Wednesday, March 15, 2006

First Prosper Repayment

For those of you following my adventures on (Prosper Post Index), I thought it might be useful to chime in with my first repayment experience.

I'm a lender on Prosper. Right now, I have 3 loans active, and 1 loan still in its bidding process (though that loan has now funded fully). Yesterday, I checked in to find that my account showed all the usual data ... plus an "Undisbursed Payment" amount of ~$49.

I wasn't exactly sure what this was, but I also didn't have much time to look into it right then. Today, I discovered that this happened because one of my three funded loans was paid off early ... well, 97.3 percent paid-off early. The borrower returned $49.35 of my $50 principal, plus $.05 interest. The other $.65 is still loaned at the original terms.

Yes, Prosper's system does allow me to know which loan this was. (A lender's loan table looks like this.) It's really no surprise to me that this loan prepaid. The terms seemed awfully sweet: high-credit-rating borrower, offering 17% interest for a business-startup loan. Refinancing at cheaper terms shouldn't have been tough for her to pull off (assuming her story was valid).

Some bloggers have mentioned the "prepayment risk" of Prosper, and what you have here is exactly what they're writing about. Except that I'm not sure how much "risk" there really is.

Consider that we're not talking extra-long-term loans here. Prosper currently offers only the 3-year variety. Prepayment risk, purely defined, would matter a lot more if we were talking about (1) making 10- or 15- or 30-year loans in a (2) declining-interest-rate environment. We don't have either of those circumstances here. I'm much more worried about repayment risk than prepayment risk, as I suspect most other Prosper lenders are, too.

So that ~$49 is right back in my account. I can put it back to work again, as soon as I'd like — provided that I can find another loan I'm comfortable with. It does bring up a useful point, though:

When depositing funds to Prosper, keep in mind that the minimum amount to lend is $50. If this particular prepayment had happened when I had no other available cash in my Prosper account, then that ~$49 would have to sit idle until I could deposit more money. (Such electronic deposits are taking roughly five business days right now.)

This time, I do have more cash in my account, so for me, it isn't an issue. But from this point forward, my Prosper deposits (should I decide to make them!) will probably be in increments of more than $50. That way, if my entire $500 account were in active loans, and one borrower elected to repay $45 of my $50 loan, I would have enough cash "padding" to ensure that I could initiate another loan as quickly as I'd like, rather than be forced to wait for another bank transfer into Prosper. Not that that's a deal-breaker or anything, though.

So there you go: The system seems to be working. I have received a principal payment, plus interest.

On the Flip Side
Conversely, take a look at these two loan requests ... from the same borrower:

Potential Prosper Loan #1
Potential Prosper Loan #2

One has to wonder about the stories presented there. Quite a change, yes? If you're a borrower, you'd be right to be a tad suspicious, in my opinion.

Related Posts
Index of Prosper Posts


— Posted by Michael @ 7:10 PM


"I'm much more worried about repayment risk than prepayment risk, as I suspect most other Prosper lenders are, too"
Right, but you have a measure of that already, the credit grade and the subsequent default probabilities. So far there is no measure of prepayment risk.

You are right though, repayment is a bigger issue :).


The interest factor is already loaded.If some bank speaks about lending below good and acceptable lending rate,they are doing so because of stiff competition.More the bank is confident about its assets ,more it will reduce the spread.But dear Michael,in any case ,if you critically analyze the whole of your asset with the bank ,you will find yourself the looser.


Wow... are they still both active listings or do you think she was advised by her group leader (Doc) to relist with a higher rate (which seems to be the critical difference) to attract lenders. Perhaps she shortened her story as well and uhh... changed it?:) I'd be passing on that one with you.

-Jeff (Group Leader- Fanafi Financial)

PS- LOVE the blog (one of my daily reads)


do you think i could borrow $200k on prosper???

here's what i'm asking it for.


empty spaces: Prosper has a maximum of $25K for loans, sorry...

As for the borrower with the different stories: If her intent was simply to shorten the story, she REALLY should have made some sort of reference to her first post. As it is, there is ZERO overlap between the posts and it is VERY suspicious!

Anonymous Anonymous
, at 3:47 PM, March 24, 2006  

Perhaps she shortened her story as well and uhh... changed it?:) I'd be passing on that one with you.

I won't comment on this borrowers particular circumstances. What amazes me is that people are so stupid, they can't see why she had to change it. The interest rate was a no brainer. White suburbanite? Young black man? I think she just got tired of the questions, harrasment and inuendo.

You fickle white perverted bastiges have done an excellent job of screwing this borrower over.



What does race have to do with this at all? Your post is the only mention of race I've seen on this blog or on the two links.

The comments about this borrower here are regarding the fact that her story changed completely. No, it is not "obvious" why she "had to change her story." If she wanted to shorten the story, that's fine, but she should never "have to change" it (in other words, "lie")!

What bank would lend someone money if they told one story, stepped out for a minute, and returned saying they needed the money for something completely different? Would the bank be "fickle white perverted bastiges" too?

Anonymous Anonymous
, at 5:17 PM, March 24, 2006  

In a decling interet rate environment prepayment risk may exist. But note that loans are different than bonds. Interest is calculated on the outstanding principal balance, not the par value of the bond issue. So the effective interest rate on the loan notional decreses over time. Prepayment can actually be a good thing if there are other good opportunities. I have found that the first half of a loan period is the most profitable. After that your interest payments start dwindling and all you start to care about is principal. So if you collect on the high interest rate in the early period of a loan and it is then repaid then you are all the better off. If rates are rapidly falling, it might be a different situation, but is that really likely in this inflationary environment especially for higher risk loans?

Anonymous Anonymous
, at 4:57 PM, April 26, 2007  
** Comments Closed on this Post **

Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]


Savings Goal: $15,000
Currently: ~$15,115
[About Our Liquid Savings Goal]