Learn To Lend

What you should know about bidding a Prosper loan too low

The competitive nature of the bidding process gets some lenders to bid down interest rates on Prosper to the point where the loan isn’t worth the risk of reward.

In the heat of the moment lenders are more likely to make an offer to fund a loan so they can get a piece of the listing they’ve been watching & bidding on.  The problem is that the criteria that seemed profitable when the bidding began no longer provides an acceptable risk/reward trade off at the lower rates.

In response to a recent MarketWatch article offering peer lending tips, one of the commentors brought this up with the following comment:

“Dumb lenders who dont understand risk/return really do ruin P2P lending.  Since most of the loan listings are setup as an auction, people bid the rate down and make many attractive loans become unattractive due to the rate.”

The existence of these bidding wars also been addressed in a more eloquent manner on the Prosper blog by WealthBoy. He offers some great advice on bidding strategies:

“Once you have placed your bids in accordance with your desired overall portfolio performance, you need to be patient and wait for the listings to close. ….. If you are outbid on a listing, do not be compelled to rebid. It is not a competition where you win a prize if you win the bid. If you were outbid, it was because the marketplace was willing to take on more risk than you.”

He emphasizes setting your criteria and then sticking with it, even though it may not be the easiest thing to do.  According to him, patience is the key to finding good investments on Prosper:

“It is of the utmost importance to be very patient when investing funds. …You should expect to lose a lot of bids. You should also expect to do a lot of bidding before having a winning bid on a funded loan. I’ve found that only about 10% of my bids are being funded ….”

Lenders that are not patient may bid down loans to an interest rate that doesn’t effectively factor in the risk of default considering the borrowers financials.  The problem they face is that although they may win the bid in the near term, over the long term the performance of their loan portfolio suffers since they aren’t being paid enough interest for the level of risk they accept. Smart prosper lenders will listen to the advice given above and will be more profitable for it in the long run.