Prime investing with Prosper

Leading P2P lender Prosper has executed an impressive $90 million in loans through its marketplace but continues to remain appropriate only for those wishing to invest in high prime credit quality consumer debt.

10% of the roughly 2,500 loans listed on the site at any time are in the high prime tier (credit ratings AA, A and B), in fact, most of the listed loans do not fund. About a third of the loans that fund and become active and billed are in the high prime credit tier.

The graph below shows an ROI comparison of Prosper's total loan portfolio by credit rating in two time snapshots, August 30, 2005 - August 30, 3006 in blue and August 30, 2006 - August 30, 3007 in yellow. In the last year, AA, A and B loans funded at 11-15% and have an ROI of 6.5-9.5% once adjusted for default.

Source: Prosper performance data. Note: the default view which specifies 0 delinquencies and 0-2 credit checks in the last 6 months should be removed to view the total loan portfolio.

Acceptable Returns?
Is 6.5-9.5% an appropriate return? It depends on a full consideration of the risk and return profile of the investment. Theoretically, high prime consumer credit loans are low risk; the historical default rate for Prosper loans has been 2% for AA and A loans and 4% for B loans. As compared with the stock market, which has on average for the last 80 years delivered a pre-tax return of 8% with a higher level of risk, Prosper loans look more attractive. 6.5-9.5% also provides a healthy risk premium over risk-free t-bills or money market funds and CDs which are currently yielding about 4.5%.