I am tracking my Prosper internal rate of return (IRR). As a reminder my prosper IRR is defined as actual cash flows up to the current month. The current month is positive account balance minus monies added minus loan values in default.
I currently have 0 loans in default and an account balance of $3,614.65. That makes my Prosper cash flows as follows:
| Month | Interest Paid | 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 | $25.40 | ($300.00) | ($274.60) |
| 1/07 | $3,614.65 | ($150.00) | $3,464.65 |
Using Excel I determine that my Prosper IRR is currently 1.67%. This is up from 1.41% on my first tracking date of 1/14/07 when I added my interest from my December monthly statement.
So what does this tell me? So far it tells me I would have done better in the short run to leave my money in a high yield savings account (5%). However, Prosper is not a short term play. It is at least a 3 year commitment. As such, I expect this number to rise steadily over time (for at least one year and at most 3 years) and then plateau. It is my prosper IRR value once a plateau is reached that I am interested in. And it is this value that I will be comparing against a high yield savings account to determine the long term benefit of Prosper.
After considering the comments from TB and some offline discussion I have restated my Prosper Jan 07 IRR: 18.41%
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8 comments ↓
I have spent a lot of time over the years calculating IRRs using Excel. Hopefully my makes you feel even better about your Prosper investments. To calculate your annualized IRR based on your cash flows, you should use the XIRR function, which takes into account the timing of the cash flows. The plain IRR function doesn’t. By my calculations, which I am happy to send to you, your annualized IRR as of 1/31/07 is 17.8%, assuming that you could withdraw your entire account balance on 1/31/07, interest was received at the end of each month and money was added in the middle of the month. If you added money at the beginning of each month, your annualized return has been 15.3%.
I am clearly not an expert, but I like to play one on TV…
I would love a little more explanation… my average interest rate is only 16.3%, how could I have an IRR of 17.8%? I thought the regular IRR function required regular intervals (months for example) which is why I simplified my cash flows into months. What am I missing?
For the plain IRR function to return the annualized return, the interval between the cash flows has to be exactly one year. In your case the interval is one month. The exact timing of when you add money (invest) and when you receive the interest payments will make a difference to the annualized IRR as could be seen in the difference between the annualized IRRs if you added new money at the beginning of or half way through the month (in my calculations). Also, if your current average interest is 16.3% but some of the loans that you made earlier on had a higher ones (and all payments have been received) your annualized return to date would be higher than the current average interest rate. The annualized IRR going forward could not be higher than 16.3% unless you invest in new loans that earn you a higher return. Personally, I would be ecstatic if I earned a 16% going forward. I can send you the Excel sheet if you send me an e-mail I can respond to.
Sorry, you beat me to it. I will send you my calculations.
Yes the interest rates are pretty astounding. I just keep telling myself to expect defaults and then I hope that they wont happen.
I am expecting for a predictable stable IRR of over 10% and hoping for over 12%.
If IRR is calculating annually and I am assuming monthly then I should be able to multiply by 12 and get a reasonable number (1.67*12= 20.04%). Is that right?
I have updated the Jan IRR…
http://rateladder.com/2007/02/01/my-prosper-internal-rate-of-return-update-end-of-jan-07-%e2%80%94-1814/
Are you defining “default” the same way Prosper defines “Default”, or are you throwing lates in as well?
- Argonaut
Any late will be treated as a default until it is sold as default or becomes current.
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