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Comparing Returns on 36-Month and 60-Month Loans

by Peter Renton on August 24, 2011

Last year both Lending Club and Prosper introduced 60-month loans for borrowers. Before that the only loan term available was 36-month loans.

These 60-month loans have become very popular on Lending Club these days accounting for more than 1 in 3 loans originated in the last year. On Prosper they have accounted for just 10% of loans since they were introduced in October last year. I should also note that Prosper introduced 12-month loans at the same time but there have been just 300 of them originated which is not a big enough sample size, in my opinion, to allow for meaningful analysis.

It has been 15 months since these loans were introduced on Lending Club and 10 months since they were introduced on Prosper so I thought it was time to take an initial look at these loans and see how they have been performing. Given the fact that there is some extra risk involved for p2p investors I would hope that there would a corresponding higher return.

I fired up Lendstats and ran a few queries looking at 36- and 60-month loans on each platform originating between October 1, 2010 and August 24, 2011. Even though Lending Club has been providing these loans since May 2010 I decided to look at just these last (almost) 11 months in order to get an apples to apples comparison. The table below gives us a snapshot of what has been happening.

Loan TermLoans31+ Days lateAverage Interest RateEstimated ROI
36 mth - Prosper64202.80%21.54%9.65%
60 mth - Prosper6610.45%18.93%12.92%
36 mth - Lending Club102030.78%10.63%7.03%
60 mth - Lending Club57531.13%15.07%9.78%

With only 661 60-month loans on Prosper it is difficult to draw any major conclusions on the performance between the two sets of loans although the 60-month loans do appear to have an ROI that is currently trending higher. The one curious thing about Prosper is that the average interest rate on these 60-month loans is lower than on their 36-month loans. The reason for this is that the 60-month loans are only available for grades AA-D and these loan grades carry the lowest interest rates.

A 2.75% Premium for 60-Month P2P Loans

On Lending Club we have a good dataset with thousands of loans being originated in both categories. Here, you can see that according to Lendstats the ROI is trending 2.75% higher for investments in the 60-month notes. This is roughly 2% less than the premium that is given to these loans at Lending Club but still high enough in my opinion. Keep in mind that Lendstats takes into account these late loans in their ROI calculations.

There is a concern that the number of loans that are 31 days late or more is a higher percentage in 60-month loans than in 36-month loans on Lending Club. I would have expected a similar or lower percentage. This is something I am going to watch closely. At an average loan age of just over five months we still have four and a half years to go before most of these loans will reach maturity.

I have been investing in both types of loans for some time and after seeing this initial data I will continue to do so. I will be revisiting this data from time to time to make sure the ROI difference is maintained and I will be sure to share my results here. It will be several years before we have any definitive data but the next time I look at these loans I want to see this gap in the ROI maintained.

I know plenty of p2p investors who ignore 60-month loans because of the greater risk. Right now, I am still comfortable investing in these longer term loans. But I think we need to keep a close eye on them going forward. What do others think?

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{ 36 comments… read them below or add one }

Matthew Paulson (P2P Lending News) August 24, 2011 at 3:50 pm

Thanks for the insights!

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CA-Lender August 24, 2011 at 5:17 pm

I like the 60 mo loans, mainly due to the higher ROI, and longer time period to receive that return. (Side note: I find it funny when borrowers say that they plan to pay off the loan much quicker then the fully term, which means, same risk of default, while earning for a shorter period. I avoid the 12 month loans and notes when the borrower plans to pay it off early).

I just ran my numbers on Lendstats for 36 and 60-mo notes I invested in from Jan 1, 2011, and the 60 mo ROI is about 6% higher then the 36 mo (15% v. 9%).

I also think that the 60 mo notes will have a higher resale value on Foliofn, after a few months of aging, due to the higher rates.

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CA-Lender August 24, 2011 at 5:44 pm

PS to my previous comment:

I’ve invested in:
1525 -36 mo loans in 2011 (ROI: 9.2%)
231 -60 mo loans in 2011 (ROI: 15.5%)

Not a huge sample size, but not small either

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Charlie H August 25, 2011 at 8:50 am

CA-lender
Since you mention 12 month loans I’m assuming your a Prosper investor?
With 1525 36m loans you are slightly under performing, but you are over performing on your 60M loans. Do you use the same selection criteria for both or is it just chance. (since with 231 loans of 661 issued random chance is likely)

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Peter Renton August 25, 2011 at 11:15 am

@Matthew, You’re welcome.

@CA-Lender, Thanks for sharing. I would like to invest in more 60 month loans on Prosper but I only occasionally see a loan that meets my filtering criteria. When I spoke with management there recently they said they are pretty strict on approving a 60-month loan which is why you see so few of them on the platform. That is certainly not a small sample size you have so it will be interesting to see if the 6% difference in ROI will stay that way going forward.

@Charlie, Yes CA-Lender is a Prosper investor. That is a good question you raise about loan criteria. But keep in mind CA-Lender is talking about 2011 loans and my table goes back to October 1, 2010. According to Lendstats the ROI on all 36-month loans originated in 2011 as of today is 8.83% and on 60-month loans it is 12.71%. This suggests that CA-Lender is outperforming in both categories although much more significantly in the 60-month loans.

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Roy S August 25, 2011 at 2:06 pm

It will be interesting to see how the 60-month loans perform over the long haul. I think another contributing reason why the 60-month loans are performing better than the 36-month loans is average age of the loans (4.2 vs 5.4 months using Nov 2010 as the base month). But trying to do a comparison on a month-by-month basis (based on when the notes were issued) yields too few 60-month notes to have a good sample comparison. Perhaps the higher yields coupled with the stricter UW policies you mentioned Peter will result in a higher ROI on the 60-month notes.

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CA-Lender August 25, 2011 at 2:45 pm

@Charlie:

My am still tweaking my selection criteria, but part of the low returns are due to my investments in March (about 50% of all my 2011 invested funds), when I invested in almost every note offered that month, including AA and A. I received a cash bonus, plus warrants in the company, so my low ROI is slightly offset by this. As of April, I began only investing in C-HR notes.

Other then that, my current selection criteria (36 v 60 mo notes) is the same.

FYI: My Prosper nickname is CA-Lender, so you can view my numbers on lendstats

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Roy S August 25, 2011 at 2:45 pm

*correction: the 36-month loans have an average age 5.2 months instead of 5.4 months. I was taking a look at AA – D loans for a better comparison since Prosper does not issue 60-month notes below grade D. It is interesting to that during this AA – D 36-month notes performed better than all 36-month notes, even with 0.2 month increase in age of the loan. It is to be expected with a higher default rate on the lower grade notes that they would not perform better in the short term than higher grade notes. But as the notes begin to mature, the higher interest rates would offset the higher default rates and the lower grade notes perform better than the higher grade notes overall.

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Roy S August 25, 2011 at 2:59 pm

Sorry for the third comment in less than an hour, but my second comment might suggest that it would be wise to purchase a higher grade note at the outset and then sell later on the foliofn secondary market while waiting until later in the life of the note to purchase a lower grade note on the secondary market. Purchasing lower grade notes on foliofn would require strategically buying at the point where the notes have aged enough to where there are statistically far fewer defaults while at the same time having a long enough lifespan where you’re getting some interest back instead of mostly receiving your principal back. I am wondering whether anyone has looked into this as a viable option.

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Peter Renton August 25, 2011 at 5:02 pm

@Roy, That is the big question isn’t it. How will these notes perform over the next four and a half years? In particular what no one knows is what the default curve will look like. There will certainly be defaults after 36 months, but will they be a tiny percentage? No one knows yet, we can just Mae educated guesses, just like the underwriters at Lending Club and Prosper.

I know of several investors who have pretty sophisticated Foliofn strategies where they buy notes that are 9-12 months old, which presumably reduces the number of defaults while still allowing for some decent returns from the interest. It is not something I have explored much myself simply because I prefer investing in the primary platform.

@CA-Lender, Prosper were certainly running some great promotions in the first half of they year. Glad you were able to tale advantage of them. It helps the real world return on your money.

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Louis Lamoureux August 26, 2011 at 6:12 am

Peter,
I applaud you for stepping out on a limb (looking at early data to improve returns), but I’m not sure your analysis is valid. My concern is that you are taking a snapshot early in the life of those loans. Based on an analysis of 36 months loans, approximately 70% of the loans that are going to default do so in the first 17 months. The curve peaks relatively early for 36 month loans (I think it was somewhere around 6 to 9 months), but we don’t have enough experience with 60 month loans to make a judgement call.

What if the lower payments of 60 month loans pushes the peak out further? If the peak of defaults occurs in the 60 month portfolio at the 12 month versus 9 months for the 36 month, then your analysis will be show 60 month loans looking better, but it may or may not be wrong. We don’t have a long enough track record with 60 month to know what that curve looks like yet, it may be flatter and longer. For all we know, all 60 month loans default at year 3. We just don’t know. We need more time/data to draw conclusions.

Sincerely,
Lou

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Peter Renton August 26, 2011 at 10:01 am

@Lou, I certainly don’t think that this is a definitive analysis. All the points you make are valid. But I think it is still useful to look to see how these loans are performing to get some indication of future ROI. I think it is more useful than doing no analysis at all. I, for one, am not going to wait another three years before I find out the difference in default curves of 36-month vs 60-month loans. I will re revisiting these loans every six months or so to see if the current trend is maintained.

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CA-Lender August 26, 2011 at 4:51 pm

After reading this, I analyzed 12M notes, and, they are even worst performers then I expected (I’m investing in very few 12M notes since May). My return over 51 notes is -3.96% (+-8.33%) according to Lendstats, while overall their ROI is only 3.19% (+-4.08%).

Seems like 12M notes might end up being a dud for Prosper, but I’ve very excited about the ROI on 60M notes (so far).

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Roy S August 26, 2011 at 5:19 pm

@Ca-Lender, overall 12-Month notes are performing positively but at a far lower return. I think as you get over the default curve that your returns will at a minimum get less negative and hopefully turn positive. Since your loans average a D grade, it would be expected that they would generally tend to perform worse overall when they are younger. Once the majority of defaults occur, the lower grade notes tend to perform better as they age due to the higher yield on them…at least the 36-Month notes show this as their trend.

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Dan B August 26, 2011 at 5:31 pm

I think that 4 yrs from now when we can look back at the “actual” performance of the Prosper’s loans that we’re talking about right now, we will find that it turned out to be much lower than what is being talked about today. Though I have little doubt that many of you will outperform the average, that average isn’t going to be the 10.6% that Prosper keeps harping about (though that number isn’t real even today). I’d be shocked if it’ll end up over 7%………….a more likely number should be around 6%. I’m talking overall regardless of whether it’s a 12M, 36M or 60M.

Of course only time will tell, but I am looking forward to that day when I can once again point out how delusional those aspirations of 15%+ returns being made today really were. And when that day comes I don’t want to hear excuses like the economy or how a new Prosper 3.0 will be better than 2.0 etc etc. A statement that contains something to the effect of Dan you were right or Dan I was an idiot will suffice. In the unlikely event that I’m wrong I’ll be sure to pay the appropriate homage as well. Of course all of the above is assuming that Prosper will still be around 4 years from now, but that’s another topic entirely.

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LC Joe August 26, 2011 at 7:54 pm

@Dan B – <>
I have had a Lending Club account since August of 2008 and the above quote from your post is what I consider to be the true risk involved with this investment. For that reason I monitor the news, venture capital investments, number of loans available to invest in, number of loans fully funded, and anything else I can gather regarding the health and growth (or the inverse) of the P2P industry. Some, but not all of my concerns are, competition from the banks themselves, being sold to a bank or other entity, and poor business management. That said, so far so good, at least where Lending Club is concerned. I have real confidence that their figures are as reasonably accurate as can be expected. I also have quite a bit of confidence in the credit management professionals they have on board. Will they be around in three, four, or five years? I don’t know, but I think so.
Because this is a risky investment I am expecting risk adjusted returns. I would like to earn at least 10% on my risky investment year over year. This is the first year I have not made deposits or received any bonus money from Lending Club. Here are real world results this year through July using statements, not the splash page:
4818 notes – Xirr in Excel from statements
-$210,625 12/31/2010 balance
$222,208 7/31/2011 balance
XIRR 07/31/2011 9.66%
The splash page is usually within less than .25% of what I calculate the xirr to be and year over year I think is just as accurate as the statements to calculate return. I have a prime account and in May I increased my desired target return to 14.5% which should yield between 10 and 11 percent. Using splash page figures (account summary) as of today my xirr is over 10%, but just barely:
-$212,128 12/31/2010
$225,847 8/26/2011
XIRR 2011 10.09%
I will try to update these results at year end. There is a lot of good information on this site and the sharing of information can only help all who are interested (or not) in P2P lending.

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Roy S August 26, 2011 at 9:37 pm

@Dan B, I see you’re an optimist! Well, I’m banking on the government bailing me out if Prosper goes under. You might attribute this to an over-sized ego, but I really am too big to fail. Come to think of it, I need a subsidy, too…

I would disagree with you that the 15%+ returns are delusional. I do not believe that will ever be the norm, and that few investors will actually see this return (though others might even disagree with me on this). Really, a 6 or 7 percent return is decent enough for me–much better than my 1% savings account or the less than 2% CD’s my bank offers. I think this forum is a valuable tool for investors to gather and discuss strategies while sharing experiences, knowledge and results. With any luck, you will be correct, and the result will be that many of us will outperform the average.

I think everyone here is optimistic, but still cautious and grounded in reality. You seem to be self-assured in your assessment that Prosper will fail. (You also seem to be waiting around just so you can say, “I told you so!”) It may very well fail, but I’m hopeful that they will succeed. I like the concept of p2p lending, and I’m willing to take the risk that they may fail to support this fledgeling industry. (As a side note, Henry Ford had three car companies. The first two failed, and the third company was Ford Motor Company. Colonel Sanders’s secret recipe was rejected over 1,000 times. Just because v1.0 failed doesn’t mean v2.0 or v3.0 will also fail. I do hope there won’t be a need to have a v3.0, however.)

fyi: “In the unlikely event that [you're] wrong,” I don’t need your homage. My investment returns will be more than enough. But I thank you for the offer regardless!

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Dan B August 27, 2011 at 12:42 am

Roy S………..I support the bailout idea. There are 2 problems. One is that there are way too few investors to be significant. Now if we had a million people investing in p2p it’d be a different story. And two, p2p poses no systemic risk to anything. We put in $1 & $1 is loaned out. Now if we we’re allowed to deposit $1 & loan out $5, then we’d be eligible for a bailout because we’d be too important to fail. Imagine the returns we could then be making.

As for Colonel Sanders………….how can a recipe that is rejected 1000 times still remain a “secret”? And secondly, have you eaten that stuff?

Henry Ford made something that people bought. A product that you could easily say changed the world. Let’s not put Chris Larsen in that category. Chris Larsen also started E=Loan, so he’s already had his successful venture. And when I mean successful, I’m referring to the success he had in getting out while the going was good. In any case my guesstimate is that he will return to the mean with Prosper & the only question that would remain in that scenario is how much OPM he will take down with him.

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Peter Renton August 27, 2011 at 6:13 am

@CA-Lender, With only 306 12-month loans originated the sample size is just not big enough to draw any conclusions. Today Lendstats is saying that the estimated ROI on these loans is 4.38% with a + or – variance of 4.63%. So we could be negative on these loans overall or we could be over 9%. Either way there just aren’t enough loans on the platform to make much of a difference yet,

@Dan, No one here has any idea what the returns will be for Prosper or Lending Club in four years time. But I stand by my opinion that there will be some investors (hopefully myself) that will be earning 15% or more on their Prosper investments. The average may well drop below 10% but that doesn’t mean that some investors won’t continue to do very well. And Dan, in four years time I expect you to do a guest post on this blog with the title, “I Was Wrong, I Guess You Can Earn 15% at Prosper”.

@LC Joe, Thanks for chiming in and sharing your results. With such a large loan portfolio I expect it will take quite a while for you to increase your returns but best of luck in doing so. Keep us informed.

@Roy, Like most investments there will be those people who do very well (which will drag up the average) and the majority will do average or slightly below average. As long as p2p lending remains in existence and both Prosper and Lending Club continue operations I see tremendous opportunity. There is risk, of course, but I feel well compensated for that risk. There is also risk that the Dow will be at 5,000 in three years time with several countries in Europe defaulting on their sovereign debt. I feel that in a worst case scenario for p2p lending (a Prosper or Lending Club bankruptcy) I will get back more than 50c on the dollar. And in the meantime I get steady double digit returns.

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LC Joe August 27, 2011 at 9:55 am

I just noticed that the quote from Dan B that I referenced in my first post did not get displayed. I wonder why? The quote is:

“Of course all of the above is assuming that Prosper will still be around 4 years from now………”

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Roy S August 27, 2011 at 10:07 am

@Peter, re: “There is also risk that the Dow will be at 5,000 in three years time”

There was an article I read (I can’t remember where at the moment), but they were discussing the stock market declining or remaining relative flat due to the demographic shift in the US population (read: Baby Boomers retiring). It was based on the ratio of those aged 40 years versus those aged 60 years. As baby boomers were reaching the age of 40 and really started investing in the stock market, the market precipitously rose as there were fewer people in their 60s selling stocks as they retired. Now they are expecting the trend to reverse with there being more sellers in their 60s than buyers in their 40s. Obviously, the article mentioned the specter of China and other countries keeping demand up or relatively stable for US equities. The problem is that even in looking back 3 years, it is becoming more difficult to predict future outcomes. The world is changing very rapidly. In 4 years time, I don’t know whether we can use the returns of these coming years to accurately extrapolate the returns for the next 4. I’m certain more legislation and government oversight, increased awareness of p2p lending as well as shifts in global power, the economic and demographic environment, and political winds are headed down the pike. That being said, I would tend to agree with your worst case scenario.

@Dan, yes, I have eaten KFC…maybe two or three times in my life. I don’t care for their stuff. But I also don’t really care for fast food in general. I would say that in the last 6 months, I have only eaten fast food twice–both times were at Subway. The point I was getting at was that sometimes it takes multiple tries to succeed with something. Just because it has failed once or twice doesn’t mean it won’t eventually succeed.

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Dan B August 27, 2011 at 5:08 pm

LC Joe………In terms of long term viability I think that Prosper’s is a much greater concern than Lending Club’s. Anyone with a free afternoon can do some research & reach their own conclusions as to what they think of the way that business has been run from the start. People here like to say that Prosper learned from it’s early mistakes & blah blah blah…………….& though there is some truth to that, they continue to suffer from a massive CREDIBILITY problem. On top of that if you objectively compare Prosper & Lending Club you will start to notice that all the little things point to things being done at a more leisurely pace over at Prosper…………..even though they’re doing a quarter of the business of Lending Club. What am I talking about? Transfers, both in & out, take longer. Sales on Folio take up to a week to settle at Prosper, they never take more than 3 days at Lending Club. When I had an active account at Prosper there were a number of occasions when fully funded notes would sit there in “pending” status for a week, sometimes 10 or more days. And these are just things that come off the top of my head. Of course then there’s the money problems, the long road ahead to any profitability, the tiny average investor numbers, the unsettled lawsuits with former lenders etc etc. So…………………..

I think your Prime Acct. at Lending Club is doing great. I’d be curious to see how much of a bottom line improvement you will see with your new higher return target & whether you’ll think it’s worth the extra risk/volatility. My guess is that improvement will be marginal if at all, but I’m rooting for you in hopes that I’m wrong. I run 3 accounts at Lending Club & have never used Prime so I may very well be wrong. I look forward to your performance updates. How long has the Prime account been open?

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Dan B August 27, 2011 at 7:24 pm

Peter…………..I’ll be happy to come here & admit to all that I was wrong if that proves to be the case. And incidentally I never said no one could get 15% at Prosper. I’m sure someone will. Someone will also win the lottery. In fact plenty of people win the lottery. I wouldn’t advise aiming for that as a “goal” though.

And by the way, you have no idea how relieved I feel that despite your belief that no one here has can predict future events………….. that you’ve somehow feel confident in your “belief “that you’d get 50 cents on the dollar in the event of any bankruptcy. Based on what extrapolation did you come up with that number?

I also didn’t know that you have been getting “steady double digit returns”. Certainly not with the Prime account you shared here recently. So you’re comfortable in saying that the bulk of your investments have been earning “steady double digit returns”? Or is that another belief or extrapolation going forward?

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Roy S August 28, 2011 at 1:22 am

@Dan, Here is why I agree with Peter’s belief that we’d see at a minimum 50 cents on the dollar in the event of bankruptcy. Peter may have come to the similar conclusion differently, so I don’t mean to speak for him.

1) The pre SEC registration loans had a return of approximately -4.6%.
2) The pre-relaunch loans had looser UW standards.
3)The pre-relaunch was prior to the latest economic downturn. I am not entirely sure whether the average FICO score is lower now than it was in early 2008, but I think a lot of people got hit hard by this last downturn. Based on those assumptions, I believe that FICO scores may be a better reflection now of a person’s creditworthiness than when people kept taking money out of their over-inflated home equity to support their unsustainable lifestyle. I also believe that people have become a little wiser with their money, banks have written off bad debt, and there are fewer people out there with a good FICO score who don’t really deserve to have one.
4) Just because Prosper goes out of business doesn’t mean the loans stop being serviced. Their backup plan allows for the loans to be serviced by a third party loan servicer. Since our Notes are treated as an unsecured debt claim against Prosper, there can still be issues with actually getting our money back if a third party servicer were to take over. Even then, I don’t believe that we will be entirely up a creek without a paddle.

The majority of companies that go through Chapter 11 unsecured creditors receive more than 50% back. Because of the way Prosper is set up, I don’t believe that if they were to go through a reorganization that we would see anything below 50%. Even with holders of Notes getting anything below 90% back on their principle would make it difficult for Prosper to come out of Chapter 11 successfully. Under that scenario, I wouldn’t expect to see the current lender members adding to their positions, and Prosper’s ability to attract new lenders would be severely hurt. Even before Prosper gets to this stage, I would expect them to find ways to increase revenues first (like a 1.5% servicing fee instead of 1% or higher origination fees). Since I believe that the assets of the Notes will remain relatively stable at a minimum (points 1 through 3 above), I don’t see a significant loss of principle on the notes themselves either.

In the absolute worst case scenario (and Prosper files for Chapter 7), we as unsecured investors would expect to receive around 35% of our unsecured debt (principle of our Notes) based on historic averages–because of the way Prosper is set up I would actually expect 35% recovery rate to be on the low end. Further Prosper appears to be able to continue as a going concern for another 2 – 2.5 years assuming current loss rates and no new cash infusions. Depending on when you started investing and when Prosper actually files, a 50% loss on your investment principle is reasonable.

But again, this is just my view of what the absolute worst case scenario–if Prosper were to go bankrupt–would look like. It is still feasible that we could walk away with nothing; however, in my humble opinion, I really do not see that happening.

Note: This is going off of Prosper data. I still haven’t really had the time to look into LC’s data, so I can’t make any inferences there. But from what little research I have done, I would disagree with you Dan. I think Prosper is actually in better financial shape. Try a $3.5 million loss for the first SIX months of 2011 at Prosper versus $3.1 million for the THREE months ended June 30th for LC—Prosper also has more cash and cash equivalents than LC at the moment. Prosper may be doing a quarter of the business, and their pace/practices might be more leisurely (try unbearably slow at times!), but they are losing money at a slower rate this year than LC. Obviously, I understand that things can change quickly.

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Dan B August 28, 2011 at 5:16 am

Roy S………….I hate to do this to you after all that time spent writing your post, but you almost couldn’t be more wrong. In terms of whether we get any money back or not………….we are the lowest on the totem pole in any type of liquidation/bankruptcy etc. You’re essentiall ay unsecured bondholders of a company that has never made any money & doesn’t look like it will for at several more years, if ever. What assets other than the loans does Prosper have? Goodwill? Come on, the answer is nothing. The cash will be pissed away just as the previous rounds have been. You think the federal government has pulled out all the stops to stimulate growth? Well Prosper’s really pulled out all the stops to stimulate growth. And what have they gotten in return? A massive increase in loans originated? Well no, not really. Surely a massive increase in investors & investor deposits then, with all the bonuses? Well no, not even that. As for losing money every month, I thought it was common knowledge here that Prosper is years away from any break even scenario. Lending Club on the other hand is there pretty much now, or at least on an operating basis.

So I mean I could go on but I don’t see the point rehashing everything that’s already been said. As it is I’m sure Peter will soon suggest that I’m bashing Prosper so I’ll just stop here & go do something more productive & stimulating. These are my final words on this topic. Good luck to you.

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Roy S August 28, 2011 at 8:50 am

@Dan,

A. Unsecured creditors aren’t the lowest on the totem pole. Unsecured creditors are above preferred and common stockholders.
B. I was using historical data based off what unsecured creditors receive in the case of either Chapter 11 or Chapter 7.
C. The largest asset Prosper has are the loans ($44.5 million). In my previous post I stated they would remain rather constant in value, even if they were sold in Chapter 7 at a discount price.
D. The largest liability Prosper has are the loan payments made to us, the lenders ($44 million).
E. Total liabilities are $46 million (i.e. other than the notes, Prosper only has $2 million in liabilities as of the last quarterly filing).
F. I laid out to you that LC had an operating loss of $3.1 million in the last quarter, while Prosper had a $3.8 million loss for the first half of the year. It doesn’t seem to me that LC is any closer to break even than Prosper. Until either demonstrates a positive cash flow from operations in their financials, I remain skeptical of how long they can remain an ongoing concern.

Ultimately, the success of each company will come down to borrower rates and lender returns. If Prosper can demonstrate that they can provide superior returns to lenders while providing competitive rates to borrowers, then I would see more lenders and borrowers switching over to Prosper. But that gets into speculation at this point.

I don’t consider you bashing. You just have an entirely different view and perception than I do. I see you are bearish on p2p lending and more so on Prosper. It is useful to see your opinions and analysis. You have different knowledge and insights, which will be helpful in my continuing research. My hope is that you eventually become more bullish on each. Assuming that I’m still hopefully optimistic and haven’t turned bearish myself, your change in view would be a further indication to me that the industry is in a better position to survive. I would still need to do my DD, but I would view it as a positive sign.

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LC Joe August 28, 2011 at 9:51 am

@Dan B – I opened my Prime Account in April 2010 and I couldn’t be more pleased. If I had done more research I think I would still be earning over 10%. I was targeting a 10% return and consequently the weighted return on all notes was 13.30% with an expected return of 9.92%. That’s pretty close to where I am now. I was just cutting it too close. Since raising my target return the weighted rate on all loans has very gradually increased to 13.35% and will continue to do so for quite some time. It’s like turning a battleship around. Once it gets above 13.5% I hopefully will be back above 10%. I neglected to mention before that I raised my target to 15% a week ago to hopefully get there a little sooner but it will take a while. I will most likely lower it back to 14.5% in about 6 months or so. I am trying to keep my greed in check here but with the risk involved I don’t think that expecting a 10% return is unreasonable. As far as volatility goes it’s one thing if it is unexpected, but the expected default rates are a known and can therefore be factored into my goals. We agree I think that the real risk is the health of the industry and of Lending Club specifically. I know nothing about Prosper but I am watching Lending Club closely and am very impressed. One other huge negative is the lack of liquidity. If you have that figured out I would love to know.
The prime account gives me great access to a lending club advisor who makes the loans based on criteria I supply. For example I recently started excluding education loans. Reinvestment is frequent and efficient. I couldn’t begin to imagine making the loans myself. I think eventually the reinvestment will be software driven.
For fun here is my all time history. It includes referral bonus returns which is why it looks so good. I got a 3% bonus on the first large deposit and a 4% bonus on the second large deposit.

All time
$0 11/21/2008
-$250 11/22/2008
-$1000 6/3/2009
-$29000 4/16/2010
-$165,785 7/30/2010
$226,001 8/28/2011

XIRR as of 8/28/2011 13.40%

As of today my splash page says I am earning 9.97%. My XIRR calculation is showing 10.06% from the first of this year.

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Dan B August 28, 2011 at 10:08 am

LC Joe……..Liquidity isn’t as big of a problem as I had initially assumed In the first 4-5 months of this year I sold almost 300 notes at a net 2% premium on the trading platform. Keep in mind though that these were $25 & some $50 notes. I’m guessing that $75 & $100 notes are tougher to sell. In your case though I’m not sure if the Prime Account allows you to sell any notes on the trading platform….it being a hands off account & all. But if it does & you’d like more info. just let me know & I’ll go into the specifics of what notes I sold & all that other stuff.

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LC Joe August 28, 2011 at 3:30 pm

@Dan B – I would really like to know the specifics of your liquidity solution. If it is too off topic to post here you can send me one of those electronically transmitted communications to zwzoznzsz0z1 via that chocolate drink in a bottle dot com. Oh and remove all of the last letters of the alphabet. Thank you for offering.

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Peter Renton August 29, 2011 at 10:50 am

An excellent discourse, gentlemen. I appreciate the reasoned discussion here.

@Dan, It is an interesting comparison you make between earning 15% with Prosper and winning the lottery. By making that comparison I presume you mean there is no skill involved in picking Prosper loans and if any investor receives that kind of return it is pure luck. Obviously I disagree with that and I am surprised that someone who spends so much time selecting p2p loans that you would believe it as well.

Now, on to some of your questions. Yes, I am earning double-digit returns right now. It is true that my PRIME IRA that I shared here earlier this month is only earning a real world return of 9.42% over the last 12 months but I have several other accounts. My PRIME Roth IRA earned 11.83% (actual return) over the 12 months ended July 31 and I have four other accounts between Lending Club and Prosper some of which have not been open a year so it is difficult to make an accurate ROI assessment. But I stand by my statement.

Let’s talk about my 50c on the dollar statement on a potential return to investors if a Prosper bankruptcy were to happen. While it is true that Prosper investors will not be first in line in the event of a bankruptcy, I looked at their balance sheet and see very few liabilities. In fact, outside of the p2p investor notes they have only $2.23 million of debt. In other words 95.2% of Prosper’s total liabilities are to their investors. Now, assuming things go downhill for them I would expect more liabilities to be incurred but I think 50% is a very conservative figure when it comes to what investors might reasonably expect back. It could easily be more than 75%.

@Roy, First let me say to you that I agree with most of what you said despite Dan’s belief that you “couldn’t be more wrong”. Dan has strong views, which of course he is entitled to and I am happy that he continues to share them here. Now, I am not a corporate bankruptcy expert so I can’t comment on your assumptions about recovery rates when compared to the historical averages.

The one thing I disagree with you on is the financial position right now. Lending Club is in a much stronger financial position than Prosper at the moment. Sure, Lending Club is burning through cash right now but they just received another $25 million in cash a month ago – this is not reflected in any of their financial reporting as of yet.

Thanks for contributing to the conversation. We all have different opinions and areas of expertise and I know I learn a great deal from all these comments.

@LC Joe, With a Lending Club PRIME account you don’t have access to the trading platform. Part of the deal with PRIME is that you are allowing Lending Club to do the investing for you. If you want access to the trading platform you need to take your account off PRIME. This will also mean doing the reinvesting yourself. This is really not that difficult. I use an Excel spreadsheet with some macros and I invest once a week in new loans. It takes me less than five minutes. One of these days I will detail my process on here.

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Dan B August 29, 2011 at 3:29 pm

Peter…………A couple of minor corrections. I don’t spend much time at all picking notes. Remember I’m the guy who didn’t read the Q&A section even when everyone could ask questions. In fact I’ll spend a helluva lot more time writing this post than I spent picking 6 notes today on LC.

No, I don;t believe that high returns are entirely due to pure luck. I think there is skill involved, but I don’t think that skill is as big a factor as some here would presume it is or want to believe it is.

Picking horses, betting on sports, picking stocks, picking notes aren’t really as different from each other as most would believe either. Even the techniques are similar. Studying trends in football or looking at form with horses or studying technical charts with stocks is pretty similar to poring over data looking for a combination of parameters that yield a better result There’s a natural tendency to want to believe that skill plays a bigger part in results. The truth is that 90+% of stock investors don’t beat the S&P500 long term & that 99%+ of sports bettors are long term losers. High effort individuals are not spared from those numbers. Similarly a very high percentage of p2p investors aren’t going to beat the average returns long term either (whatever that real world average number really is)

And the mental gymnastics will only get more & more interesting as p2p matures. Just the other day I read about an investor who is comparing default rates to the use of certain “words” in the loan description. I mean come on really? Now this is definitely my final word on this topic. I swear!

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Peter Renton August 29, 2011 at 5:24 pm

@Dan, I appreciate the clarifications. Peer to peer lending is so new there is no way to tell if all our efforts will be rewarded or not. The way I look at it is this. The large credit card companies have an excellent idea of the probability that you will default based on your credit data when you apply for a new credit card. If this was primarily an exercise in luck Chase/Capital One/Citi would have exited the credit card business years ago. While we don’t have the data history that credit card companies have to me it seems like a similar process. Which leads me to believe that analyzing historical data will likely provide above average returns.

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Roy S August 29, 2011 at 7:17 pm

@Peter, Thanks for the update on LC’s cash status as I had not heard, however, I would prefer to see some positive cash flows from LC’s and Prosper’s operations not from their financing activities. But with the economy the way it is now, it is encouraging to hear about additional financing. I believe the recent infusions of cash for both LC and Prosper are a positive sign as I would assume (hope) these investors would have access to more detailed financial data than we have and have done their DD prior to committing multiples of millions of dollars.

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Peter Renton August 30, 2011 at 5:56 am

@Roy, Lending Club is in a very strong position financially. While they are still burning cash from operations they are producing revenue now of more than $1 million a month. In discussions I had with their CEO, Renaud Laplanche, he said they could operate at break-even today if they needed to but they are focusing more on growing the business as fast as they can. And it shows. You will see a huge bump in their monthly loan volume when the month ends tomorrow. Prosper is also in decent shape financially but with much lower volume than Lending Club they have a steeper hill to climb.

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Mark M August 31, 2011 at 12:13 pm

Is anyone tracking prepayment? These 60 month loans seem to in my experience be paid off in full well before their full maturity (of course this is true for the 36 month loans as well). I am just a bit frustrated by how many “gems” get paid off in full in a short period of time (less than 2 years) and then I have to recycle that capital back at lower rates or higher risk.

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Peter Renton September 1, 2011 at 11:49 am

@Mark, It has always been curious to me that someone would pay a 3-5% origination fee and then pay back their loan in a couple of months. So their actual APR on the loan could easily be over 40%. But there is no prepayment penalty so borrowers feel free to pay off their loans early. As to your question, I have never seen any data on prepayments and what kinds of loans more likely to pay off early.

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