May 19, 2011

An Updated View on Risk Performance

By Prosper

At Prosper, we take lender returns very seriously. That’s why returns are always front and center on our home page, and it’s also the reason that we make so much of our loan performance and marketplace data freely available to our customers.

View our most recent Risk and Return Update.

We recognize that risk performance can be complex, and our lenders don’t always have the time to slog through all the data, so we want to highlight a few key ideas that you should keep in mind when investing:

  1. Both risk and return vary by Prosper Rating.

We expect annual principal losses of less than 2% on our AA-rated loans. For our E-rated loans, we expect that rate to range between 12% and 15% – for more information about how these rates are calculated, click here. However, when setting rates, we always want to think about worst-case scenarios. For instance, “What if losses were to be worse than expectations?”


We set prices to account for such possibilities. The upside is that when losses come in lowerthan expected, our lenders earn that much more — which is what’s been happening for Notes originated since July 2009:

Net Annualized Returns by Prosper Rating*

  1. Losses must be measured against expectation.

When it comes to credit, remember that principal losses (charge-offs) are a part of doing business. Clearly you want to minimize them whenever possible, and we work to do so with strong underwriting and rigorous collections management, but some losses are still likely.

That doesn’t matter, though, if your Notes are priced appropriately. The clearest example of this is our E-rated Notes. Since 2009, the loss rate on those Notes has been 9.8% – more than five times higher than the loss rate on our AA Notes! But because the yields on those Notes are higher, investors are still enjoying an excellent return: 19.1% to date.*

These ideas and others are presented in more detail in our updated Risk and Return Presentation. Check it out and let us know in the comments if you have any questions or feedback!

To see our previous Risk and Return presentation, click here. Also, make sure to check back next week for Part One of our series, “Five Strategies of Successful Prosper Lenders”!

* Net Annualized Returns represent the actual returns on Borrower Payment Dependent Notes (“Notes”) issued and sold by Prosper since July 15, 2009. To be included in the calculation of Net Annualized Returns, Notes must be associated with a borrower loan originated more than 10 months ago; this calculation uses loans originated through May 31, 2010. To calculate Net Annualized Returns, all payments received on borrower loans corresponding to eligible Notes, net of principal repayment, credit losses and servicing costs for such loans, are aggregated then divided by the average daily amount of aggregate outstanding principal for such loans. To annualize this cumulative return, the cumulative number is divided by the dollar-weighted average age of the loans in days and then multiplied by 365. Net Annualized Returns are not necessarily indicative of the future performance of any Notes. All calculations made as of March 31, 2011.