American Banking News has recently come under fire from members of the “Prospers” peer-to-peer lending community for citing Prosper.com’s statistics about the interest rates that its investors are earning, contending that the true interest rate that borrowers are earning is much lower and that most lenders are actually losing money by investing in personal loans through the company.
Until recently, Prosper.com reported on its homepage that lenders were earning an average interest rate of 7.12% on their homepage. The interest rate that it posted was based on a hand-picked investment portfolio that the company had outlined in their prospectus. Now Prosper.com is advertising that its investors earn an average interest rate of 7-13% depending upon the loan portfolio that the investor places.
Prosper.com places the following disclaimer on the interest rates that they purport that their investors earn:
The Estimated Return is presented to help you evaluate this portfolio plan and set an appropriate minimum yield and bid amount. Estimated Return is the average annual expected return on funds invested in this plan and is calculated by subtracting the estimated weighted average loss impact of all slices from the minimum bid yield. The estimated impact of credit losses is derived from the following components: estimated average annualized loss rate for a portfolio of similar loans (based on the historical performance of Prosper loans for borrowers with similar characteristics) and an adjustment for accrued interest not collected and late fees on defaulted loans. The calculation of Estimated Return requires significant assumptions about the repayment of loans and lenders should make their own judgments with respect to the accuracy of these assumptions. Actual performance may differ from estimated performance.
Prosper.com provides its loan data to its community to splice and interpret using any data analysis tools that they would like. One website, Eric’s Credit Community, has taken Prosper.com’s data and created a chart based on the interest rates that lenders on Prosper.com are earning. They have calculated that the mean interest rate that lenders are earning is -2.97% and the median interest rate that borrowers are earning is -2.00%
Here’s how Eric’s Credit Community calculates their mean and median rates of returns for Prosper investors.
“The graph below shows how lender performance on Prosper breaks down based on EricsCC ROI. This should give you some idea of what the typical return for a Prosper lender has been historically. You can also use the criteria below to narrow down the lenders to only those with specific portfolio attributes to make the data more meaningful.
The graph will only include ROI brackets where there are at least 50 lenders and only includes lenders with an average loan age of at least 30 days. This is to help eliminate some of the outliers and those for whom we can’t yet calculate an ROI figure.
The table below the graph shows the same data in tabular format along with some other interesting information about the lenders in each ROI group such as average loan age and average amount invested.”
What’s the true average interest rate that borrowers are earning on Prosper.com? That number will vary based on the assumptions made in the calculation, what outliers are removed, and which loans are used to calculate the averages.
The average rates of return investors are earning on Prosper.com are likely much closer than to what Eric’s Credit Community is reporting than what Prosper.com is publishing. Prosper.com has an incentive to artificially inflate the rates of return that its investors are making and Eric’s Credit Community does not.
Although this does not alone give Eric’s Credit Community more clout, it has been widely reported that 40% of Prosper.com loans have gone delinquent. There are also dozens if not hundreds of anecdotal stories about losses from and very low interest rates earned on on Prosper.com that have been posted online by former and current Prosper.com investors.
