Thursday, August 23, 2007

Prosper beats the S&P 500 (on AA loans with no delinquencies)

Prosper sent out an email campaign to all Prosper members with the following news:

"Did you know that the average loan on Prosper is outperforming the 2-year return on the S&P 500? Smart lenders like you have already discovered that lending on Prosper is a great way to earn a market-beating return!"

Some people on the Prosper forums claim the ad is misleading. You have to read the fine print of the email to realize that what Prosper is calling average performance is computed using just the performance of AA loans with no delinquencies which is a very small part of the overall marketplace. They also selectively picked date ranges that ensured the best performance relative to the S&P 500.

Here is what their fine print says:

[1] Rate of return shown is the average net annual return on Prosper loans originated between 7/22/06 and 7/22/07 to borrowers with AA credit grades who have 0 delinquencies and 0 to 2 credit inquiries on the their credit record, as of 8/23/07. For more information, go to
[2] Avg. annual return of the Standard & Poors 500 Stock Index from 8/16/05 to 8/16/07.
[3] APY on FDIC-insured Citibank, N.A. 1-year Certificates of Deposit as of 7/23/07.
[4] Annual Percentage Yield (APY) on FDIC-insured E*TRADE Money Market accounts as of 7/23/07.

Overall, I think it is encouraging to see that sector of Prosper doing so well. In our posts on this blog we have tried to steer lenders toward A and AA loans to earn the best performance. However, Prosper does need to get better about creating straightforward marketing. Earlier marketing campaigns claimed that you could make up to 29% returns on Prosper which was also misleading since no one is earning those kinds of returns after fees and defaults.

1 comment:

Mike said...

I wrote up a post that compares the S&P 500 versus Prosper loans for the same time period and also factored in taxes (which also hurt Prosper).