Pricing Your Bids

How should I price my bids?

You should bid an interest rate that takes into consideration the borrower's estimated loss rate, the rate adjustment due to defaults, the Prosper loan servicing fee, and any other credit or social criteria that you find relevant.

To help lenders understand how loans can be expected to contribute to their portfolio return, Prosper provides a projection of estimated return at time of bidding when placing manual bids, or at time of plan creation when building a portfolio plan. The estimated return is based on the historical performance of Prosper borrowers with a comparable credit grade and characteristics, and takes into account the minimum bid, expected loss rate and servicing fee.

Estimated Loss / Estimated Loss Criteria

The loss rate is a key driver in the estimated return and is based on the historical performance of Prosper borrowers meeting the "estimated loss criteria" shown on the manual bidding page. The "estimated loss criteria" represent key characteristics of the listing for which you are placing a bid. The main characteristic is credit grade and this is supplemented by a few other factors.

To obtain the loss rate, Prosper reviews loans already made to borrowers with these similar characteristics, projects a loss rate based on payment history to date, and assumes this listing will have similar performance.

Calculation of Estimated Losses

To obtain meaningful loss rates, Prosper divided the Prosper portfolio into segments (listed below), each with different criteria, driven primarily by credit grade. The "Estimated Return" table on the marketplace performance page was then used to generate the estimated loss rate for each segment.

The portfolio was divided into more segments than just the seven credit grades in order to provide greater differentiation in loss rates, as not every borrower within a credit grade (which incorporates a range of scores) has the same risk of defaulting. In addition, credit grade is based on the borrower's credit score, which is in turn based solely on information from the borrower's credit report and does not take into account non-credit report factors available to Prosper lenders, such as income and automatic funding.

To create the segments, the portfolio was first divided by credit grade. Within credit grade, a variety of variables available to lenders, such as "now delinquent," "inquiries," and "debt-to-income ratio," were tested to identify those with the greatest segmentation power with respect to loss rates. Key variables were then combined to create the segments, shown in the table below. The segments are not permanent; they will change over time as Prosper accumulates more data and the segments are refined. For example, there are a number of variables that were made available to lenders in early 2007, including "revolving credit balance" and "endorsements," that do not yet have enough performance history to evaluate, but may be added in the future as the portfolio matures.

These estimated loss rates provide a source of potentially useful loss guidance for Prosper lenders making bids. The rates are not a guarantee, but they do represent the observed performance of Prosper borrowers with similar characteristics. As such, in Prosper's opinion, this loss guidance is preferred to Experian's historical loss rates based on Experian's population, of which Prosper borrowers are a subset.

When making bids, lenders should always keep in mind that there are factors other than credit grade that contribute to expected default rates, including but not limited to income, employment and unique Prosper metrics like friends, endorsements and group membership. All available factors should be considered, including the utilization of questions and answers to obtain more insight into the borrower's credit worthiness. Lenders must make their own judgments with respect to the risk of default associated with individual loans and actual performance may vary from estimated performance.

Each credit segment can be isolated by Prosper lenders for bidding purposes simply by creating a portfolio plan, using the credit grade and specific segment criteria as the filter criteria for the portfolio plan.