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Prosper Delivers Higher Investor Returns, Attractive Rates

by Prosper on 10/7/11

Prosper’s continuing strong risk performance has resulted in better-than-expected returns for investors. Because loss rates have been coming in below expectations for an extended period, expected loss rates in some borrower groups have been reduced. This move, and the associated pricing changes, will benefit both borrowers and investors.

Prosper Ratings improve for repeat Prosper borrowers

In some cases, performance of repeat borrowers has been so good that they merit a better Prosper Rating than they have been getting.

Using Prosper Notes rated D as an example, the chart below illustrates the new expected loss curve (dotted line) which has been lowered from previous expectations (solid). With today’s changes, this group moved to a C Prosper Rating to reflect lowered loss expectations.

Note that the distance between the new expected loss curve and the actual losses from seasoned Notes (colored solid lines), especially in the later vintages, demonstrate still cautious projections for losses.

Loss Rates D Vintage Since 2009

Loss Rates D Vintage Since 2009

(Click images to enlarge)

Pricing changes protect investor returns while benefiting repeat borrowers
In recognition of the high credit quality of borrowers returning for another loan through Prosper, Prosper Ratings and corresponding pricing were adjusted accordingly for these groups. Moving these borrowers to a better Rating enables them to get a lower APR while still protecting investor returns.
Following the earlier example of repeat borrowers with Prosper Rating D moving to a higher Rating C, the repeat borrower benefits with a reduction in the Annualized Percentage Rate (APR). The investor’s interests are maintained as well, because the lower Expected Loss Rate improves the coverage of Return:Risk (calculated as Expected Return divided by Expected Loss Rate).

As illustrated in the chart for 3-year terms, below, today’s pricing changes result in higher Expected Returns on repeat loans for all Prosper Ratings except for AA and E.

Expected Returns as of October 2011

Expected Returns as of October 2011

Appropriate Risk:Return ratios have been maintained across the Prosper Ratings. Risk:Return ratios serve as an investor’s gauge for margin of safety, as these ratios illustrate how many times an Expected Return covers the Expected Loss.* See below for these ratios applied to 3-year terms across available Prosper Ratings.

A win-win situation for investors and borrowers

We expect that better rates for repeat borrowers will attract more qualified borrowers to Prosper, so that our investors will enjoy more and higher quality loans.  Lower rates attract higher quality borrowers since this is the population likely to have stronger credit and more available choices. At the same time, we are committed to conservative underwriting standards to ensure investor returns are aligned with risk.

We believe today’s pricing change makes the appropriate adjustments to reflect the strong performance of Prosper borrowers, and in turn draws even more of the quality borrowers Prosper investors have come to expect.

Information available for download

The new pricing chart can be viewed here; pricing has been updated as of today’s listings. Detailed information regarding loss rate performance and today’s pricing change can be viewed in this presentation.  We encourage investors to compare actual losses to the estimated loss we originally provided for our Notes, which are detailed in our recent blog post.

*Note: We believe that diversification is an important component of any investment approach, and Prosper recommends that investors have at least 100 Notes in their portfolio to safeguard their returns against individual losses. Please see our perspective on why and how to diversify your Prosper investment.


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Notice: Blogs and other materials posted on or linked from this page that use the name "Prosper" generally use that name to refer to Prosper Marketplace, Inc. if published before January 31, 2013 and to refer to Prosper Funding LLC if published on or after February 1, 2013.