Wednesday, August 15, 2007

Lending Efficiency

Since I'm still having procrastination problems with writing about default models, I started thinking about what my time spent working on Prosper loans is worth. That got me looking at the revenue generated from Prosper loans and how my time was invested in getting that revenue. Lets start by looking at the interest income over 3 years for a bid of $50 (the Prosper minimum).

Interest Rate
Interest Income
10%
$8.08
14%
$11.52
18%
$15.07
22%
$18.74
26%
$22.52
Doesn't seem like much does it. After all, $50 at 10% per year should be at least $15, right? That's the magic of the amortizing loan schedule. The interest earned decreases every month as the borrower repays a portion of the $50 borrowed.

As to time spent, my off-the-cuff guess is that I spend around 5 minutes per bidded listing (most of that time is passing on the rest of the listings), and only a third of those listings will successfully become loans (between not being fully funded, outbid, and having the loan canceled). This is sufficient to determine my hourly wage for being a bidding monkey.
Interest Rate
Interest Income
Hourly Income
10%
$8.08
$32.32 / hr
14%
$11.52
$46.08 / hr
18%
$15.07
$60.28 / hr
22%
$18.74
$74.96 / hr
26%
$22.52
$90.08 / hr
This is, of course, excluding early repayments, defaults, and time spent researching loan strategies. If only life were like the 26% loans. The right strategy to improve your efficiency is to invest more per bid (say $100) instead of chasing those D, E, and HR listing, but be careful to stay diversified with a very low percentage (2-3%) of your Prosper money in any given loan.

3 comments:

Andrew said...

Hey Mike - use standing orders. It's the easiest way to get in on the loans that you want to be on, and stay away from the ones you don't.

The 26% loans have, on average, a 49% default rate, so they're not worthwhile at any hourly rate.

Lend in the higher grades to folks with 0 delinquencies and 0-2 recent inquiries, and you'll get risk-adjusted returns in the 9-11% range.

Mike said...

Andrew -

I've considered about that. Whenever I create a standing order scheme, I always find some loans that I wouldn't have bid because of something in the description. It's not all, but a large enough percentage that I'm unwilling to trust automation. I'm finding this especially true since certain sub-prime and mortgage default damaged areas (see my previous post) can't be excluded.

Mike

pfodyssey said...

Prosper Lenders be careful out there...

http://pfodyssey.wordpress.com/2007/08/17/prosper-and-sub-prime-mortgages-connection/