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Lenders on Prosper do not have the opportunity to meet you, as say a bank loan officer would, and cannot, therefore, make a judgment on the intangibles normally factored into a loan decision. Prosper lenders may only look at your credit score, debit to income ratio and the proposed interest rate offered to decide if they will place a bid on your loan.
The Experian chart below shows historical default rates lenders use as a guide in deciding whether or not to bid on your loan.
For example, a borrower with a D rating has an average default rate of 6.2% that means if a lender invests in 10 D borrowers 1 borrower will default about half way threw the loan and the lender will take a 50% loss on that borrower.
The significantly higher risk (and the higher possibility that they will not be repaid) requires “compensation” in the form of higher interest. Say a borrower expects to make at least an 8% return on all loans they make. That means the lender must add the 8% to the 6.2% default rate to get a 14.2% rate that they need to bid in order to make a 8% return on a D loan.
Lenders may use a formula to gage their risk vs reward when making a decsion on bidding on a loan. Here is an example of a lenders formula.
Prime Rate is currently 8.25%
A lender may want the following returns based on credit risk.
| Rating | Prime | Default Rate | Risk vs. Reward | Minimum Bid |
| AA Rating: | 8.25% | + 0.20% | + 0.05% | = 8.5% |
| A rating: | 8.25% | + 0.90% | + 0.25% | = 9.4% |
| B rating: | 8.25% | + 1.80% | + 1.0% | = 11.05% |
| C rating: | 8.25% | + 3.30% | + 2.75% | = 14.30% |
| D rating: | 8.25% | + 6.20% | + 4.0% | = 18.45% |
| E rating: | 8.25% | + 11.10% | + 5.0% | = 24.35% |
| HR rating: | 8.25% | + 19.10% | + 6.0% | = 33.35% |
Prosper has a max borrower rate of 30% so you will not see many HR loans be filled if the lender were to use this calculation.
