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I’ve often ignored the “Credit Profile” category for “Inquiries in the Last 6 Months” when bidding loans on Prosper and realize now that it’s to my detriment. This category has a huge impact on delinquency rates and overall ROI (Return on Investment).

The reason I ignored this field is because I have seen mine at different times in my credit history and thought “where did that number come from”, implying that this number was never right. Well, sometimes it may not be correct, but it definitely has a big impact on performance.

Let’s crunch the numbers. I have focused on 4 categories, 0 to 3 inquiries, 3 to 6 inquiries, 6 to 10 inquiries and 10+ inquiries. As the inquiries go up, the return on the investment goes down.
This chart tracks the differences in percentages of defaults at the different credit grades at different levels of inquiry. The trend is obvious at every credit grade.

Now, you may look at that graph and say “they are not so far apart” but that would be wrong, they are. Defaults are the single most damaging element of lending money via Prosper, and a tiny increase in the default rate has a huge impact on how much you actually profit.

Most of these default rates are double between the 0-3 level and 10+ level. Ask any lender to double their default rate and see what they tell you. There is often the sense that too many inquiries equals desperation and the numbers certainly bear this out.


At January 9, 2008 at 5:32 PM j9359 said...

Number of inquiries is a major part of breaking down borrowers into segments. Take a look at this help page on Prosper:
typically 0-1 inquiries is one segment and 2+ is a different segment.


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