After logging into my Prosper account the other day, I notice that the status on one of my loans has a funny color next to it I haven’t seen before. I investigate to see that one of my loans is now considered late in the 1-15 day range. I don’t like this. My stat model that I use at lendstats.com assumes that if a loan goes late even for 15 days, the odds of default at rise a lot. For the return calculations I use a 90% write-off value when a loan goes late at all. Thus I expect to loose 90% of my investment on average. However, this is a D rated loan, which provides a pretty healthy yield. Luckily the borrower paid the loan back up to current, but the question is do I want to keep the loan, or sell it? I’m tending toward the sale option, even though there is significant effort. More about this later.
So as you can see, the overall portfolio has gotten slightly more risky over the last month. The A rated loans and the C through HR used to be about equal at around 25% of my portfolio. Now the A rated loans only comprise around 17% of my portfolio, and the B rated loans have shrunk to about 45%, and the C through HR rated loans have expanded to about 30% of the portfolio. I’m counting the pending bids on loans in this last category as well, as I added a few loans recently that have yet to close, but they are all rated C through HR.
The majority of my loans are still 3 year loans, but I’ve added a few 5 year loans as well. In fact, I won’t take any A rated 3 year loans at this point, as the 8% yield doesn’t do much for me. However, the 5 year A rated loans yield 12%, which is a bit more appealing. In all the other cases, I’ll take 3 or 5 year loans for the B through HR rated loans. This gives me an extra 14% points of return or so (after compounding) over the same time period of the 3 year loan. On a percentage basis, this is a huge increase over the standard 3 year loan, for only slightly more risk.
To date, I’ve received $350, with $95 of that being interest payments. I’d like to get that number up over $100 a month, and I should get there with my current search criteria once I have a full loan portfolio of 100 loans.
Getting back to the decision at hand, should I make the effort to register to trade notes via the security exchange in order to sell this loan because of the late payment, or should I hold onto the loan and hope that this is a one time exception? Given the assumptions I had above, that I expect to lose 90% of my funds on average, it seems pretty clear what I should do huh? Luckily, my status is back to where I lick to see it, Current, Pending, and Cash only. So I have a bit of time to sell the loan, as it likely won’t default on the next payment.
Readers, what would you do? Do I hold the loan or dump it while it’s still current? What has your experience been? Have you or someone you know loaned money to someone who was late paying it back?