Friday, July 27, 2007

RGF Rocks!

I stumbled onto RGF via RateLadder's two posts on him. RGF is a Prosper lender who identifies himself as an underwriting manager at a bank with 15 years experience in collections. I'm putting all his posts on my required reading list as he's got all good material. A sampling is below:

On Bankcard Utilization:

I don't really worry about credit card utilization so long as total unsecured is under 3 months salary.

Let's say you have someone making $50,000 a year, is middle aged, has only a single charge card with a $4k limit, and has a $3k balance. He's requesting $3k on prosper to term out the card. Let's say he has A credit, so he clearly could open more cards if he wanted to, but apparently has chosen not to. Is that 75% utilization supposed to scare me? It just doesn't. I'd say he's just financially conservative.

Unsecured debt:

For those still awake, I'll give another ratio you should consider. Note my recommendations are conservative, it's hard to find postings that will hit all these. But I would try to stay as close to them as you can.

Unsecured debt. Ideally, total unsecured debt should be 3 months salary or less, or 25% of annual income.

I assume revolving debt is credit card debt. Unfortunately, prosper mashes home equity lines of credit into revolving, so some of the revolving might not be unsecured. But if you don't know you have to assume the worst, that it's all unsecured.

Debt Ratio:

To get his true debt ratio, like the banks do, you first need to get his gross monthly income. He gives his net income as $4,933. To get gross income (pre-tax), you could estimate it by multiplying it by around 1.2x, or around $5900 (this is an estimate, it all depends on deductions). You can simply divide his monthly mortgage or rent into his monthly income, and add that percent to his prosper debt ratio. His monthly housing is $1200, divided by the $5900 we calculated, and housing is 20%. Add that to his Prosper debt ratio (39%) and his debt ratio is 59%. For unsecured lending, most banks will not go over 50% debt ratio, and would strongly prefer people be under 40%.

Yes, steadily losing money at a known rate is not "risk", it's a known loss. For example, a monthly car payment.

I don't think you read my whole post, for any investment you have to consier both the average return and the risk. If the average return is negative, it's a bad investment regardless of the risk (like craps or lottery tickets).

Now, go read all of RGF's posts


RateLadder said...

I really like his forumn posts as well!

Tom said...

Funny - I was going to do a post like this too. Looks like we are all rgf fans!