Don't be fooled by the interest rate Prosper says you are earning when you log on to their web site. Compared to the way I do the math the numbers seem wildly inflated. Perhaps my analysis will, if not flawed, prove valuable to present and potential investors.
[Please note: Subsequent to my original post I discovered an error. I was looking at the wrong statements. I had them mixed up. Prosper, in it's not-so-infinite-wisdom does not put account numbers on their statements. Personally, I regard this as nothing short of over-the-top-idiocy. I have more than once confused statements from my Standard and Roth IRA accounts. In recalculating the numbers I came up with a marginally better interest rate of 2.37%]
As of January 31, 2015 the balances at my Prosper account were as follows:
Cash: $2,051.34
Notes: $21,436.19
Total Account Value: $23487.53
(My account had already been open for a long time so there was no matter of the initial cash deposit needing additional time to be fully invested.)
One year later, January 31, 2016, a year during which no deposits or withdrawals were made to or from the account, the balances were:
Cash: $1,237.54
Notes: $22,774.32
Total: $24,011.86
Over the course of 12 months my account grew in value by $524.33. Divide that amount by the account value at the beginning of that one year period to get this: .0223. Multiply .0223 by 100 to get the interest rate of 2.23%. This is simple interest. No fancy numbers manipulation to make things seem like something that they are not. This is an actual reflection of the growth of the account value over a one year period expressed as a percentage.
Logging onto my Prosper page today the company reports two interest rates: Seasoned Only Notes 10.19%, All Notes (current year) 9.94%. Yes, it is now a couple months past the end of the one year period for which I’m calculating interest, but as I recall the numbers reported by Prosper today aren’t all that different than those reported during the 12 month period I have analyzed.
I have excluded from the Jan. 2016 account value (above) the amount of $316.34 that Prosper lists on my Jan. 2016 statement as Pending Payments. Prosper’s definition of Pending Payment: “A principal debit adjustment for payments that were initiated during the statement period and which are pending receipt for the next period.” Well, if the money “ain’t been received it ain’t been received”. Tagging onto my statement an amount I will be, or may be receiving during the next immediate month might be OK if it’s done consistently, but since no such pending payments calculations were included by Prosper on statements until the beginning of 2016 it would skew the results for the purposes of this particular analysis which includes most of 2015.
Just for the heck of it, let’s pretend that those pending funds had actually been deposited into my account. That would raise the interest earned on the account to 3.6%. Still a far cry from what it seems Prosper wants me to believe I’ve been earning.
One can complicate matters by thinking of the cash balance and the amount invested in notes as two separate things and to somehow make an effort to exclude cash from the interest rate-of-return calculation. To me, this is something of a red herring. I look at the lump sum I've turned over to Prosper as my investment, upon which the percentage rate of return should be compared to other investments. (Risk adjustment calculations are beyond my ken, so for me KISS is the motto.)
I do not do the note picking for my account myself. I let Prosper handle this for me. If I wanted to do it myself then perhaps I’d earn more. That’s not the point I’m making. I’m suggesting that the interest rates Prosper reports on individual investors web pages may, at least in some cases, be inflated--significantly.
It gets complicated trying to calculate interest rates when deposits and withdrawals are made during the period being analyzed. In the past I’ve used the Excel XIRR function to calculate rates for my Prosper and Lending Club accounts when I've made deposits or withdrawals. In those cases too, as I recall, both Lending Club and Prosper seem to wanted me to believe that I was earning more than what it seemed to me I really was.
To me, the particular analysis I’ve done here, that of simple interest over a 12 month period, where no deposits or withdrawals have been made is just as straight forward, simple, and factual as you can get. 2.23%. Admittedly, I’m a math dummy, so if I’m wrong somebody please show me how. G-d, I really want to be wrong!
Has anyone else performed a simple interest rate of return calculation for some period of time on an account that has had no deposits or withdrawals, and come up with either s similar or disparate result?
Can somebody tell me why I wouldn't be better off selling my notes and investing my money in an S&P 500 index fund? Alternatively, how much time would I need to spend doing the not picking for my account myself in order to quadruple the rate of return I'm getting now.
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