After investing with Lending Club for four years, I decided to diversify my peer-to-peer lending asset class and make an investment with Prosper. Having been bullish on peer-to-peer lending from the time I first opened a Lending Club account back in 2009, I am excited to see how my investment in Prosper grows over the next several years. In order to bring some level of transparency to my investments, each month I plan on providing an update on how my Prosper investment is performing. Let’s see how August turned out.
Prosper – Taxable Account
August was another successful month for my taxable account with Prosper, with the total net interest income growing to $17.89. You will have noticed a significant jump in the ending cash balance as I made an additional $300 contribution to the account just prior to the end of the month. Since those contributions have not been invested just yet, any organic “snowballing” of my net interest income was slow, hence the small increase over the previous month.
Until the account grows significantly, there will be monthly swings in net interest received as late and defaulted notes hit the account. Given my goal of $120 from Prosper in net interest for 2013, progress towards this goal has been better than anticipated as I’ve already hit $46.25 in net interest. However, it is only a matter of time before my risk level results in a defaulted note. Ultimately it will be very close come the end of the year.
As a reminder, just like with my Lending Club accounts, I track net interest, which is the total interest received less any fees, defaults and charged off loans. Prosper actually makes this process easier as I calculate my return on an actual account balances while ignoring accrued interest, which Prosper does not include in the account balance.
As you can see above, Prosper has provided an all notes return figure of 15.09%. Given the anticipated returns of around 15-16% given my investment criteria, I am assuming this number will increase as the account matures, then drop once the late notes start to hit. The real test will be once my notes start hitting the “seasoned” age of 10 months. Looking below now, take a look at the details of the account as it stands now.
Currently, I have available cash of $323.87 with no notes pending. My account currently holds 43 active notes with one paid in full. Having that one note paid off early is a bit disappointing as it really prevents me from maximizing my returns. Early payoffs increase cash drag and reduce returns. Again, as I have done with Lending Club, I will continue to roll the payments I receive into additional loans at $25 per note.
Given my overall risk of the notes in which I’ve invested, now 21.66% at acquisition, there will most certainly be late notes in this account. With Prosper, the selling of these loans is not an option, so I will be continuing my buy and hold strategy, by default. Naturally as I continue to track the performance of this account, you will see how these notes perform and what my default rates end up being.
As for my earnings, during August, as I said above, I earned $17.89 of net interest, giving me an initial internal rate of return since opening the account of 14.34% using Excel’s XIRR function. While smaller than July’s increase, this was still a big jump from last month’s 11.87%. The increase is purely a result of the additional month of interest earned while getting further away from the initial cash drag period when I opened the account. I am expecting this to continue to increase as the effects of that initial cash drag minimize, as well as any additional contributions get invested quickly.
Isolating the month of August, my overall internal rate of return came out to be annualized 21.63%. Unsustainable, but I’m not complaining! With such a short time frame and smaller account, the swings in this rate of return could be large as a default could wipe out an entire month of interest income. All of this is to be expected, as I mentioned before, given my overall higher risk profile of the notes I am investing in currently.
I have updated my Prosper page with this information.
Interested in investing (or borrowing for that matter) with Prosper? Feel free to check them out!
Have questions about peer-to-peer lending? Just ask!