Wait, NA, you lost me there. Can you please explain this thing about time corresponding with interest?
Sure... Highest level, it's as simple as: The more payments a loan makes, the more money you'll get.
If a loan defaults after 9 payments, you're going to lose principal - but not as much principal as you'd
have lost if it defaulted after, say, 3 payments. If it defaults after making, say, 24 payments (2 yrs),
you've probably recovered most of the principal and it might only be a small loss, or even a small gain.
So, it matters WHEN loans default. It's functionally not about "principal" or "interest" as they are not
frontloaded loans, they're fully amortized over 36 months, so, it doesn't matter what you call it really.
Me, I just call it money.
The object of the game is, first, to get back the money you lent, then to get back the money you're
owed (interest/profit) for having lent that money. Breakeven on principal depends on the rate of the
loan, but, generally it occurs somewhere in the 24-32 payment range - lower the rate later it occurs.
We're dealing with 36 month instruments, fully amortized, so, excluding edge cases where late fees or
whatever cause the very last payment to balloon slightly, each payment is 1/36th of the loan amount.
By "loan amount", I mean the fully amortized, over three years, "cost of the loan" to the borrower, so:
http://www.prosper.com/loans/calculator_results.aspx?share=1&grpmbr=False&product=1&rate=10.0&schd=False&amount=10000&csco=0There's a $10k loan fully amortized over 36 payments (click "view payment schedule" for the table).
I'm speaking from the lender perspective, so, we subtract out Prosper's origination fee (charged to
borrowers), and the "loan amount" (ie, the total the lender expects to see, given 36 full payments)
is $10,000 + $1,616.20 = $11,616.20, which, magically, is $322.67/mo times 36 monthly payments.
For a $10k loan at 10% interest, breakeven on principal occurs during monthly payment number 31,
where you get your first $2.77 of "interest" (profit). The math is very easy: $10,000 / $322.67 =
30.991xyz, so, you need 31 payments to break even on that loan. Backwards, $322.67 * 31 mo.'s
works out to $10,002.77, so, you'll have "made" $2.77 after receiving your 31st loan payment here.
Now, if this $10k loan had been at 15% interest, you'd break even around payment 28 and if it had
been at 20%, you'd break even around payment 26, and if at 25% interest, breakeven is month 25.
(I'm not actually doing the maths here but I think those are right, maybe you should check on me?)
All of that to say: it TOTALLY matters "when", in the payment cycle, any particular default occurs.
If a loan defaults at breakeven, you lost nothing but time value. If later than breakeven you profit.
If somewhere below breakeven, then, the closer you are to breakeven, the less the default "costs".
This leads to all kinds of other questions about what kind of loans to target or rates to go after but
if nothing else, I hope that makes clear what I meant by % or # of defaults being sort of misleading.
-t