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What is "Laddering" within Prosper?

When you are using Prosper as a lender, bidding on an 'auction style' loan, a very good technique to consider is what is called "laddering".

Laddering is where you place a group of bids on a single listing at different rates. The general idea is to invest less in the loan as the rate goes down.

Lets look at this in numbers. For example, you see an attractive listing at an attractive interest rate. This loan will likely get funded, so you bid, then bid a few more times at lower rates.

So:

$5000 @ 22%, B Credit

1st bid: $50 @ 22%
2nd bid: $50 @ 20%
3rd bid: $50 @ 18%
4th bid: $50 @ 16%
5th bid: $50 @ 15%

So, if this loan gets funded at your bottom line, 15%, you only invest $50. But if the loan rate ends up higher, you invest more. If you get lucky, you'll invest $250 at 22%. If you do well, you'll invest $150 at 18%. If the loan becomes very competitive then you'll only invest $50 at 15%.

So you can see by this example is that you are stacking the loan in your favor depending on the interest rate. This technique can make a big difference in your long term lending strategy.

1 comments:

At December 23, 2007 at 4:21 PM RateLadder said...

Nice summary. Also the origin of my name.

 

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