Prior to opening my account with Prosper at the end of this past spring and investing $1,000, I spent many hours researching and developing my investment criteria. Having had plenty of experience with doing this with my Lending Club accounts, this was simply a matter of applying the same level of effort and similar concepts to Prosper’s historic loan performances. The reason I share my filter is for both transparency and a conversation starter with those considering Prosper as a viable investment.
Naturally, this is a great time to remind everyone that past performance is no indication of future results. My investment criteria are based on some historic values, gut feelings, and dumb luck. Since investing is putting your own money at risk, I have no responsibility for how you might screw things up!
With that out of the way, historic analysis, or backtesting, is a great tool for any peer-to-peer investor to explore prior to investing. This allows an investor to identify some of the more common borrower attributes that might inhibit an investor from maximizing their return while minimizing risk. My goal is to earn above average returns, while balancing adequate diversification across multiple rating levels.
Additionally, while it is easy to find a combination of filters that return over 20%, the key is to find one that will allow for a reasonable amount of investment. What is more valuable, a filter that results in 50 loans issued since inception returning 20%, or one with over 3,400 loans issued returning over 16%? For me, I’m going with the latter every time. Below is the second filter I just mentioned, and the one I use for my Prosper investments.
- Prosper Rating: C, D, E, HR
- Loan Term: 36-months
- Debt-to-Income Ratio (DTI): 10-40%
- Now delinquent: 1 or fewer
- Public Records last 12 months: 0
- Inquiries last 6 months: 0
- First Credit Line: 12+ years ago
- Open Credit Lines: 6+
- Total Credit Lines: 10+
- Stated Income: Greater than $25,000
For the development of my filter, I used Prosper-Stats, a third-party peer-to-peer lending stats site devoted to tracking Prosper’s returns. If you are interested in seeing my filter and playing with credit variables while at Prosper-Stats, please check it out!
Prosper Investment Criteria Highlights
I am not a credit analyst or statistician, and can’t put any sort of validity on my criteria besides the fact this is what I use to invest my money. As I said before, I’d rather utilize a filter that has a reasonable amount of loans regularly becoming available and still provides me with above average returns.
In the case of my filter above, a couple of things of note:
- There were 1,993 loans that were issued prior to 2013 and after 2009 that met requirements of this particular filter. Given we are now in November of 2013, all of these loans are “seasoned” and have provided a 16.57% return since the beginning of 2009, as of the time of this writing.
- I do not invest in 60-month loans with Prosper as I don’t think the interest rate appropriately rewards me for the additional risk of the lengthier loan term at this time.
- The reason I include ‘C’ rated loans is for additional diversification, loan selection, and as a hedge should the economy dive. Investing only in the highest risk loans could spell trouble should our economy severely falter. I don’t feel as if I am sacrificing too much return with the ‘C’ loans as they have returned 13.61% and 14.07% for those loans issued during 2009-2012 (seasoned) and since 2009, respectively.
Let me know your thoughts on my filter, what filters you have used, and what methods you have found to be successful over the course of your time investing with Prosper. If you have any questions, feel free to ask below in the comments, or reach out to me through my contact page.
Interested in investing (or borrowing for that matter) with Prosper? Feel free to check them out!
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