Why do I want to calculate my Internal Rate of Return (IRR)?  To make sure it is higher than my cost of money – ergo a good investment.  I claim that my cost of money is 5% which I can earn in an Internet savings account.  So my IRR needs to be higher than 5% plus a risk premium.  How does one calculate an IRR?

Well the real answer would require knowing with absolute certainty the default rates over time of Propser loan in your portfolio.  Prosper data isn’t as old as the term length of the loans, so any default rate would simply be a guess.  Since extended credit isn’t available it isn’t possible to isolate the data the same way you can with standing orders. Hence, any suggested default rate is a pure guess.

If I value the principle in the loans at 0 PV.  In which case my entire principle $3,361.60 would have been used to generate $20.63 in interest.  IRR clearly negative and clearly meaningless. So what is a better assumption? 

My Prosper journey is at least 3 years long and hopefully lifelong.  So I am going to define an IRR that I think has meaning and follow it over time.

My IRR is the current cash flows (monthly summary of money into prosper and generated by loans in interest payments) with an additional month in which the current account value minus in arrears loan value is used.  My current account value according to Prosper is $3,440.16 and I have 0 late loans. Perhaps seeing the data will explain.

My monthly cash flows are

Month	Interest Earned	Monies Added	Cash flow
7/06	$0.00	($200.00)	($200.00)
8/06	$1.92	$0.00	$1.92
9/06	$2.33	($200.00)	($197.67)
10/06	$2.73	($1,231.17)	($1,228.44)
11/06	$13.65	($1,430.43)	($1,416.78)
12/06	$0.00	($300.00)	($300.00)
1/07	$3,440.16	$0.00	$3440.16

 

Which generates an IRR of 1.11%.  If my money were fully vested at inflow then this would be a pretty bad IRR.  But in my experience money takes at least 3 weeks to turn into a loan, the loan takes 1 month to generate it’s first interest. Hence, my IRR has more meaning over time than at any one instant, particularly so early in the journey.  I expect my IRR to increase steadily for at least one year and at most 3 years until it levels out. Propser thinks my historical performance is 15.38% for a net gain of $79.25.  I fully expect my IRR to be greater than 10%.  

I will be keeping this information on a page My Prosper IRR and revisiting over time.

Questions, comments, screams of anguish?

 

Related Posts

• Prosper.com and Your Emergency Fund I was reading an article on bankrate.com about Using a CD Ladder as Parking Locations for Your Emergency Fund. One of the big problems with a CD Ladder is the finite number of times you can withdraw money without a fee. Another big problem is length of time it......
• My Prosper Internal Rate of Return Update (End of August 07) = 2.75% This is a RateLadder only IRR update. (An IRR lender “game” update is in the works.) I was involved with my first default debt sale.  I sold 1 AA loan for 25% of prinicpal. Here is my permanent tracking page: http://rateladder.com/my-prosper-irr/ My Prosper IRR is defined as: Monthly cash flows......
• Default Rate: It's Not Just If a Loan Defaults, But When I had a very interesting email exchange with RGF.  (I emailed him after using his forum posts in articles last week). Here is a portion of that email exchange on default rates over time and their affect on yield. RGF: Default rate:  It's not just if a loan defaults, but......
• My Prosper Internal Rate of Return Update (End of September 07) = 0.61% This is a RateLadder only IRR update. (An IRR lender “game” update is in the works.) I was given a last second reprieve from a negative IRR this month by a collection payment!!!  A post is coming about this. Here is my permanent tracking page: http://rateladder.com/my-prosper-irr/ My Prosper IRR is......
• My Prosper Internal Rate of Return Update (End of Jan 07) — 12.31% It seems that after some thought EnoughWealth and TB and hit upon the thing that wasn't quite right with my XIRR based IRR My Prosper Internal Rate of Return Update (End of Jan 07) — 18.14%.  It was double counting the interest since it was both being paid at the end......

Related Websites

• Prosper to Provide Secondary Lending Market Today I received an email from Prosper to notify me that they are entering a quiet period, as they register with the proper securities authorities for a secondary lending market. What is a secondary lending market? It is a market where you can buy and sell loans that have already......
• Newport Dunes Resort and Marina, Newport Beach, CA Phone: (949) 729-3863 Marine Stand By Channel? Yes, the marina monitors both channels 12 and 16. Average Water Depth? Depending on the time of year, the depth is usually around four and a half feet. This is subject to change, please contact them for exact information. Is there a......
• A loan of nonsense Kiplinger's Personal Finance, October 2005 issue, page 94, has a one-pager: "Lock in your loan?" The main point of the article is that it's not always a good deal to go from an adjustable-rate home-equity line of credit (HELOC) to a fixed rate one, despite the fact that the prime......
• Lending Club Review I am now an official member of the peer to peer lending scene at Lending Club.  Over the last couple years I have read a lot of positive reviews of sites like Lending Club, but never fully investigated the opportunities to participate in peer to peer lending there.  Between the......
• Revealing the Keys to Prosper Success Earlier this week, I defended the Prosper's business viability. I spent two posts rebutting the idea that it might not be a good investment. Just yesterday, I discussed the Prosper mistakes I've made. Today, I will share with you what I've learned. Hopefully 5 minutes from now you'll be......

Online Stores

• Cash Registers Banks, Registers Vending Collectibles
• Manuals, Strategy Casino Collectibles

If you liked this article, vote for it on del.icio.us and stumbleupon.


Categories:

Prosper.com, Statistics, Strategy

Tags:

azerbaijan, mozambique