I’ve been lending on Prosper for a bit over 7 months now. I’ve seen quite a few loans move in and out of late status. I suppose some borrowers prefer to “optimize their cash flow” by allowing their loan payments to lapse a few days. This is just fine with me, as long as they eventually make the payments. Unfortunately, I also have some other borrowers that have allowed their payments to lapse more than just a few days and I currently have four loans in collections. Here’s a summary of my earnings on Prosper so far:

• Cash deposited into account: $2,500
• Earnings from referrals: $50
• Principal Loaned: $3,000 (includes reinvested principal received and referral bonuses invested)
• Principal Received: $376.45
• Interest Received: $219.78
• Late Fees Received: $0.70
• Servicing Fees Paid: -$10.23
• Collection Fees Paid: -$0.24
• Net Profit: $210.01

Now of course, there is a high probability that at least one of my four loans in collections is going to default if not all of them. The net principal balance for the four loans in collections is $191.61, so even if all four loans defaulted, taking into account my net profit I’m still ahead of the game by $18.40. That’s about a 0.74% total return so far or about 1.1% annualized. Although EricsCC and LendingStats have my estimated ROI much higher than that, I prefer to take a more conservative approach. Warren Buffett’s first rule of investing (and mine too) is don’t lose money. So far I think I’m doing well in that regard on Prosper.

I still think that Prosper is a good investment vehicle, and a good addition to any investment portfolio. As long as you can outpace your defaults with your average interest rates, you can make money investing in Prosper loans. Here are a few simple rules I try to stick by when I’m investing in prosper loans:

• Don’t invest in charity cases. I’m investing my money not giving it to charity. If you do lend to someone in a charity case, don’t get mad if and when you lose your money.
• Don’t invest in start-ups. Without proven results, investing in a start-up is more of a gamble than an investment.
• Don’t lend for working capital. If someone needs money for working capital it typically means they do not have the positive cash flow necessary to run their operation.
• Invest in those consolidating debt. These are my favorite kinds of loans, particularly if it will improve someone’s cash flow situation.
• Draw a line in the sand as far as your minimum interest rate. For example, if your target rate of return is 7%, then you shouldn’t invest in loans at a rate any lower than 7%.

I haven’t always followed these rules, but it is because I hadn’t yet formulated them in my mind. If ever I do break any of the rules now, I need a very good reason for doing so. If you’re dealing with a small portfolio (less than 100 loans), it’s easy to stick to these rules. If you’re dealing with a larger amount of money and a higher number of loans, you’ll probably want to use a portfolio plan. Either way, you should try to be as consistent as possible with your loan selection in your lending portfolio.

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TechCrunch has an article about a new p2p student lending site called GreenNote. In addition to facing many of the same challenges that await Fynanz, GreenNote will have additional obstacles to overcome in order to attract investors. Perhaps the biggest challenge is that the interest rate is not set by lender bidding and is fixed across all loans (currently 6.8%, the rate of a Federal Unsubsidized Stafford Loan). Not only will GreenNote have a hard time competing with Fynanz in terms of the potential returns for investors, but Fynanz also provides some protection against defaults by guaranteeing at least 50% of the principal on defaulted loans. GreenNote provides no such guarantee.

Given that they do offer a very good interest rate for students, they will surely have no problems attracting borrowers. However, I think GreenNote has a long road ahead if they intend to attract enough investors in order to meet the demand. Unless they can eventually insure part of the loan principal as Fynanz does or provide a secondary market for liquidity, I have serious doubts as to whether they will be able to compete with Fynanz and survive the long road to profitability.

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I finally downloaded and tried out Greasemonkey for Firefox extension the other day. I had heard of it before, but never installed it until recently. Greasemonkey is a Firefox extension that allows you to manipulate any web page you visit in Firefox. It uses JavaScript code that runs as if it were embedded into the website. It also provides some additional functions that let you do magical things such as cross-site scripting (which can also be dangerous if you install a malicious script). I actually had written a few JavaScript “bookmarks” to do some quick stuff for me on the Prosper website, but Greasemonkey provides a much better interface. It allows me to do what my bookmarks were doing and even more. Here are the features I’ve put into the script so far:

• Auto-login

This is disabled by default. In order to enable it, right-click on the monkey, and click “Disable Automatic Login” under the User Script Commands. When the prompt appears asking if you want to disable the auto-login, click Cancel and it will enable the automatic login. I realize this probably isn’t the most intuitive thing in the world, but I was too lazy to develop my own dialog and I just used the window.confirm() JavaScript method. Your username and password is stored locally within your browser and is not transmitted anywhere other than to the Prosper website.

I assure you that that the auto-login feature does nothing evil. I have it disabled by default in case you don’t believe me. Your username and password will be stored as configuration values within Firefox. If you navigate to about:config in the browser, you’ll see them under greasemonkey.scriptvals. Please note that the password is not encrypted. If you’re using a public machine or someone else’s computer, you may want to think twice about using the auto-login feature.

• Total Revolving Credit and Total Available Credit

If there is more than 0% utilization, then the calculated total revolving credit and total available credit is displayed. If utilization is 0%, it is displayed as Indeterminate.

• Estimations on Listing and Search pages

The estimated loss, adjustments, fees, and estimated return will be displayed on listing pages. On search pages, I display just the estimated return and estimated loss (to take up a bit less space than displaying all 4 numbers). You will need to be logged in for this feature to work.

If you’d like to try it out, first install Greasemonkey on Firefox. Then click the button below to install:

If you have any suggestions for new features to add, please feel free to let me know and I’ll be glad to see what I can do to accomodate.

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Update: I’ve added a user script command called “Set Investment Preferences.” It allows you to specify a minimum desired return, bid amount, and maximum loss amount. When you run searches, as the estimates are loaded in, listings will be removed if they are below the minimum desired return or if they have an estimated loss higher than the max loss.

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As I was writing my Rule of 72 on Prosper article for the official Prosper Blog, I began to think about developing my own ROI calculation based on what I had written. I had attempted creating an ROI calculation once before that was based on actual payments received, but I became frustrated with the lack of the detail payment data in the LoanPerformance table of the private export. I took another crack at developing an ROI calculation based on actual payments, and think I’ve come up with something that’s reasonable. If you’re interested in the actual implementation, you may want to check out the technical details and link to the SQL code here:

http://wealthboy.com/wbsroi-technical-details/

Once I’ve constructed the tables necessary to calculate the payments that a lender has received, I have all of the information necessary to calculate the WealthBoy Strict ROI. The WBSROI performs two return calculations: TotalROI and AnnualizedROI. The TotalROI calculation is calculated by dividing the total profit (interest less servicing fees) by the total amount invested (which excludes reinvested loans). The calculation does not take into account the declining balances, hence the “strict” designation. If you have been lending successfully for a long time, it is certainly possible to have a TotalROI more than 100%. Here is the formula in a nutshell:

TotalROI = (Total Interest Received - Fees - Losses on Defaults) / (Total Loan Originations - Reinvested Loans)

The AnnualizedROI is calculated by dividing the TotalROI by the weighted average loan age and multiplying by 12. The weight for each bid is the amount lent as a percentage of the total originations. This may not be the best way to perform the AnnualizedROI calculation, but it was the best I could come up with. I believe the TotalROI is relatively indisputable, barring the errors in the payment calculations. The AnnualizedROI could probably use some enhancements.

I like the idea of having a strict ROI calculation that doesn’t account for the declining balances. Many lenders on Prosper may not even be aware of what a declining balance is. Others may know about declining balances, but they just want to know what kind of return they’ve received on the total amount they’ve invested. That is what the WealthBoy Strict ROI attempts to do, and I believe it does it reasonably well. If you are reinvesting loans, your strict ROI should be reasonably close to your average interest rate less fees and your default rate.

So what about late loans? Why aren’t they part of the calculation? Well, one of the nice things about of my calculation is that it really doesn’t take much more effort to account for the probability of late loans eventually defaulting. With the information provided in the calculation, you know the total investment and you know the total profit. All you need to do to account for late loans is to incorporate the loss estimation into the profit and presto! You have your new ROI including the probability of late loans defaulting.

I decided to exclude any default projections from the initial announcement of my ROI calculation. Although it probably wouldn’t take much more effort to incorporate it, I think there is something to be said for an ROI calculation that doesn’t make any kind of suppositions. The WealthBoy Strict ROI calculates how much went in and how much came out. It makes no assumptions about the future value of loans. I have left it to others to make whatever assumptions they wish to make about estimating defaults.

I do realize that not everyone has the expertise and/or resources to put together a Microsoft SQL Server database for analyzing Prosper data. Unfortunately, I don’t have a web application connected to my database so that people can see their WBSROI. If you would like me to provide you with your WBSROI, just post your screen name into a comment here. I’ll post the data in a responding comment. If I become overwhelmed with responses to the post, I may not be able to respond to requests any longer. If it does become a popular metric, perhaps someone with a popular stats site may be willing to add my calculations to their site. Here is what the WBSROI on my account looks like:

Screen Name:WealthBoy
Total Bid Count: 45
Total Reinvested Bids: 3
Total Originations (total amount loaned): $2,250
Total Investment (total amount loaned excluding reinvested bids): $2,100
Total Income (total principal and interest less fees): $209.22
Total Profit (total interest less fees and defaults): $60.53
Total ROI: 2.88%
Average Loan Age: 1.76 months
Annualized ROI: 19.62%

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Techcrunch has an article today about a new peer-to-peer lender for student loans called Fynanz. According to the lender FAQ, they will guarantee 50-100% of the loan if the borrower defaults. There are a few reasons why I have my doubts that Fynanz will work:

• Interest rates on student loans tend to be pretty low. It will be difficult to attract students to Fynanz, when they can just get a traditional student loan at a lower interest rate.
• If the rates do get bid down low enough to compete with traditional student loans, the rates may not be high enough to attract investors, even if a minimum of 50% of the principal is guaranteed.
• As with traditional student loans, the term of the loans are long. At a glance, I looked at some of the loans and I saw them ranging from 10-20 years. This is an extraordinarily long time for an investor to lock up money in an illiquid investment. They will need to eventually provide a secondary market to provide liquidity, otherwise they will most certainly be doomed to the deadpool.
• As with traditional student loans, borrowers have the option to defer payments. Many investors won’t like the idea of waiting for up to several years before receiving their first payment.

Time will tell if Fynanz will survive, and I will certainly be watching with great interest.

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Having Trouble Refinancing? Borrow from a Rich Friend or Family Member

I was talking with a friend that recently purchased his home with an ARM and did 100% financing. With little (or possibly negative equity with home prices dropping), he will certainly have a very difficult time refinancing into a fixed-rate when his rate begins to adjust. As it so happens, his mother-in-law recently inherited a large sum of money. More than likely he will end up borrowing from her and refinancing his mortgage with her. I told him I think it is a great idea, and it is basically peer-to-peer lending on a grand scale. Here are some of the many benefits of borrowing from a friend of family member:

• Very low closing costs

Basically you will just have to pay the local and state government some fees (doc stamps, taxes, recording fees, etc.) for the documentation.

• Quick recovery of closing costs

Because of the low closing costs, it won’t take very long at all to recover your closing costs. It will likely take on the order of a few months as opposed to years with a traditional refinance.

• Low fixed rate

Your friend and relative may even be kind enough to loan to you at 0%, but a fair rate would be something between that of a standard 30-year fixed loan with an institution (assuming that is the term you use) and the interest rate of a high-balance money market account.

• Potentially higher cash flow for borrower

Depending on your current financing situation, because of the lower rate, the refinance may leave more money in your pocket each month.

• Potentially higher cash flow for lender

If the interest rate is higher than that of a high-balance money market account, the lender will enjoy better cash flow as well. Technically speaking, the amortization of the loan will also provide increased cash flow. However, it isn’t additional income since it is additional cash going towards the balance and the balance of the loan (investment) is declining.

Of course, when there are benefits there are also disadvantages as well. In this case, it is the potential ill-will if you were to ever default on the loan or make late payments. So I will offer the following disclaimer: if you are late with payments or default on your loan, a family member may disown or oust you from the family, a friend may never forgive you and will no longer be your friend, and in either case you may be sued and your home may be foreclosed. In other words, I’m well aware that what I’m suggesting in this article probably goes against everything you’ve probably ever heard about borrowing/lending money to friends and family. Now you are aware of it as well.

That being said, there is one major disadvantage for the lender. Even if you do everything by the book and set up a note and everything, if the lender ever wants to sell the note it would likely have to be at a significant discount of face value (because of the low interest rate). So the lender is more or less locked into the investment until the note matures or the home is sold. All-in-all I think it is a fairly good deal for the borrower and lender as long as both parties understand the terms, conditions, and risks.

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Today marks my first trip ever to the West Coast. Although contrary to my intuition that my trip would be uninteresting to others, including regular readers of this blog (my thanks to both of you!), I’ve decided to dedicate a post to to my expedition. I must say that I have been greeted with open arms. I have met with fellow natives and residents of the great state of Florida, residents of the great states of Hawaii and Alaska, as well as those that reside in the home of Prosper Days, San Francisco California. Although I am known (although not very well) as WealthBoy, I have found myself in the habit of introducing myself with my birth-given name.

Regardless of my introductions, I believe that Prosper Days will prove to be a productive and exciting trip for me. I only wish my better half could be here as well as our beautiful young ones. Unfortunately, we decided the trip to be much too taxing on them, and they would be better off back at home with Mom. Instead, we decided to tax Dad by sending him on the redeye back from San Francisco to Philadelphia from 10PM PST to 6AM EST (5 hours in the air). Ultimately I will arrive from Philadelphia to Jacksonville at 10:20AM the following day (8.5 hours travel time).

The story isn’t much better from there. In my haste to secure my trip from Jacksonville to San Francisco, I failed to secure transportation from the Jacksonville airport back to my home upon my return home. Much to my chagrin, after I booked my flight I came to learn that my wife had previously scheduled a play date from 10:30 until 11AM. It takes about a half-hour to get from our home to the airport, so that means it is likely I will be home no earlier than noon.

Being the analyst that I am, I surmised that WealthBoy(.com) does not yet provide sufficient income to merit a cab ride back home, so I am more than glad to await for the family to complete the play date to go pick up Dad. Later that day we will make the two-and-a-half hour drive to Orlando for our soon-to-be two-year-old. To be honest, it’s not really a big deal but I’m doing my best to make this story as interesting as possible. I would do anything for my family, especially if it involves having a good time with Mickey Mouse.

All of this in the name of peer-to-peer lending. RateLadder asked if I would be blogging about the trip. I told him that I was having a very hard time with the blogging. Despite his encouragement it is hard for me to come up with original material. I told him that my best (well…. most popular) article (Gas in the U.S. is Cheap) actually began as a repost/commentary on an article about the U.S. Auto Market being in recession. So how the hell did I come to conclude that Gas in the U.S. is Cheap?

That’s a good question that at this point I would have a hard time answering. Perhaps it may be obvious to you, or perhaps some other day when I am not wrought by jet lag and oversized west-coast margaritas I might be able to answer that question. Actually I only had one oversized west-coast margarita, one shot of excellent tequila, and many beers, but again… That’s another story.

I’m still finding my place as a blogger as well as becoming a dispenser of good information. I’ve found that the most interesting bloggers have a propensity perform both acts exceedingly well. We shall see how I ultimately perform in my endeavor. I suppose I summed it up well when I told RateLadder, “I guess most bloggers become truly successful (bloggers) when they are able to integrate their blog well with their life.” Up until now I have not done that, but perhaps beginning with this post I will make a greater effort to do so.

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My first post on the official Prosper Blog was published today! Many thanks to Rate Ladder, Editor-in-Chief of the Prosper Blog, for affording me the opportunity to contribute to the Prosper community. I hope it is the first of many articles to come.

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The WealthBoy Strict ROI for Prosper Lenders

Recently, I had come across an article about zopa.com and it really peaked my interest on peer-to-peer lending. In researching more about Zopa, I also came across two other major peer-to-peer lenders: Prosper and LendingClub. I researched both Prosper and LendingClub a bit and decided I liked LendingClub better, so I signed up for an account with them.

I had problems validating my identity with LendingClub, which was extremely inconvenient. It prevented me from investing in any loans, which defeated the purpose of signing up. I then began researching Prosper a bit more and signed up for an account with them as well. I had absolutely no problems signing up with Prosper and validating my identity. Within a few days of signing up, my account was funded and I was ready to begin bidding on loans.

As I was doing my research on both sites, I came to realize that although LendingClub touts very good loan statistics with regards to defaults and late payments, Prosper has been around much longer. I think LendingClub’s loan statistics are somewhat misleading, as they really haven’t been around long enough for a lot of loans to default. I read a post on TechCrunch about LendingClub going nationwide and provided some of my analysis in a comment on the article:

I would take LendingClub’s stats with a grain of salt. The oldest loans were originated at the end of May, so there hasn’t been a lot of time for defaults to take place. Also, given the rising popularity of the service, the majority of those loans will have been in force much less than 7 months. I pulled the csv down from Lendingclub, and the average loan age is only 75.85 days (only 2 1/2 months).To provide a more fair comparison, I looked at some of the Prosper.com data on lendingstats.com. 2,869 grade AA-C loans were originated on Prosper.com between July 14 - December 13. I chose grades AA-C because Lendingclub only allows those with a 640 credit rating or higher to participate. Using Prosper.com’s AA-C grades approximates this restriction. The average age of these loans is 75.7 days. I selected the dates to provide approximately the same age as the lendingclub.com loans.

Of the 2,869 Prosper.com loans, 0.87% were late, 0.82% were 1 month late, and 0.09% were 2 months late (total of 1.78% late). None of them were any later than 2 months and none of them have defaulted. Even if I went back to May 24 on Prosper.com, only 3.61% of the loans are late and still no defaults. During this time frame, 3,796 loans were originated with an average age of 100.9 days.

I think after the loans on lendingclub.com have aged more, the statistics will likely be very similar to those of Prosper A-CC grade loans. I was all ready to open up a lendingclub.com account, but then came to the realization that the service hasn’t existed long enough to provide an accurate statistics. Also, in the process of creating my account they were unable to verify my identity. They were never able to resolve the issue and I would have had to manually verify my identity. With all the problems I had in in opening the account, I decided to take a look at Prosper and decided it was better to go with them anyway since they were more established and could provide better statistics.

Basically, I found that loans on Prosper that were similar to those on LendingClub showed a late rate of about 1.78%. Currently, LendingClub shows a late rate of 0.44%. According to my analysis, the late rate on LendingClub is only about 1.34% better than that of Prosper.

I can certainly appreciate the additional measures that LendingClub takes to help investors reduce the risk of losing money from late payments and defaults (640+ FICO score and ACH repayment of loans). Afterall, that was what drew me to sign up with them first (I may have stuck with them if I hadn’t had problems with validating my identity). However, I would prefer until they have been around long enough for some of the loans to default in order to get a better overall picture. For now I will stick to investing on Prosper.

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