Thursday, June 28, 2007

NuWire features Prosper lenders

NuWire Investor has published an article about Prosper Lending which features two prominate Prosper bloggers - Kevin Gillett who authors Rateladder and Technologyguy who authors Lazy Man and Money. We just talked about rateladder and lazy man in our review of top Prosper blogs. NuWire's article was written nearly two months ago but was just made available to the general public in their free section. Here are quotes attributed to the lenders:

Many investors were intrigued by the idea of replacing banks in the lending equation. “It was a very interesting idea to me,” Kevin Gillett, a Prosper lender and the author of, said. “I love the idea of cutting the banks out of the picture.”

Prosper “basically allows me to be the bank, which I really like,” said a Prosper lender who goes by the user name of Technologyguy and authors the site

Prosper has the advantage of independence from the stock market, “so even if it can’t blow the doors off returns that you might see hyped up about it, if it can return 10–12 percent and be orthogonal to the stock market, I think that alone is enough of a reason to invest in it,” Gillett said. Prosper is creating a “completely different asset class,” he said.

Another interesting part of the article is the statistics about the success of Prosper lenders.

Most of Prosper’s 11,500 lenders are seeing competitive returns so far, according to Eric’s Credit Community, a website that analyzes the official data released by Prosper. After adjustments for default risk, 75 percent of all Prosper lenders are seeing a return of more than 10 percent, and 98 percent of lenders are achieving more than 6 percent.

Diversification increases results; of the borrowers with more than 25 loans, 81 percent are seeing returns of more than 10 percent, and 99 percent are achieving more than 6 percent.

Based on the tone of lenders in the forums you would think the returns are even lower than this. Perhaps those that have lost the most are just the most vocal. Technologyguy talks about his concern about not receiving interest on idle money. This is something John Witchel, Prosper CTO and co-founder addressed back in April. Witchel said it is not the priority right now, "it's not the dominant variable. Marketplace liquidity and default performance are the dominant variables that Prosper can influence."

Technologyguy said he would like to see Prosper provide interest on money that sits in a lender’s Prosper account. Right now, he said, he receives no interest on funds that are not invested, and “the money sits around for a long time when it’s being transferred from your bank account into Prosper.”

He said after finding and bidding on a loan, it can take up to yet another month before the loan is fully funded, verified and active. Since the money receives no interest during those waiting periods, “it really cuts into the amount of gains that you can make.”

Kevin and Technologyguy also discuss their concerns with standing orders. Both would like greater flexibility to time standing orders.

Gillett has relied mainly on standing orders and only recently began to experiment with manual bidding. He said recent changes in Prosper have made standing orders less effective. The problem, he said, is with loans that are not autofunding, which means that “as soon as they’re 100 percent funded, they continue to have the auction open and the bids continue to come in” and the interest rates get driven down.

Gillett said his standing orders “would fire and my money would be tied up in this loan that started off at a great interest rate and then by the time the loan actually closed, I was bid out of the interest rate.”

“eBay has taught us all that the optimal auction strategy is to show up at the last two minutes and outbid everybody and win the listing,” Gillett said. “You weren’t in the loan early, no one knows you’re coming, and…that way, you get the best interest rate possible.”

“The time remaining criteria would allow my standing order to basically act as I’m acting in a manual bid, which is to say, watching the interest rates, watching the loans, and then when the loan gets within 30 minutes of the end of its auction, then to have the standing order fire,” Gillett said. Such a system “is absolutely necessary if you’re going to be a standing order bidder these days,” he said.

Lenders with multiple standing orders face special challenges, Gillett said. He uses five standing orders that build a bid ladder, but “they fire in completely random order and I have no control over the order that they fire in.”

Rather than bidding at the most attractive interest rate first, the orders fire randomly. “So I’d like a little bit more transparent control over when the standing orders fire,” he said.

1 comment:

Matt said...

Those are some really good comments. I agree with Prosper that earning money on idle money is not the top priority for lenders. If your money is idle for one month out of 36 then it would change a 10% rate into a 9.7% rate. That can just be factored in during the bidding. A secondary market and lowering the default rate are things that would have a much greater impact for lenders.