New academic study estimates average Prosper ROI at 6%

wiseclerk 1 Comment

The new study "Dynamic Learning and Selection: The Early Years of Prosper.com" by Seth Freedman and Ginger Zhe Jin, both at the Department of Economics, University of Maryland analyses Prosper data in a time frame from April 19th 2006 to December 31st 2007.

The study analyses the development of the Prosper.com marketplace and how lenders refined their strategies as a result to own experiences and changed settings.

They write:

Overall, we conclude that Prosper is evolving from a comprehensive market to a market that primarily serves the borrowers who have access to traditional credit. This implies that Prosper will compete head-to-head with the traditional banks rather than pick up a missing market. Assuming away any cost in information processing, we estimate that the average rate of return of a Prosper loan is 6% if Prosper loans continue to perform according to what we have predicted from their existing performance. From the lenders point of view, this number compares favorably to 6-month certificate of deposit and 3-year Treasury bill, but less favorably to the rate of return implied by the S&P 500 in the same time period.

Other findings are that high interest loans yield lower returns due to high default rates and that the probability for defaults of Prosper loans peak at month 10 and the edge down.

The main uses of Prosper loans are:

33% of all previous Prosper listings have mentioned credit card consolidation, which is higher than the mention of business (23%), mortgage (15%), education (22%), and family purposes (20%) such as weddings.  

Cited from the conclusion chapter of the study:

The first two years of Prosper has enlivened the concept of P2P lending, but the road towards success is full of challenge. While it is tempting to expect P2P lending to alleviate credit rationing for near- or sub-prime risks, we find Prosper evolving from a comprehensive market toward a market that primarily serves borrowers who have access to traditional credit. This implies that Prosper will compete head-to-head with the traditional banks, rather than pick up a missing market. This pattern is not unique to Prosper. …

How can Prosper compete with traditional banks? Our study suggests that the microfinance approach, as implemented through Prosper groups, has failed to select good risks or enhance loan performance. But on the up side, lenders are learning fast about the pitfalls of P2P lending thanks to the transparency of Prosper. Our calculation suggests that, if the loans continue to perform as what we have predicted from the market performance, Prosper loans could yield an average return of 6%.

See related post on the Prosper blog.

Bankrate.com: Peer-to-peer online lending grows in tight economy

wiseclerk

A recent Bankrate.com article gives an update on the development of p2p lending in the US.

Chris Larsen of Prosper.com sees the current financial situation as a chance for p2p lenders:

Home equity used to be the cash management tool for the credit-worthy borrower, and that has really, really dried up. In many ways, Prosper's three-year, 25,000 US$ loan is a pretty good proxy for what people were using home equity for — improving their home, starting a sole proprietorship, college costs and certainly for replacing credit card debt.

Javelin Strategy & Research is quoted that credit card debt is the main reason people want to use p2p lending:

We're forecasting that P2P lending specifically for credit card balances will grow from 38 billion US$ in 2007 to 159 billion US$ by 2012

The final advice of the article is:

Prospective borrowers and lenders would do well to thoroughly research P2P companies before jumping at the chance for a lower rate on a loan or a higher return on an investment. …

Greennote – p2p student loans at a fixed low interest rate

wiseclerk

Greennote.com will offer p2p loans to help college students pay for their education. Unlike at the competitor Fynanz, at Greennote interest rates are equal for all loans – at launch 6.8%.

Greennote puts a lot of trust in students. All that's required is a school id. No credit checks.
From the Greennote Lender FAQ:

Q: Is there any collateral for the loan? Does the student go through a credit check?

No collateral is provided. This is an unsecured loan. And there is no credit check for the student. You are making this loan because you are helping your student and believe in his or her potential. It’s an investment in someone’s future. At the same time, this is not a handout and you will receive a return on your money.

However, as with any loan, there are risks involved. GreenNote cannot guarantee the repayment of any loan. If a student is unable to repay the loan and defaults after leaving school, GreenNote will provide collections services. We will report delinquencies to credit agencies, which will impact the student’s ability to get credit in the future.

The terms sound certainly attractive for students, especially for those with a low or no credit grade. Students can defer payments while in school:

Payments begin six months after the student finishes (or leaves) school. The student can also defer payments for the entire time he or she is enrolled in school, for up to a maximum of five years.

Student then have 10 years to pay back the loan. They can pay it back early any time without a penalty.

Whether this model appeals to lenders remains to be shown. A slogan on the site says: "Help students you know" – so Greennote is targeting relatives and friends who lend to students.

According to TechCrunch, Greennote raised 4.2 million US$ venture capital from Menlo Ventures and Glenbrook Partners last year.

Status of my MyC4 loans

wiseclerk

I have lend money in over 170 loans on MyC4.com. My average interest rate is 13.8%. There are no defaults yet (not only in my portfolio, but overall). But lately there are several loans that are late (usually up to one month).

In the account balance late loans are recorded as repayments with zero value:

Latest borrower who went late is Sarah Akany, who runs a computer training and internet center in Uganda. I don't really worry, since she went late once before and caught up again.

The provider (CMC) posted the following notice to lenders on the blog:

Dear investors,

We have contacted the client and she has promised to clear the late payment. We shall continue tracking the client and ensure payment.
Thanks.

 

MyC4 with new look – currency risk now to be covered by lender

wiseclerk 1 Comment

Today MyC4 presents itself in an all new shiny layout. On MyC4 lenders can give loans to small businesses in Africa. Unlike at Kiva, lenders at MyC4 earn interest. So far 1.8 million Euros (approx. 1.2 million US$) have been invested in loans and there are no defaults yet – only several late payments. With the new release …

… three key elements have been prioritized on the new website; usability, design and communication. We have made it easier to understand what MyC4 is all about, how to join, how to upload money, how to find a Business, which fits your criteria and lastly how you invest and re-invest.

According to MyC4 the changes in today's release are:

  • The look of MyC4.com has been updated
  • Improved navigation making it easier to find your way around via a top menu and a left hand menu with sub-levels
  • “Opportunity” changed to “Business” – to access the overview of Businesses, click on “INVEST” in the top menu
  • MyCredits is now changed to EURO (€)
  • The Investor now carries the Currency Risk
  • Withholding tax

I also noticed that MyC4 is no longer marked as "beta".
The handling of currency risk is a major change. The announcement email says:

At MyC4 we want to offer a sustainable and easy to understand solution for the African Businesses. The currency Risk has until now been carried by the African Business, but this has uncertainty for their loan conditions.

To ensure that MyC4 and the African Businesses are sustainable in the long run a new model for the Currency Risk has been developed. We now transfer the Currency Risk to the Investor, which has to be covered by the size of the interest rate you demand.

As a consequence please be aware that going forward there is a Currency Risk on your new investment when investing in some African countries. MyC4 cannot advise on the daily currency development, but based on the last 3 years currency fluctuation we suggest as a guideline that your add the following percentages to your normal wanted interest rate to cover for the potential Currency Risk;

Uganda 6%
Kenya 2%
Côte d’Ivoire 0%

This means that if you where planning to Bid on a Business in Kenya with an interest of 8% in mind you now add the 2% – so you Bid 10%, but will properly get 8% depending on the currency fluctuation over the period of the loan.

 Screenshot of MyC4 in new design
 MyC4 new release