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Prosper Lowers Rates for Borrowers

by Peter Renton on January 13, 2011 announced today that they have lowered interest rates across the board for all new loans. You can read the official press release here. I received an email from Prosper this morning with the news – here is an excerpt from that email:

In order to keep up the momentum and ensure our rates remain competitive, we are lowering our borrower rates – particularly for the highest quality borrowers where rate competition is most fierce. Attracting great quality borrowers is critical to delivering strong lender returns over time, and these changes will ensure we can do that while continuing to deliver fantastic risk adjusted lender returns.

The higher grade borrowers will get the most benefit but every new borrower will now be paying less for a Prosper loan. The new rates are very low, starting at just 4.99% for a AA rated loan, an amazingly low figure for an unsecured loan. For comparison here are Lending Club’s interest rates; they use a different rating system so we can’t really compare apples to apples but we can say that Lending Club’s interest rates range from 5.42% to 21.59%, a much tighter range than Prosper’s 4.99% to 31.99%. Here is the link to the page with Prosper’s new rates and below is a table that shows the differences between the old and new rates.

Prosper RatingTerm (yrs)# Previous Prosper LoansOld RateNew RateDifference

As you can see Prosper has lowered borrower rates by about 1.5% on average, quite a significant move. Of course, one has to wonder why make this move now? We can probably guess the answer to that. Regular readers will know that Prosper changed their lending model a few weeks ago and since that time the number of loans available has dropped dramatically. I have checked the listings almost daily since the change and they have been averaging about 20-25 loans available to invest in at any one time with the bulk of these loans the risker, higher yield loans.

Will P2P Lenders Invest in These Loans?

The big question is now, will anyone want to invest in a 4.99% one year loan. With the 1% loan servicing fee that means a return of 3.99% for investors. A federally insured 1-year CD can yield 1.4% today according to Will investors want to take the extra risk for another 2.6% return? Prosper obviously thinks they well.

Here is my take. There are many automated investing plans on Prosper and these people never even look at the loans they invest in. I think Prosper is counting on these automated plans to invest in these low interest rate loans. The investor who looks at each individual listing and cherry picks the loans they want will likely shy away from such a small return. Right now there is an oversupply of investors on Prosper and not enough loans. This move should increase the supply of loans available. But I have to wonder this: will investors be happy with their returns on money invested today come 18 months or two years down the road?

Prosper clearly had to do something to increase loan supply and this was probably the easiest move. I hope it works out for them and all their investors because it will certainly work out well for the borrowers.

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Dan B January 13, 2011 at 2:10 pm

It’s important to note that if you compare top rated borrower to top rated borrower on a 3 yr. or 5 yr. loan ………….. LC still offers the best rate for borrowers. For example, I’ve seen 3 yr loans at LC at 5.49% whereas even with the lower rates the best number at Prosper on a 3 yr. is 5.99% or 6.55% depending on whether they’ve had a previous loan or not.

Aaron January 13, 2011 at 3:12 pm

Prosper is crazy to think that I will give anyone an UNSECURED loan for anything less than 8% (my return.) Even for a 12 month loan. I don’t care what your credit rating is. One defualt at that kind of rate could really ruin your day. Especially if it happens in the first 9 months.

What is sad is that the amount of money the borrower is requesting has no weight on the rate system. An AA investor asking for $15,000 will get the same rate as a AA investor asking for $1,000.

Peter Renton January 13, 2011 at 5:48 pm

Good point Dan. LC still has the edge on interest rates for borrowers because the 4,99% is for one year loans only. Thanks for catching that.

Aaron, It is curious that they don’t take loan amount into consideration with the interest rate. You would expect a larger loan would have a much higher likelihood of default than a smaller one. And as I said in the post, I don’t think these AA rated loans will be getting many investors who are not in automated plans.

Dan B January 14, 2011 at 12:48 pm

Aaron………..yes it really does take some “creative” thinking to come up with scenarios where lending “unsecured” funds would make sense at 5-7%. Come to think of it, I wouldn’t lend anyone any money through Prosper for under 12-13%…………given their historical performance. With their shortage of loans right now I’d imagine that they’ll be able to fund pretty much everything that shows up on their site, but longer term it does seem like a lot of wishful thinking.

Dan B January 14, 2011 at 12:52 pm

In fact, I just looked over at Prosper & they have a 1 year $15k loan at 4.99% that is about 91% funded in only 45 minutes. So, yeah I guess anything at any interest rate will fund right now.

Peter Renton January 14, 2011 at 2:48 pm

Wow. There really is an oversupply of investor money on Prosper right now. I wonder how long this is going to go on for.

I actually went in and looked at this loan that you mentioned and by looking at the time there were over 100 investors in on it within 10 minutes, obviously almost all this were automated plans. Now, it is 93% funded and bids are coming in very slowly. I also noticed this investor, Aberdeen, who kicked in $8K. Interesting.

Dan B January 14, 2011 at 4:34 pm

When I was younger investment moves like these would make me wonder if there was a connection between having money & intelligence. I don’t wonder anymore.

Daniel B June 3, 2011 at 12:42 am

Great website! So glad I came across it.

I have a few questions that I’m wondering whether Peter might be willing to address.

I am currently paying 25% interest on a credit card balance and would like to get a loan at a lower rate, for the purpose of paying off the debt faster.

I just checked my scores at TransUnion shows 800 and Equifax shows 762. All my accounts are showing zero balances (the account for the balance I want to convert to a lower rate is not in my name). I am very conscientious about making payments and I am eager to pay off the debt that is currently costing me 25% interest, after having paid off all my other consumer debts in full.

I’ve been doing a lot of reading online but there are several questions I haven’t been able to figure out:

1. With my FICO scores, would I be considered a AA borrower or are there other conditions I need to meet?

2. As of this time (June 2011), which P2P service would be my best bet? Am I likely to do better on the new one (peerform)? (I am not concerned with shaving off a fraction of a point.)

3. I noticed comments in January 2011, to the effect that borrowers are in short supply on Prosper. Is that still the case at this time (early June 2011)?

4. The balance I have been paying 25% interest on is $20,000 but if I would be more likely to get a loan for half that amount, I would rather apply for that and be accepted than for the entire amount and be rejected. On my credit reports, I have an immaculate history of repayments going back 25 years but no record with any P2P lender. Would it be prudent to request $20,000 for my first loan?

5. I presume that the first thing these lenders do is pull your credit, resulting in a hard inquiry, so would it not be true that one would want to do everything possible to successfully get the loan at the first P2P lender?

6. Would I need to specify a term (number of years), before I know what the interest rate would be?

7. Does the P2P loan show up on one’s credit reports, BTW?

Thank you for your time.

Peter Renton June 4, 2011 at 2:17 pm

@Daniel, Thanks for your comments. I will try and respond to each of your questions:
1. I have no idea whether you will get a AA rating or not. Prosper uses a number of factors to determine the rating and a great credit score doesn’t necessarily mean you will be an AA. I have seen credit scores as low as 740-759 get a AA rating and people with a 760-779 FICO get rated a B.
2. To be honest, I think your best bet as a borrower right now is Lending Club. Investors there are funding 98% of new loans. The percentage on Prosper is a little lower, but you would probably still get funded there.
3. No, borrowers are no longer in short supply at Prosper.
4. With your history you will likely be accepted for $20K on both platforms.
5. Prosper and Lending Club do a soft pull of your credit report, not a hard pull. So it won’t matter if you don’t get fully funded. You can try the other with really no penalty.
6. I think you will get your rate and then choose how many years you want for the loan. It will be a lower rate for a shorter term.
7. Yes, I do believe the p2p loan will show up on your credit report once it is funded.

I think you are a good candidate for a loan on either Prosper or Lending Club. You can sign up for a loan by clicking on one the ads in the right hand column here on the site (full disclosure: I will get a small commission if you do this and your loan is funded).

Daniel B June 4, 2011 at 8:11 pm

@Peter, thank you so much for your very informative answers! I am happy to link to the applications from this website.

I see that the current minimum (starting) interest rate is 7.4% on Prosper, 6.78% on LendingClub and 4.56% on peerform. Peerform seems to offer only a three-year term but I could manage that, borrowing a little less ($15K). Is there any reason why it would not be advisable to try peerform first, given that the starting interest rate seems to be significantly lower?

Peter Renton June 4, 2011 at 9:30 pm

@Daniel, If you happen to live in one of the states where Peerform is accepting borrowers then by all means give them a try. They are only operating in a very limited number of states right now, but they are certainly an up and coming p2p lender.

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