Friday, April 07, 2006

Everything You Ever Wanted to Know about Group Rewards, But Were Afraid to Ask

This explanation is best digested in combination with Prosper’s official help guide to group rewards – I wrote it in response to another lender's question. Plus, I had to spend more time on the group rewards help page than the rest of the help pages put together to decipher Prosper's advice. (Yes, I read fast, but that’s not the only reason :)) Any failures of this guide to correspond to actual lending practices lie with Prosper, not with the author. For more details, see the official Prosper Help page:

Group rewards areincentives for borrowers/group leaders to belong to groups/get people to join their groups. They come primarily in the form of some X% of interest rebated on a given loan to the borrower and/or group leader.

The size of the reward depends on 2 things:

1)Credit grade of borrower

2)what % of group rewards are shared by the group leader.

b)for borrowers:

1)How credit grade affects rewards for borrowers:

Assuming that rewards are 100% shared, these are the reward levels:
Credit GradePayment Reward
AA, A0.50%
E, HR, NC5.00%

This part seems silly to me, insofar as their only net effect on borrowers is to lower the max rate they can list at, since the rate to a lender is always shown net of all group rewards. (If you have group rewards accruing to you as a borrower, your max effective listing rate is reduced by the amount of the reward.) After all, the lender doesn't care about much besides the ultimate rate that s/he receives. (To be very technical, since rewards aren't actually issued for ~3 months, this isn't strictly true, but whatever... "Payment rewards are paid after a 3-month withholding period to ensure the loan isn't bad right out of the gate. After 3 months, all current month payment rewards earned for that month are paid. At the end of the loan term, any remaining rewards withheld are paid in full.")

2)How % of group rewards shared affects rewards for borrowers:

The rewards above are earned if the group shares 100%.They're halved if 50% sharing applies, reduced to 0 if 0% sharing applies, and the same goes for 75% and 25% sharing (sharing is granular, in 25% chunks).

So, you ask, what happens to the rest of the rewards if not 100% shared?

c)for group leaders:
They get the slices of reward forgone by the borrower -- under 100% sharing, they get zilch. Under 0% sharing, they take it all.

d)why did I say that rewards come PRIMARILY in the form of X% rebates? Because there's one other component of group rewards that can only accrue to leaders -- the match reward.These also depend on the same 2 things -- credit grade of borrower, and % sharing of group.Under 0% sharing, match rewards for the group leader are:
Credit GradeMatch Reward
AA, A$20
E, HR, NC$10

Under 100% sharing, there are no match rewards; under 50% sharing, all match rewards are halved.BORROWERS NEVER GET MATCH REWARDS! So, if a leader opts for 100% sharing, Prosper doesn't give anyone match rewards! These are "received one month after match if the loan is still outstanding (not repaid) and payment is current." Again, for more details, see the official Prosper Help page

Insert editorializing:
E/HR Borrowers, recognize that if you join a group w/0% shared rewards, you're effectively paying 5% of interest on your loan to your group leader over the next 3 years or so! (And $10 up front, but that's typically nothing in comparison.) Keep this in mind when you choose your group!!!

Remember that group reward levels at the time of your loan start are what matter! Once you list in a 0% shared group, even if your leader has a change of heart and switches to 100% shared, unless you relist, you're out of luck!

I personally wouldn't go w/a group with less than 75% shared rewards, whether I'm an AA or an HR.

Read more!