Snowflaking is a way to save on interest. The general principle is to pay in a small extra amount towards a loan every month, a $5 snowflake here, a $10 snowflake there starts to build into a snowball which, if rolled downhill, compounds. These small amounts might not seem like much, but they definitely add up.

This process is traditionally used for reducing credit card payments but it’s also viable for a Prosper loan since any snowflake you put in will reduce the overall interest you’ve spent for the entire term of the loan. You will also end up paying it off early.

You will see below that that snowflaking is more valuable the higher your interest rate goes.

For example:
Let’s look at a very simple example of how this process can save you money. Let’s say you got the minimum amount possible for a Prosper loan, $1,000 and let’s say it was at 9%. Let’s snowflake at a 1% rate, meaning that you put in an extra $10 (which is 1% of the loan amount) a month towards the principal, and see what happens:

• Your 36 month loan term has been shortened to 27 months
• Your total interest paid has been reduced from $144 to $106, a savings of $38 which adds up to a savings of 27% on interest
• That’s 3.8% of the $1,000 principal

It may not seem like a huge amount, but if you pay a higher rate see below, it gets better.

Scaling it out
Now, a $1,000 loan is not a lot of money, and $10 is not a lot extra to pay in, but if you scale the 1% rule up you save a lot more money. If you borrowed $10,000 and snowflaked at a 1% rate ($100 extra a month) you’d save almost $400 in interest payments! Scale it up to the maximum loan amount for a Prosper loan of $25,000 and, at 9%, you’d save $1,000 in interest - nothing to sneeze at.

Scaling it up
I mentioned it gets better. We looked at how much you can save on a Prosper loan by looking across different loan amounts. What happens if we look vertically at different interest rates as they go up, how much more will you save?

Turns out a lot. Let’s start with that $1,000, and let’s say that interest rate is 25% instead of the 9% rate used above:

• Your 36 month loan term is still shortened to 27 months
• Your total interest paid has been reduced from $431 to $309, a savings of a whopping $122 which adds up to a 29% reduction on interest
• $122 on $1,000 is 12.2% of the principal!

Now that we are scaling these calculations up to higher interest rates, let’s scale it out again for higher loan amounts:

At $10,000 and 25% interest, the 12.2% still applies, so you’ve saved $1,222 in interest payments. That’s a lot of money. At the $25,000 maximum the savings are a whopping $3,050!

The 1% rule
I like the 1% rule because it’s easy to calculate and easy to do. No matter how much you borrow and no matter how much your interest rate, a 36 month Prosper loan will always be reduced to 27 months by simply paying 1% of the loan amount on top of your regular payment.

In October 2007, Prosper launched a Facebook application for our members. In April 2008, we then launched a new Facebook application which allows people to transfer funds to their Prosper lending account instantly. We provided this service because lenders wanted a more immediate ability to bid on loans they liked without having to wait for funds to clear.

We are pleased to announce that over 5,000 members have downloaded this application!

If you are a registered lender on Prosper and have not yet installed the Facebook application, you can do so here. Once you have installed the Prosper Facebook application, you can transfer as little as $50 and as much as 50% of your loan value instantly.

Adding the Prosper Facebook application allows you to keep your friends updated on your Prosper Lending activity. And, if you want, you can display which loans listings you are watching and/or have bid on in your news feed and mini-feed sections.

If you are not a member of Facebook and are not sure about this social networking site take another look at it. There are over 36 million US users - it’s not just for students anymore! Facebook attracted over 123 million unique visitors in May, 2008. Their website’s ranking among all websites increased from 60th to 7th in terms of traffic from September 2006 to September 2007 and has now increased to 5th according to Alexa.

Hundreds of applications are created everyday, and there are now 7,000 applications on the site. 

Join our 5,000 member strong base and see how easy it is to set up a page on Facebook and download our application.

Greetings from lender services! At Prosper I assist our lenders with everything from getting started on Prosper to full account reviews. Everyday we help a whole new group of lenders, each day is different. Some lenders are very methodical, looking at all the previous listings and using the Q&A extensively. Other lenders like to help people in need; social lending at its best. Hearing from all our lenders on what has worked for them, what hasn’t, I have no shortage of stories and experiences to share.

My lending strategy is focused on the social lending aspect, though I closely analyze the credit data for risk. I’m not a large lender, and that allows me to find loans that I have a certain connection with. This may be to help a recent UC Davis graduate to get on her feet, I can relate with the financial burdens students face during and after college. I’ve shared interests with my borrowers, some want a new boat, others want to start their own skateboard company. I enjoy helping people get a loan when we share a common interest, even though I will never meet the borrower. That’s what makes lending on Prosper fun for me, and why searching through pages of listings can be so rewarding.

Being a Pittsburgh Steelers fan, I recently helped fund a loan for a new fight song compact disk. Most of my borrowers have mid-prime credit with currently no delinquent accounts, and a low number of recent inquires. I like helping real people through Prosper, that’s the enjoyable part for me.

—

Cameron Fleischer is a Lending Account Manager at Prosper

Individuals with good credit have a variety of alternatives when they need to borrow money.  Traditional banks have spent untold millions of dollars on brand advertising reinforcing the notion that borrowing from a bank somehow bestows prestige on quality borrowers.  But, does membership really have its privileges?  Smart borrowers know there are two things they should consider when borrowing money, the price and the terms.  Using these two criteria, Prosper’s marketplace is the best place for most borrowers with excellent credit to borrow. 

The better your credit rating the more you benefit from an underwriting process that takes into account your individual characteristics.  Traditional lenders segment borrowers into groups so they can centrally set pricing and terms.  This approach shortchanges the best borrowers in any segment because they are given an offer designed for the average customer.  On Prosper borrower rates are arrived at independently for every borrower.  Quality borrowers are rewarded for their individual credit characteristics and get the best price the market has to offer.  In many (if not most) cases these rates are lower than the rates quality borrowers pay to banks for a similar loan product.

Another way Prosper differs from traditional lenders is loan terms.  Because traditional lenders profit from borrowers paying higher rates, the terms of many traditional lending products are designed to attract borrowers with low rates, and increase rates over time to increase profits.  This is not a practice limited to lower quality borrowers.  Teaser rates, penalty pricing, no grace periods, and prepayment penalties are some of the tools traditional lenders use to increase portfolio profits for all their customers, including the ones with excellent credit.   Prosper has fair terms so borrowers know what they will be paying over the life of the loan.   Prosper loans have fixed rates that never change over the life of the loan.  Often banks label rates as fixed when they don’t float to market rates, but still reserve the right to change the rates based on their discretion at any time.  Prosper loans have a payment grace period before which a late fee is charged, and have no prepayment penalties.  Prosper believes that all borrowers should know for certain what they will be paying to borrow money, and should benefit from a low rate for the life the loan, not just at the beginning.

Maybe membership does have its privileges, if you join the right club.

—

Kirk Inglis is the CFO of Prosper.

One of our primary objectives in making Prosper market data fully transparent and freely available via an API is to allow and encourage anyone to study the Prosper market and consumer credit markets in general.  We deeply appreciate the level of diligence and analysis so many have contributed using Prosper’s marketplace data.  We are also very encouraged that an increasing number of economists and professional credit analysts have taken the time to conduct deep studies of the market and share their conclusions publicly.

One such study was released yesterday by Economists Ginger Zhe Jin and Seth Freedman of the University of Maryland.  The study looks at Prosper’s market since inception to determine average returns and other interesting conclusions about the market. Among their findings:

1. The average Prosper returns since inception were estimated at 6.05% with a 5.72% standard deviation and were trending up as credit quality continues to improve (see table 9 and figure 8.3).
2. The highest returns were in Near Prime loans (grades B-D) at an average of 8.27%, followed by Prime loans (grades AA & A) at 6.78% and sub-prime loans at 1.73%.
3. The probability of default of a Prosper loan peaks at month ten and then edges down (see Figure 9). This is a major reason why Prosper’s performance tool shows more conservative returns. Prosper’s performance tool does not adjust for this later default moderation, which is significant given that the average age of the Prosper portfolio is currently 9.7 months (i.e. at the peak of the default curve).
4. The study showed that the highest returns occurred for loans priced up to 25%. Loans funded at more than 25% actually showed lower returns because defaults increased disproportionately. This implies that borrowers willing to pay very high rates show higher adverse selection, which is logical (see Figure 8.1).
5. The study found that lenders learn quickly - adjusting their bids and strategies as performance is revealed. New lenders also learn from their observations of earlier lenders in adjusting to marketplace dynamics.

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Chris Larsen is the CEO and Co-founder of Prosper.