for 6 months. Unfortunately, just a few sentences later you find that:

“Keep in mind these offers include a transaction fee of either $5 or 3% of the amount of each transaction, which ever is greater.”

While it was nice of them to not have this detail the small print, this 3% for 6 month period is effectively 6% on an annualized basis.  So either way, its not such a great deal.  If you are transferring the max of $6,350 you are going to pay at least $190.50 in transfer fees.  This amount of course is instantly added to your balance, so if you don’t pay it off the entire balance by the end of 6 months, you pay interest on the that $190.50 along with the rest of your balance.

Of course, this might actually be a good choice if you are on some other higher interest credit card paying 29% in interest.  However, unless you pay it off quickly (6 months) the rate goes right back up to 13.25% (in my example).  You could alternatively use the 3.99% offer for 18 months, but you still then have to pay the 3% transfer fee.  Finally, and the wording is confusing, it appears they start charging interest at the 13.25% “on the transaction date”, so unless it is all paid off within 6 months or 18 months, you are paying both the 3% fee, but also the 14% on both the transferred amount and the 3% fee. 

It is frustrating to me, how once you get in the debt trap there are a million-and-one fees and tricks designed to keep you there.  I like to follow the “Don’t buy stuff you cannot afford plan” and avoid this nonsense altogether.

Cheers,

Can you prosper with Prosper.com?

The following is my personal review of Prosper.com and my expierences with the site.  For those that have not heard of them, Propser.com is a peer-to-peer micro loan lending site.  Thousands of individuals that have money get together and make small loans that aggregate into large loans for individuals that need money.  The site then manages the anonymous relationship between the mass of micro lenders and the borrower.  For this management, they collect a small (1% fee).  This fee covers credit checks, running the site, collections, etc.

Most borrowers are looking to consolidate debt, finance a business, payback a friend or lower their existing interest rates.  Some have stellar credit (AA on the Prosper scale), with good debt-to-income ratios, no past delinquencies, good credit scores, etc.  Others have horrific credit (D, E or HR on the Prosper scale), with recent or current delinquencies, bad credit scores, etc.  The rest are somewhere in between (A, B, C on the Prosper scale).  The interest rate that each group pays is controlled by Prosper (it this is actually new) and is based on the amount and term of the loan and the borrowers Prosper score.  Someone with a score of AA may borrow at 6% (5% + 1% fee), B may be around 10 to 14%, C around 18%, D 25%, E/HR 30% or more.  The amounts range from a few thousand to tens of thousands.

On the other side of the equations are the lenders.  Most lenders lend the minimum micro amount, which is $25.  When you see a loan being funded, there will be literally 100’s of bids of $25 to $50, with only a handful of $100-$1000 bids.  The bigger bids seem to come from lending “groups”, or simply people with a lot of money.  The reality is the size of the bid doesn’t really matter, as long as it is an appropriately small portion of the total you are investing on Prosper.  Diversification is key, because these loans can and do go bad.

My results

I started using Prosper.com in 2009, with an initial investment of $2000.  I made a bunch of loans in the $25-$30 range and just let it sit for a year.  Overall, things seemed to be going very well and since then, I have raised my investment $2000 ever 6 or so months and now I have $8000 there.  To give you an idea of the returns and risks involved I will share my results.

Over the past 3 years I have funded approximately 320 loans.  Of these, 18 have been paid in full early, 3 have gone bad and 3 are currently late.  The result has been in earnings of approximately $350 and a loss of $70.  Total result is $280.  If things continue at this rate and I don’t do any additional investments, I expect to make 9-13% on my portfolio of loans over the next 2-3 years.  This is actually really good, especially considering that most savings accounts these days may 0.25% and CDs for 2-3 years are only going to get 1.5 to 2%.

In theory, I may recover some of my $70 in charge offs if and when Prosper sells that debt off to a collections agency or is able to recover some of it – but I will consider myself luck if I recover even 25% of it.

The risks

Prosper.com is by no means a “get rich quick” system; in fact it is just the opposite.  Most loans are 3 to 5 years and unless you are investing hundreds of thousands of dollars with them, you won’t exactly earn a living off the interest.  The money you loan via Prosper is not insured and in theory you could lose it all.  Prosper.com has also only been around since 200X, and in its time has had to make changes to its model and deal with a few legal and regulatory hurdles.

  • Loss Risk – All Prosper.com loans are “unsecured” loans, so just like a credit card of a personally guaranteed loan from the bank.  Whether you get paid back or not is based entirely on the credit worthiness of the borrower and their desire / ability to repay the loan.
     
  • Time Risk – Once you place a bid and the money is lent, that money is “locked” and cannot be accessed until the loan is paid back.  There is no option for early withdrawal.  So if you plan on needing the money you are investing before the term is complete you should look into other options.
     
  • Interest Rate Risk – Just like CDs, since you are locking in rates for 1 to 5 years, there is the risk that interest rates will rise and your capital will under perform.

Tips

I am by no means a pro at this, but I will share some of the things I look out for and have learned over the last few years.

  • Manual vs. Automated – Prosper.com offers both manual loan-by-loan lending and automated investment plans.  I have no experience with the automated plans, but since I like to know exactly where my money is going and why, I have shied away from them.
  • Be careful “chasing yield” – Just like the fools that caused the credit crisis, not all borrowers are worthy of credit and sometimes interest rates are high for a reason.  While a portfolio of entirely D, E and HR loans will earn you 25-30%, you can expect that at least loss rates to be very high.
  • Compare the risk vs. reward.  Recently Prosper has started offering AA loans at rates as low as 5% for 3 years.  Personally, I think these rates are too low.  While diversification is still key and history suggests loans of these types will yield 4%, the risk vs. reward ratio with a 3 year bank CD at 2% doesn’t seem that appropriate.  Because these loans are unsecured, I think the 5% rate is too low and as such I have reduced the amount of AA loans I make.
  • Read the borrowers post – Do they have lots of typos?  Did they even fill it out?  Did they explain why they want the loan?  Do the reasons make sense?  I have seen borrowers looking for $15k no questions asked.  On the other hand, I have seen similarly rated borrowers clearly state they need $15k to pay off 2 credit cards with interest rates of as much as 30%.  They explain, how the savings in interest will be used to accelerate payments and clearly explain why they believe they are worthy of a loan.
  • The money you have sitting in your Prosper.com account that is not invested does not earn any interest.  Something to be aware of.
  • Keep an eye for Prosper.com sponsored “deals”.  Occasionally, where there is an imbalance of loan requests and a dearth of lenders, Prosper will offer rebates of 1-3% of the amount invested to encourage lenders to lender.  While this can be a “good deal”, it is not the end all and be all. For example, assume you lend $50 to an E borrower at 30%.  Proposer will give you a $0.50 rebate, but you could still loose the base of $49.50 if the borrower never pays the loan back.  Not such a great deal.
  • Read and understand the borrower’s stats – I have made loans to AA, A, B, C, D and a few E rated borrowers. Regardless, there are a few things that I care about:
    • I really don’t like to see existing or previous delinquencies.  If there are, I expect a very good explanation.  Sometimes people have them, and I will lend them my $25, sometimes they don’t and I won’t lend them anything.
    • I don’t like to lend to people that are comply maxed out.  If they have 35 credit lines own, are all fully maxed out and debt to income is 97% – I am going to pass.  This person is unfortunately maxed out and I don’t want to be the last sucker to lend them some money.  I truly believe it is in these peoples best interest to go bankrupt and rebuild.  Maybe next time they will living below their means.
    • Watch out for dropping credit scores.  Not all posts provide this information, but a recent drop in credit score can mean something is going on that the other numbers don’t show.
    • Sometimes outstanding credit will be very high (like $300k); this usually is a home-equity loan.  I tend to shy away from these, but not always.
    • Are they borrowing an appropriate amount of money and at an interest that makes sense?  If the person only has $5k in outstanding debt, but wants to borrow $15k – I wonder what the extra $10k is for.  If the person has a Prosper score of E and is trying to refinance a credit card with an interest rate of 30% with a Prosper loan at 30%, this doesn’t make any sense.  If the roles were reversed, would I want to borrow money at the terms specified, if the answer is “no”, then I have a hard time lending the money.

My conclusion

Overall, I think Prosper.com is great.  However, I have not yet tried competing sites like LendingClub.com.  I recently recommended them to both my mother and a friend and they both have joined.  I personally think that Prosper.com is doing a true service for the country, unlike the leeches in the banking industry.  Prosper.com allows people to help one another in a fair and relatively safe manner.  Why should I be forced to lend money to a bank at 1%, while they charge my neighbor 30% to pay off his credit card?  The truth is that both my neighbor and I would be better off, if I simply lent him the same money at 15%.  I make a better return and the neighbor pays less interest.

NOTICE: This article is not to be construed as investment advice. Past performance is not necessarily an indicator of future returns. Investing in Prosper.com may result in the loss money.    This information is provided “AS IS”, without warranty and confers no rights.

US Pledges to donate $100M to Haiti – China pledges “only” $4.4M

I found this too ridiculous to not comment on:

Article number one:
US Pledges $100M in support for Haiti
http://www.guardian.co.uk/world/2010/jan/14/haiti-barack-obama-aid-china

Article number two:
China to positively respond to UN flash appeal for quake-hit Haiti (Donate $4.4M)
http://news.xinhuanet.com/english/2010-01/16/content_12818703.htm

Of course, everyone knows that the US doesn’t have any money to pledge, but that doesn’t matter.  We are after all running an annual budget deficient of over $1T on top of our $12T+ in outstanding debt; so what’s another $100M.  It is in fact, nothing new for the US to live far, far above its means.  What is interesting however is that China is living perfectly well within its’ means.  Here’s the breakdown:

This is of course all funny money but look at this it this way:

  1. US borrows $100M from “somewhere” (Fed printing arguments aside, it was probably China)
  2. The current 30-Year US Bond is paying 4.375%
  3. China basically pledges the first year’s interest
  4. Hilarity Ensues

Cheers,

A few words of wisdom…

“Money is fungible, but a general guideline is to match the term of the debt with the useful life of the asset. A 30 year loan for a house. A 5 to 7 year loan for a car. Pay cash for lunch.” – Calculated Risk Blog

Well that certainly makessense. For those that live below their means, taking on debt is a choice and the length of that debt is something we can use to our advantage. Debt is not always bad… and in the right amounts and uses,can be very beneficial. I have gotten 0% financing on new carpet for 12 months and put the $5k in the bank for the year, I made my $140 bucks or so in interest and paid it off in full at the end of the year. 5 year car loan at 2.9%? Sign me up. 30-year mortgage at 4.75%??? absolutely, where are you going to get 30 year money for under 5%?

Financing clothes, vacations, etc… not such a good idea… these are short term unsecured items and as such you pay higher rates of interest.