Apple User Group on Prosper has moved to a new home at Mac Lenders

Lenders on Prosper do not have the opportunity to meet you, as say a bank loan officer would, and cannot, therefore, make a judgment on the intangibles normally factored into a loan decision. Prosper lenders may only look at your credit score, debit to income ratio and the proposed interest rate offered to decide if they will place a bid on your loan.

The Experian chart below shows historical default rates lenders use as a guide in deciding whether or not to bid on your loan.

For example, a borrower with a D rating has an average default rate of 6.2% that means if a lender invests in 10 D borrowers 1 borrower will default about half way threw the loan and the lender will take a 50% loss on that borrower.

The significantly higher risk (and the higher possibility that they will not be repaid) requires “compensation” in the form of higher interest. Say a borrower expects to make at least an 8% return on all loans they make. That means the lender must add the 8% to the 6.2% default rate to get a 14.2% rate that they need to bid in order to make a 8% return on a D loan.

Lenders may use a formula to gage their risk vs reward when making a decsion on bidding on a loan. Here is an example of a lenders formula.

Prime Rate is currently 8%
A lender may want the following returns based on credit risk.

Prosper has a max borrower rate of 29% so you will not see many HR loans be filled if the lender were to use this calculation.