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Why I Love Prosper.com

by Prosper on 03/25/08

Guest Post from Living off Dividends (aka on Prosper WealthBuildingLessons). 

I have a blog called living off dividends where I discuss, among other things, my passion for investing and generating income that can be used to replace one’s salary. I have numerous different types of investments like rental properties, stocks, canadian income funds, CDs, foreign currency ETFs as well as owning loans on Prosper.com.

Since a lot of my net worth is in illiquid investments like real estate, the rest of my investing has to be relatively liquid. This means that it shouldn’t be locked up for 10-15 years or more and it should be relatively easy to invest in.

Building a portfolio of loans on Prosper.com is easy and while it does tie up the money for 3 years, the returns are almost three times larger than on a 3 year CD.

Bidding on loans on Prosper.com is a form of asset allocation. You can’t always predict which asset class will do well so you spread your investments over various classes as a way of lowering your risk and boosting your yield.

While bidding on loans on Prosper.com is not without risk, my overall experience (and investment returns) have been quite positive. I’ve been investing for nearly 18 months and I’m receiving over 13% annualized returns. That sure beats any 3 year CDs on the market! I love investments where I can get 5% more than I get in a savings account, and without too much risk.

As an investing buff, I’m also a big fan of compound interest. I think it was Albert Einstein who said that one of the greatest mathematical discoveries was compound interest. One of the greatest proponents of this belief are the credit card companies. They charge you 20%+ interest on your balance, but you don’t usually have to pay more than a fourth of the interest accrued every month. This results in you having to pay interest on the accrued interest from the very next month.

I like my investments to have the potential for compounded returns. The interest on your savings automatically gets compounded. But most people stop there. They don’t try to compound the returns of their other investments. By re-investing a stock dividend back into the stock, you can essentially compound your stock returns too. Even Prosper loans have the potential for compounded returns by re-bidding the interest payments back into more loans.

So far, I’m quite happy with lending on Prosper.com. It fulfills most of my investment criteria and at tax time they even streamline your accounting by providing you with a statement detailing your interest income and expenses. If you haven’t already given it a shot, now’s a great time to do so.

Nirav is the author of Living Off Dividends, a blog about investing. He’s currently lives in San Diego, California but has lived in England and India. He is an active lender on Prosper.

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16 Responses

112233 | March 25th, 2008 at 12:26 pm

how did you calculate your return?

Investing & Passive Income | March 25th, 2008 at 9:37 pm

I take the amount I initially deposited across all accounts, subtract that from the current value of my prosper portfolios to get the increase. I multiply that by 100 and divide it by original deposits to get the percentage increase.

An unlucky investor | March 25th, 2008 at 11:48 pm

I am not so lucky as one of my loans is now in collections. Just one such loan can totally skew the results and now I look real bad.

I am not sure if the prosper folks get to read this, but I am requesting anyway to lower the minimum amount from $50 to $20 or so. This would help folks like me spread out risk any further.

Shauna | March 26th, 2008 at 8:58 am

What about lates and/or defaults?

Peer Lend | March 26th, 2008 at 1:34 pm

Hi – you’re not making 13%.

Your ROI formula is straight out of Fantasyland. Among other things (including lack of accounting for time, in any way) it treats all of your lates as *current*. Can you see how that might muddy up the picture a bit? Sorry to be the bearer of bad news.

The “current value” figure is not reflective of anything other than “what you are owed” – even defaulted loans, until they are sold, show up in current account/portfolio value…

If you’d like to look at a more accurate estimate or two, you can see a full breakdown of your portfolio at the following links:


The two estimates of your return (~5% and ~1%) differ due to treatment of lates (you can read into their methodology to see why, if you’re interested – but it essentially boils down to one being more “optimistic” than the other).

The reason they differ from your own estimate of ~13% is because these two calculations factor in time, lates, etc – while yours does not.

The calculation you’re currently using, above, is like trying to handicap horses without taking into account that one (or more) of the horses *actually has a broken leg*.

Oak_Hill_Fire | March 26th, 2008 at 4:04 pm

Your formula means you expect to collect the full value + interest for all your loans including the 5 that are 2 or more months late? Don’t you think that’s being a little optimistic?

RateLadder | March 26th, 2008 at 11:38 pm

In defense of wealthbuildinglessons…

Both EricsCC and LendingStats try to predict (in some fashion) what will happen with lates. The prediction is a guess (based on past Prosper history) and neither formula (the code) is available for public scrutiny. I value their attempts at this prediction, but neither are likely to be 100% accurate (or even near 100%) because of their predictive nature.

The only 100% accurate way to evaluate your return is to look at actual history. And whether you like it or not the only loans that have 100% of their history known are either paid in full, defaulted, or repurchased (except for the new agency test loans which some lenders opted into and other opted out of). The treatment of loans in any noncomplete status is purely a guess.

Personally I track all of the predictive ROIs, my quicken ROI, and 3 different IRR values. My hope is that they will eventually start to converge. My expectation for the convergence has no timeline… particularly while I continue to invest/reinvest funds.

My values for these figures range from (2.11%) to 13.06%. In addition, I have 6 loans in the new agency test. I have very little hope of someone without access to my account transaction history being able to calculate my ROI or IRR. It is a good thing I do it myself.


WealthBuildingLessons return estimation, while overly simplistic because of the lack of time in the equation, will eventually yield the right answer. Like many things with this brave new world of p2p lending… the final outcome will take time.

NewHorizon | March 27th, 2008 at 9:41 am

Excellent comments above. But it’s overly simplistic to characterize as “overly simplistic” the overlooking of the “estimated loss” figures which Prosper thankfully provides on each bid page. :)

Anyway, I hope wealthbuildinglessons is still looking in.

RateLadder | March 27th, 2008 at 10:46 am

I did not characterize the over looking of estimated loss as overly simplistic.

I pointed out some of the many issues with ALL of the estimated loss calculations… and anything that is predictive is… well predictive. It is the difference between a backward looking factual statistic and a forward looking indicator. One doesn’t even attempt to predict the future and the other is just a guess.

btw don’t even get me started on the enormous bounds in the creidt criteria of the credit grade tranches and the unfortunately small number of loans in each bucket.

All estimated loss calculations have issues. They all also have merit when taken in context.

NewHorizon | March 27th, 2008 at 2:22 pm

“All estimated loss calculations have issues. They all also have merit when taken in context.”

Which context gives merit to simply placing $0 in the estimated loss piece of the ROI calculation as he extrapolates and compares his figures to 3-yr CDs? (Not a rhetorical question – I’m truly looking for an answer.) I mean if somebody were to guess a loss of $1 instead, wouldn’t *this* guess have more merit than a loss of $0 regardless of context?

NewHorizon | March 27th, 2008 at 2:39 pm

BTW, let me cast an unsolicited non-binding vote :) in support of wealthbuildinglessons returning to address Oak_Hill_Fire’s question…

RateLadder | March 27th, 2008 at 2:41 pm

My point is that any prediction is a prediction.

Any backward looking number is the right answer at that point in time.

The further into the future you go more the ongoing default process will be accounted for in the account balance provided by prosper and the cash flows into and out of Prosper.

To take it to an extreme. When someone stops lending and their last loan reaches a final state. The right answer to what rate they received will be an annualized calculation similar to the one used by WAB or will be a function of IRR using the cashflows (depending on your druthers). Not Eric’s CC prediction.

Banks use an ROA not an ROI calculation for a reason.

Mike | March 27th, 2008 at 5:51 pm


I think the very valid reason for push-back is that Nirav made a huge assumption to calculate the 13% annualized return. To get 13%, he has to set the value of his 3 “4+ Month” late loans (lets just ignore the others) to the principle+outstanding interest. This is a hugely faulty assumption, because we know that 4+ Month late loans are >90% likely to go to debt sale for around $0.10 on the dollar (+/-).

Using the “looking back” method without prediction is a safe method if you can assume that the asset’s primary value (the principle) is rock solid. This is true with CDs and bank accounts. However, you’re taking a time snapshot of the estimated value for the loans (they’re assets, not cash, and there’s no secondary market yet, so your only hope is to guess the effective current value). If a set of loans aren’t worth anything (and I would argue that 4+ Month late loans fit in this category), assuming that they are is faulty logic.

RateLadder | March 27th, 2008 at 6:10 pm

After the next debt sale those losses will be realized in the account value. Over time all losses will be realized in the account value…

Peer Lend | March 27th, 2008 at 9:14 pm

I encourage everyone to click the trackback link to RateLadder’s blog at the end of this post – further relevant discussion, much of it highly enlightening, has (and is) taking place there.


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