Friday, June 09, 2006

Be aware of how much group rewards/leader fees cost over 3 years!

This is intended as a supplement to "Everything You Ever Wanted to Know about Group Rewards, But Were Afraid to Ask -- The Long Version."

First off, "group rewards" are better termed "leader fees." Even in a 100% shared group, all that happens is that a borrower doesn't get penalized with respect to the rate at which he or she can list his or her loan -- there is simply no automatic numerical advantage or bonus at all for being a member of such a group. The borrower doesn't get hurt, that's all.

However, it is true that certain groups offer valuable services that less directly, but still significantly, help borrowers. Membership (or sometimes, vetted membership) in such groups can increase lender confidence in the borrower, and may lower the final rate that a loan closes at (if lenders bid the rate down), or drive an unfunded loan to become fully funded.

Do note that the lower your credit grade, the larger the group bonus needs to be to offset the "leader fees" that are taken from your listing.

Pretend that you are an E borrower living in chicago who is a member of a 0% shared group.

Your state rate cap is 9% (because you live in Illinois), your leader takes 5% annual interest on your loan, and as a result, lenders viewing you loan see you as offering only 3.75%.

Math:
9% - 0.25% -5% = 3.75%
max Illinois rate - 0.25% chunk in case you sign up for bank drafts - 5% leader fees = divine intervention necessitating loan.

Here is a chart showing the amount of interest you will be paying to your group leader every year, depending on your credit grade and your leader's shared reward levels:



And, an overly simplistic, back of the envelope (aka, makes the math/finance nerd side of me want to tear out my hair) approximation of how much "rewards" cost borrowers:

Let us assume a $5,000 loan over 5 years (assuming that an E or HR borrower lists at 25%, in a 0% shared group, which means that 5% is going to the group leader and 20% to the lenders):

I use Prosper's loan calculator:

Total payments over 3 years for a $5000 loan at 25% rate:
$7,156.77

Total payments over 3 years for a $5000 loan at 20% rate:
$6,689.42

Amount you've paid to your group leader:
$7,156.77 - $6,689.42
=$467.35!!

According to the loan calculator, 50% rewards mean.

Total payments over 3 years for a $5000 loan at 22.5% rate:
$6,920.88

Amount you've paid to through 50% shared group leader:
$7,156.77 - $6,920.88
=$235.89!!

My advice? There are no groups out there that I know of that are worth the pain of 0% and 25% shared levels. And, unless your leader adds value, there's no reason to sign up for anything but 100% shared groups (or as I like to call them, 0% leader fee groups -- like mine :) )

[rant on]
Prosper currently describes group rewards in such a confusing fashion (for instance, choosing to term these taxes on borrowers and lenders "group rewards," rather than "leader fees"), that most of the new borrowers I've spoken to have no idea how much group fees cost them, or that they cost anything at all. This must be fixed![rant off]

We now return you to your regularly scheduled programming.

5 Comments:

At 9:41 AM, Blogger haasey said...

Well put. That is 10 times better than prospers help file explaining these fees. I sometimes wonder why some listings are so low. Seems people should know better, now I'll check the group affiliation as well. Kinda wierd that not being part of a group could be better than 50% of the groups out there.

 
At 2:05 PM, Anonymous Anonymous said...

Hi,
I'm new to the scene as a lender.
Let me ask the question. Why isn't it ok for a GL to have some financial reward for the work he does setting up a group and riding herd over it?
And the other thing I'm not quite understanding. What are the tax consequences to /as a group leader.

 
At 2:23 PM, Blogger cellardoor said...

Having group rewards is absolutely fine, and I have no problem with group leaders who are upfront about charging for rewards and also add value.

The backstory/controversy is that certain group leaders were deliberately and flagrantly flouting the truth -- or just plain lying to sign people up for their 0% shared groups. In other cases, they neither vetted, nor recruited people from outside the existing prosper pool, or did anything else -- but they did "guarantee" people funding if they joined (which didn't happen), made knowingly false claims about the amount of funding available to people who joined their groups, misled financially unsophisticated borrowers into believing that rewards cost them nothing, etc etc ad nauseum.

There are 2 main components to this problem:

1.Prosper makes it very unclear to people that
a)group rewards are actually fees to borrowers (and lenders)
b)in straightforward $ terms, just how much a fee of X% adds up to over several years
2.Borrowers, on average, tend to be less financially sophisticated, and more importantly, have far less incentive to learn about the fine print of prosper (unlike leaders and lenders, who will presumably continue to use prosper, borrowers can only have 1 loan out at a time).

As for GL tax consequences, income is income, however you get it. I'm not sure whether it'd qualify as interest income of employment income, however.

 
At 6:28 PM, Anonymous Anonymous said...

It's ridiculous to think that group leaders should not be paid in some form for their work!

I spend AT LEAST 5-6 hours a day working my group by approving listings, approving membership, rewriting listings for borrowers, vetting information and the like and you don't think I should be paid for that?!?

Though you may pull my post for this, I find you and the other group leaders that don't think GL rewards are a good idea completely bizarre! At best, you have a lot of free time on your hands and this keeps you happily busy and at worst, business isn't your forte. No offense, but come ON! This GL stuff is ALOT of work and not very rewarding work at that. The little tiny match fee for getting one funded doesn't even cover most expenses involved let alone the amount of time I end up spending.

Considering the majority of borrowers that come to Prosper are HR credit and have NO clue what to put in their listings to get it funded, I feel my expertise and time are well worth the tiny bit of cash I receive from their loan. In most cases, if it wasn't for MY hard work, they wouldn't have been funded to begin with.

 
At 2:46 PM, Anonymous Kevin said...

I dont see why anyone would choose a group without 100% rewards. Why give away money? As an independent lender I find hhe whole concept of groups distrubing. Please see my Prosper.com blog: http://rateladder.com

 

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