Estimated vs. Realized returns for over 25,000 Prosper loans

When an investor decides to lend his or her money through Prosper, they are generally given an estimate as to how much return they should expect on their investment. Nontheless, the estimate that they are given is just that, an estimate, and might not be a true reflection of the realized return on the loan. The following plot shows the difference between estimated and realized returns for the periods between July, 2009 and November, 2013. The returns are for 25992 Prosper loans.

A few important observations can be made:

1. First, the estimated return provide a very optimistic picture for the returns that an investor can achieve on the loan. Notice that across the years, the realized return has been consistently smaller than estimated return.
2. Prosper has clearly improved it's underwriting model. You can note that the divergence between estimated and realized returns has shrunk over time. Moreover, the difference in has shrunk due to an increase in realized returns, which is a very good thing.