Last week Prosper added some new advanced search criteria that could help investors refine their note selections. There are three new selections in the Advanced Search section under Advanced Criteria->Listing Basics: State, Lender Yield and Minimum Expected Return. Let’s take a look at each one.
State of Residence
For this one I say it is about time. Lending Club has had the ability to filter loans via state for years. Prosper now brings this selection to their investors.
When I was doing some research on Lendstats recently and I was looking at the state breakdown for all loans. On Lending Club states like Florida and California provide below average returns so I have been filtering out those states when choosing loans. But on Prosper, California is outperforming the average handily, although Florida still underperforms when looking at all Prosper 2.0 loans.
One word of warning before implementing this filter. Apply a state filter after you have chosen your other criteria. I found that the performance of previous borrowers differs dramatically by state than for first time borrowers. So it is important to look at the state breakdown as the last step in your filtering process on Lendstats.
When I look at my Prosper account I have C-grade notes that range in interest rates from 16.99% (for a 3-year loan to a repeat borrower) up to 26.05% (for a 5-year loan to a new borrower). These loans are over 9% apart but are both graded as a C. Other loan grades have similar large ranges.
There are three reasons for this big variance:
Repeat borrowers get much lower rates than new borrowers.
Three-year loans have lower rates than five-year loans.
Prosper adjusts their interest rates regularly.
Until now, if you wanted to invest in just loans that yielded between, say, 18% and 25% you had to do multiple searches with different credit grades to get all these loans. Now, you can ignore credit grade completely and just use lender yield.
Minimum Expected Return
This is the most interesting change of the three. As you can see in the graphic here, whenever you invest in a loan Prosper gives you their estimate of the annual loss you will receive if you invest in a basket of similar loans. Subtract that from your effective yield and you have expected lender return.
Prosper has often promoted the fact that they have been beating their own estimates as to the expected performance of their loans. If you believe this will continue and you want a 12% return or more then you should just invest in every loan that Prosper expects a return of greater than 12%.
One word of warning about expected lender return. Five-year loans have a much lower expected default rate than three-year loans, which mean a higher expected lender return. But five-year loans have a short history being just introduced in 2010 so we really don’t have enough data yet to know if these higher returns stand the test of time. So, I would caution you before investing in all loans with the highest expected return because these will all be five-year loans.
These are Positive Changes for P2P Investors
All three of these changes I think will help investors select the loans that are right for them. I am going to be incorporating some new saved searches into my Automated Quick Invest on Prosper.
What do other Prosper investors think? Will you stick with your existing selection criteria or take a closer look at these three new filters?
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.