{"id":145,"date":"2022-07-01T22:24:34","date_gmt":"2022-07-02T05:24:34","guid":{"rendered":"https:\/\/www.sidehustleera.com\/?p=145"},"modified":"2022-07-01T22:24:34","modified_gmt":"2022-07-01T15:24:34","slug":"lessons-learned-from-50-prosper-com-loan-defaults","status":"publish","type":"post","link":"https:\/\/www.sidehustleera.com\/index.php\/2022\/07\/01\/lessons-learned-from-50-prosper-com-loan-defaults\/","title":{"rendered":"Lessons Learned From 50+ Prosper.com Loan Defaults"},"content":{"rendered":"\n
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With\u00a0two years of Prosper.com lending\u00a0under my belt, I wanted to take a deeper dive into the 50+ loans that have defaulted on me during that time.<\/p>\n\n\n\n

Prosper does NOT make it easy to access or analyze this information on an aggregate level, so it turned into a pretty tedious data-entry project. (Which I outsourced to my virtual assistant<\/a>, of course. Thanks Patty!)<\/p>\n\n\n\n

The results are pretty interesting so we\u2019ll go through point by point.<\/p>\n\n\n\n

Loan Amount<\/h2>\n\n\n\n

My theory was that the a higher loan amount equated to higher risk, which does not turn out to be the case. On Prosper, loans typically range from $4000 to $25,000, depending on the borrower\u2019s need and credit-worthiness.<\/p>\n\n\n\n

I was surprised to find that 70% of the defaulted loans were for $8000 or less<\/strong>. The median defaulted amount was $7000.<\/p>\n\n\n\n

In hindsight, I think it makes sense. Borrowers taking out a $4000 loan for example, might not qualify for a $15,000 loan. So in that sense, a lower loan amount could signify higher<\/em> risk.<\/p>\n\n\n\n

Yield<\/h2>\n\n\n\n

The median lender yield of the defaulted notes was 24.99%.<\/p>\n\n\n\n

Prosper Loan Rating<\/h2>\n\n\n\n

Prosper grades each borrower on a letter scale from A to E. The lower the letter, the higher the return and the greater the risk.<\/p>\n\n\n\n

These numbers are pretty worthless because I can\u2019t get an accurate percentage of the overall loan volume. For instance, it would be far more valuable to know the\u00a0percentage<\/em>\u00a0of D notes that defaulted, rather than just the raw number.<\/p>\n\n\n\n

Loan Purpose<\/h2>\n\n\n\n

Borrowers must also submit what they intend to use the money for. The most common purpose is debt consolidation, but an entire range of reasons exist. Some\u00a0more entertaining than others<\/a>.<\/p>\n\n\n\n

I guess I have a soft spot in my heart for business loans but they are inherently risky ventures.<\/p>\n\n\n\n

Also, I\u2019ll be sure to avoid loans for \u201cOther\u201d<\/strong> in the future \u2014 they seem to default at a disproportionately high rate!<\/p>\n\n\n\n

Geography<\/h2>\n\n\n\n

Does the borrower\u2019s location play a role?<\/p>\n\n\n\n

Again these numbers don\u2019t mean much because I couldn\u2019t find a way to easily gather the overall aggregate number of loans made to each area. Instead this chart just shows the percentage of defaults that came from each region.<\/p>\n\n\n\n

Prosper Score<\/h2>\n\n\n\n

Prosper also assigns borrowers a numerical score from 1-10 based on their creditworthiness. In general, it aligns pretty closely with their Rating.<\/p>\n\n\n\n

Nothing really stands out here, especially because again, I\u2019m missing the big denominator that would show the percentage of defaults among each Score group. But I\u2019ll include it anyway.<\/p>\n\n\n\n

Credit Score<\/h2>\n\n\n\n

I was surprised to find even borrowers with excellent credit history defaulting on their loans.<\/p>\n\n\n\n

Now Delinquent<\/h2>\n\n\n\n

In each note, Prosper will show you if the borrower has any accounts that are currently delinquent.<\/p>\n\n\n\n

I consider these a red flag and try to avoid lending to these people, but a few slipped under my radar. In fact, 22% of my defaults<\/strong> were from borrowers with 1 or more current delinquent accounts.<\/p>\n\n\n\n

7 Year Delinquencies<\/h2>\n\n\n\n

Beyond the current delinquencies, Prosper will also record the number of delinquencies the borrower has had over the past 7 years. Again, I recognize people can change but still consider this to be a red flag and try and avoid making these loans.<\/p>\n\n\n\n

More than 25% of my defaults<\/strong> were from borrowers with 1 or more 7-year delinquencies.<\/p>\n\n\n\n

6-Month Inquiries<\/h2>\n\n\n\n

This statistic shows how many times a prospective borrower\u2019s credit has been run in the past 6 months. Basically, are they out shopping for credit a lot or are they pretty set?<\/p>\n\n\n\n

Among my data set, the average number of credit inquiries was 1.4, and the median was one.<\/p>\n\n\n\n

But this may be my biggest takeaway: nearly<\/strong> 70% of the defaulters had 1 or more inquiries<\/strong>.<\/p>\n\n\n\n

The recommendation to set your filters to 0 for this item has been mentioned before by others<\/a> but I will reiterate it here. In my data, this appears to be one of the strongest factors in default rates.<\/p>\n\n\n\n

Credit Age<\/h2>\n\n\n\n

When the borrower opened their first line of credit can be used to get an approximation of their age.<\/p>\n\n\n\n

I don\u2019t find anything too interesting in this data. It could be that older people are more responsible in paying back their loans, or it could just be that fewer of them are seeking loans on Prosper.com.<\/p>\n\n\n\n

Credit Lines<\/h2>\n\n\n\n

The median defaulter had 27 lines of credit open<\/strong>. Does that seem really high?<\/p>\n\n\n\n

I think a few lines are good, because it shows they know how to use credit, but too many can get ugly.<\/p>\n\n\n\n

I\u2019ll aim for borrowers with fewer open lines in the future.<\/p>\n\n\n\n

Revolving Balance<\/h2>\n\n\n\n

The median defaulter carried a $7000 balance, but I\u2019m not sure how to interpret the data.<\/p>\n\n\n\n

A higher balance could be a risk signal, but the opposite can be true as well. Case in point: 8% of defaults were from borrowers with a $0 balance<\/strong>.<\/p>\n\n\n\n

Bankcard Utilization<\/h2>\n\n\n\n

To me, maxed out credit cards signal a poor financial situation and a potentially risky loan. The general rule of thumb is to keep your balance at or below 33% of your total available credit \u2014 any higher and the bureaus may reduce your credit score.<\/p>\n\n\n\n

Indeed, a third of my defaults were from borrowers using 66% or more of their available credit<\/strong>.<\/p>\n\n\n\n

Home Ownership<\/h2>\n\n\n\n

Conventional wisdom holds home owners should be a better credit risk. After all, some bank probably lent them a whole lot more money than they\u2019re asking for here.<\/p>\n\n\n\n

But my data shows\u00a0no definitive correlation to suggest renters are significantly riskier<\/strong>.<\/p>\n\n\n\n

Debt-to-Income Ratio<\/h2>\n\n\n\n

The debt-to-income ratio is a rough indicator (the lower the better) of a borrower\u2019s ability to pay back the loan. Or at least it\u2019s supposed to be.<\/p>\n\n\n\n

My data shows a surprisingly high number of defaults from borrowers with low DTI ratios.<\/p>\n\n\n\n

If anything the takeaway here is to avoid the N\/A \/ Not-Calculated ones but other than that don\u2019t but too much weight on this metric.<\/p>\n\n\n\n

Length of Employment<\/h2>\n\n\n\n

More than half of my defaults came from borrowers with less than 5 years of employment<\/strong>\u00a0at their current job. The more tenured workers defaulted as well, but in general the new hires were riskier investments.<\/p>\n\n\n\n

Stated Income<\/h2>\n\n\n\n

I was surprised to see so many defaults from high earners (but then again, it is \u201cstated\u201d income, not verified income).<\/p>\n\n\n\n

But in general, the less money a person makes the harder time they may have repaying their loan. File this under the \u201cno duh\u201d category.<\/p>\n\n\n\n

I typically try and avoid making loans to those earning less than $25k a year so the sample size among that group is likely very small.<\/p>\n\n\n\n

Occupation<\/h2>\n\n\n\n

The riskiest occupation is \u201cOther.\u201d <\/strong>Roughly 35% of my defaults were from borrowers who said their job was \u201cOther,\u201d \u201cN\/A,\u201d or left the field blank entirely.<\/p>\n\n\n\n

In the future, I will be avoiding these borrowers.<\/p>\n\n\n\n

Previous Borrower?<\/h2>\n\n\n\n

Prosper.com will also tell you a borrower\u2019s history on the site if they\u2019ve had a previous loan. It will show the amount borrowed and their repayment history.<\/p>\n\n\n\n

Historically, previous borrowers have been an excellent credit risk with above average returns. Because of this, I focused a lot of attention in 2012 on repeat borrowers.<\/p>\n\n\n\n

However, this is not a perfect strategy. Nearly 25% of my defaults were from previous Prosper borrowers<\/strong>, those with a supposed proven track record of repayment.<\/p>\n\n\n\n

Description Filled Out?<\/h2>\n\n\n\n

One of my personal theories was that if the borrower took the time to fill out the optional description area, and explain why they needed the money and were a good candidate for the loan, they would be a good risk.<\/p>\n\n\n\n

Or at least a better risk than those who couldn\u2019t even be bothered to type in a few short sentences.<\/p>\n\n\n\n

Turns out, I was way off! Almost 90% of my defaults were from borrowers who\u2019d filled out the description text<\/strong>.<\/p>\n\n\n\n

Takeaway: Don\u2019t necessarily discount those who skipped the description, because filling it in doesn\u2019t seem to correlate with any improved loan performance.<\/p>\n\n\n\n

If you\u2019re ready to sign up for a Prosper account of you own and start earning great returns (and learning from my mistakes!),\u00a0click here\u00a0to get started (affiliate link).<\/p>\n\n\n\n

Prosper.com Defaults: What\u2019s Next?<\/h2>\n\n\n\n

Check out my full list of\u00a0alternative investment platforms\u00a0for more ways to diversify your investments and earn solid returns.<\/p>\n","protected":false},"excerpt":{"rendered":"

With\u00a0two years of Prosper.com lending\u00a0under my belt, I wanted to take a deeper dive into the 50+ loans that have defaulted on me during that time. Prosper does NOT make it easy to access or analyze this information on an aggregate level, so it turned into a pretty tedious data-entry project. (Which I outsourced to […]<\/p>\n","protected":false},"author":1,"featured_media":146,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":{"0":"post-145","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-investing"},"_links":{"self":[{"href":"https:\/\/www.sidehustleera.com\/index.php\/wp-json\/wp\/v2\/posts\/145","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sidehustleera.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sidehustleera.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sidehustleera.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sidehustleera.com\/index.php\/wp-json\/wp\/v2\/comments?post=145"}],"version-history":[{"count":1,"href":"https:\/\/www.sidehustleera.com\/index.php\/wp-json\/wp\/v2\/posts\/145\/revisions"}],"predecessor-version":[{"id":147,"href":"https:\/\/www.sidehustleera.com\/index.php\/wp-json\/wp\/v2\/posts\/145\/revisions\/147"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sidehustleera.com\/index.php\/wp-json\/wp\/v2\/media\/146"}],"wp:attachment":[{"href":"https:\/\/www.sidehustleera.com\/index.php\/wp-json\/wp\/v2\/media?parent=145"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sidehustleera.com\/index.php\/wp-json\/wp\/v2\/categories?post=145"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sidehustleera.com\/index.php\/wp-json\/wp\/v2\/tags?post=145"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}