My Prosper Screening Criteria
I am going to make my first loans today, but before I did that, I set up quite a few different screens under the advanced search options to see how different factors affected default/late payment rates.
I look for no more than 2 current delinquencies, and no more than 6 serious delinquencies in the past 7 years. I also screen out people that have over 30 open credit accounts, and those that have less than 5 years of credit history (though that one could be scratched, it's just a personal preference). I also don't like to see more than 2 public records for someone I'm going to lend money to, becuase that says to me they've had/have SERIOUS legal problems. Finally, and probably most importantly, I don't like to lend out to anyone with > 30% DTI ratio. Admittedly, the Prosper method of determining DTI is pretty screwed up...but all of these criteria are based on a search of the historical Prosper statistics for default and late payments.
After I get my screened list of people, then I read the listings to see if there is one that I like. I'm looking for something that personally tells me it's a good loan, and I'd also like to see that the Group Leader has bid on it. If it is over 33% funded already, that's a bonus, because it means the rest of the Prosper community agrees with me that it's a pretty good risk.
Finally, I'm a pretty greedy bastard...so I'm looking for the holy grail of investing (% returns that are > average S&P 500 historical returns of 10.5% annually). I used the default rates to adjust my risk/return minimum interest rate based on credit score. So, for example, a guy with a AA rating I would loan money to at 11% (though he probably wouldn't take it at that interest rate) and a guy with an E credit rating I'd loan to at 22% (and he probably would take it). For the record, MY credit rating came back as an "A" when I set up a loan for testing purposes. I withdrew it before my group leader could approve it because the last thing I need right now is more debt. That being said, I imagine that my "portfolio" on Prosper is going to be disproportionately focused towards C credit risks or lower...if only because they have the highest chance of paying me a "holy grail"-type interest rate. I'm counting on my VERY selective screening process to eliminate defaults and late payments. The criteria I set up (supposedly) should result in a less than 1% late payment rate and a 0% default rate. We'll see if that holds up. If it does, then I think a lot of people might copy this screen and we'll get a lot more loans funded in the high risk categories.
I think that Prosper will probably require a minimum of $1500 total to become self-sustaining (the point where monthly payments from loans exceeds the minimum bid requirements). It will probably take me two years of putting $50 per month into Prosper in order to create a self-sustaining system...but by that time, we'll know if the Prosper experiment works or not. If it doesn't, then I'm out at most $1500...if it does...then I may just move a significant portion of my investment money into Prosper, because the opportunity cost of having it elsewhere would be significant. To put it simply...why settle for 4% annual returns (ING) or 10% annual returns (stock market) when you could be getting 22% annual returns (Prosper)?
I look for no more than 2 current delinquencies, and no more than 6 serious delinquencies in the past 7 years. I also screen out people that have over 30 open credit accounts, and those that have less than 5 years of credit history (though that one could be scratched, it's just a personal preference). I also don't like to see more than 2 public records for someone I'm going to lend money to, becuase that says to me they've had/have SERIOUS legal problems. Finally, and probably most importantly, I don't like to lend out to anyone with > 30% DTI ratio. Admittedly, the Prosper method of determining DTI is pretty screwed up...but all of these criteria are based on a search of the historical Prosper statistics for default and late payments.
After I get my screened list of people, then I read the listings to see if there is one that I like. I'm looking for something that personally tells me it's a good loan, and I'd also like to see that the Group Leader has bid on it. If it is over 33% funded already, that's a bonus, because it means the rest of the Prosper community agrees with me that it's a pretty good risk.
Finally, I'm a pretty greedy bastard...so I'm looking for the holy grail of investing (% returns that are > average S&P 500 historical returns of 10.5% annually). I used the default rates to adjust my risk/return minimum interest rate based on credit score. So, for example, a guy with a AA rating I would loan money to at 11% (though he probably wouldn't take it at that interest rate) and a guy with an E credit rating I'd loan to at 22% (and he probably would take it). For the record, MY credit rating came back as an "A" when I set up a loan for testing purposes. I withdrew it before my group leader could approve it because the last thing I need right now is more debt. That being said, I imagine that my "portfolio" on Prosper is going to be disproportionately focused towards C credit risks or lower...if only because they have the highest chance of paying me a "holy grail"-type interest rate. I'm counting on my VERY selective screening process to eliminate defaults and late payments. The criteria I set up (supposedly) should result in a less than 1% late payment rate and a 0% default rate. We'll see if that holds up. If it does, then I think a lot of people might copy this screen and we'll get a lot more loans funded in the high risk categories.
I think that Prosper will probably require a minimum of $1500 total to become self-sustaining (the point where monthly payments from loans exceeds the minimum bid requirements). It will probably take me two years of putting $50 per month into Prosper in order to create a self-sustaining system...but by that time, we'll know if the Prosper experiment works or not. If it doesn't, then I'm out at most $1500...if it does...then I may just move a significant portion of my investment money into Prosper, because the opportunity cost of having it elsewhere would be significant. To put it simply...why settle for 4% annual returns (ING) or 10% annual returns (stock market) when you could be getting 22% annual returns (Prosper)?
posted by ~Scott~ at 9:38 AM
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