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Tuesday, March 14, 2006

Three Loans Made Via Prosper.com

I've got three loans funded now through Prosper.com:

  • $100 @ 8.85%
  • $100 @ 15.00%
  • $100 @ 23.75%

The 8.85% loan was made to Gualberto. Don't default, Gualberto - I know where you blog! :-)

I've got another bid out for a $200 loan. That listing won't end for another 10 days, so it could be a while before I find out if I got that one.

All my loans are less than a week old, so there haven't been any payments yet. My average interest is 15.36%, after Prosper takes their 0.5% service fee.

One thing I would like to see is an email notification when I have won a loan. Currently, you need to log in to the site to see the status of your bids. Also, an email notifying me when a payment has been made would be nice. Of course, that might already be implemented - I haven't gotten a payment yet, so I can't tell - but so far, I don't think I've received any system generated emails from Prosper, so I'm guessing I won't get one for payments either.

Another thing I'd like to see would be some clarification of how their bidding process works. Prosper lenders bid an amount and minimum interest rate they will accept for a loan. Multiple lenders are grouped to reach the borrower's requested loan amount. I'm a bit unclear about how Prosper determines who the winning lenders are.

For example, someone wants to borrow $1,000 @ 10%. The current bids are, in order of date received:

$500 @ 10%
$250 @ 9%
$250 @10%

There are enough bids to fund the loan and the resulting loan would be $1,000 @ 10%. However, suppose the bidding is still open for another day and now someone else comes in and bids $100 @ 8%. What happens?

It's probably not a big deal in the grand scheme of things, but the engineer / programmer in me is curious to see how this situation is handled. It's a bit more complicated than the standard eBay auction model, since there are two variables involved.

3 comments:

jon said...

Our help section covers this a bit. In particular, you should check out the bidding tutorial on our site. It walks you through bidding step by step with some good screen shots.

Basically, a lender's reservation price (aka "minimum rate") determines priority. The bids with the lowest "minimum rate" will win the loan if its funded. Simple tie-breakers, like who bid first, are used if lenders bid the same rate.

If the total amount bid (sum of the amount for each individual bid) is more money than the borrower asked for, there is excess demand for the listing. In that case, bids will start losing--partially or in full--and the interest rate will start falling.

All lenders get the same rate. The loan rate is basically set a bid increment below the lowest losing minimum rate. (Although, there are a few exceptions to this mainly to ensure people don't end up lending at a rate lower than their reservation price.)

So in your example it would end up like this after the 4th bid:

Loan: $1,000 @ 10%
Max bid rate allowed: 9.95%
$500/500 @ 10%
$250/250 @ 9%
$150/250 @ 10%
$100/100 @ 8%

Basically, the loan rate won't fall until another $650 worth of bids are placed. Although, on our site the only reservation price you would know would be for the partially losing bid of $250 @ 10%.

In case you are still hungry for more... there's some interesting chatter about this on one of our forums.

Cheers,
Jon

Anonymous said...

Wow. I'm really confused about these loans for such tiny amounts of money (or by $100 do you mean 100K?!!- sorry if I'm being a dummy!)
And i'm confused by the high interest rates and who is actually doing the lending here.

I know I'm missing something- what is it?!

Shaun said...

Anon - you are confused about how Prosper.com works. Prosper is simply a place where individuals can meet to loan each other money. Prosper groups money from several individuals and loans it to one individual. They then also split the loan payments made by the borrower up and sends them back to the multiple lenders.

For example, someone wants to borrow $1,000. Ten lenders might each lender that person $100 each. The borrower gets $1,000 and his monthly payment is then divided up 10 ways and returned to the lenders.

There is a bit of an eBay-quality to the process in that the interest rate charged is one of the bid variables. Some lenders might not think a person is a good credit risk, and therefore will only loan to that person at a higher interest rate. Someone else might think they aren't such a bad risk, and is willing to loan at a lower rate.

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