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Another Look at P2P Lending Default Rates

by Peter Renton on October 12, 2011

It has been nine months since we took a close look at p2p lending default rates. Defaults have such an impact on returns for investors that I thought it was time to revisit this topic.

Back in January when we looked at the basket of loans that were originated from July 2009 through June 2010 at Lending Club and Prosper these loans were only 11 months old. Now they are close to 20 months old and past the peak default period. There will still be some more defaults but the impact of future defaults will have far less impact than these early defaults. This is because investors will have received more than half of their investment back on almost all the loans that are current now.

Where do we stand today? As expected defaults have risen dramatically in the last nine months and also as expected Lending Club has a lower default rate (6.83%) than Prosper (8.55%). These default numbers have more than doubled since looking at these loans back in January – back then Lending Club was at 2.75% and Prosper 3.99%. Overall, though, these loans are producing decent (albeit single digit) investment returns according to Lendstats.

Below is the updated table for loans issued from July 1, 2009 through June 30, 2010. All the numbers are current as of today and will certainly change in the future.

No. of loansDefaultsDefault RateLate loansLate %Interest RateLendstats ROI
Lending Club84605786.83%1361.61%12.60%5.14%
Prosper48164078.55%791.64%17.86%9.01%

We should also keep in mind that Prosper and Lending Club have changed their underwriting algorithms since they issued the loans in that period so today many of these loans would not make it on to the platform, or they would have a different interest rate. So, most likely defaults would be lower and ROI higher if investing in a similar bucket of loans today.

What was interesting to me is that late loans at both companies is running at about the same percentage. But it is safe to assume that defaults at Prosper will remain significantly higher than Lending Club which is understandable given the higher risk borrowers and higher interest rates being charged there. But according to Lendstats Prosper investors are being rewarded for taking on these higher interest loans with an estimated ROI of 9.01%.

Finally, Michael at Nickel Steamroller has been producing some great work recently and he has a bunch of new charts on his site now. I pulled the default rate chart for the same period analyzed here. The red line is Prosper and the blue line is Lending Club.

Default rate analysis for Lending Club and Prosper

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{ 7 comments… read them below or add one }

Glenn October 12, 2011 at 4:30 pm

Peter,

Glad you included the ROI number in the last column. As you’ve illustrated, default rates are only important as a function of the notes’ yield. At the end of the day, we are happy that we are able to give investors the best returns in the industry.

Prosper notes are offered by Prospectus. http://www.prosper.com/prospectus

Glenn G. Millar
Prosper Employee

Reply

Peter Renton October 12, 2011 at 8:09 pm

@Glenn, Certainly. Give me a 25% interest rate with a 10% default rate over a 7% interest rate and a 1% default rate any day. This is why I focus most of my investing in the higher interest loans.

Reply

Porch Monkey January 9, 2012 at 10:04 am

I’m a Prosper borrower and I’ve decided to not pay them anymore. I’m only going to pay the person who directly lent me the money.

Reply

Glenn G. Millar January 12, 2012 at 9:22 pm

@Porch Monkey – Be aware there is no possible way to pay your lenders directly. As you may know, every loan is funded by many lenders, not just one, and in multiple increments, so even if you knew who the lenders were, it would be a logistical nightmare for you.

Also be aware, that our responsibility to our lenders is to collect the money which they loaned out. We do report late payments to the credit bureaus and eventually turn loans that are delinquent over to collections.

So please to make your payments directly to Prosper so we may best serve our lenders.

Thank you,

Glenn G. Millar
Prosper Employee

Reply

Peter Renton January 12, 2012 at 11:11 pm

@Porch Monkey, As Glenn pointed out this is really not possible and as a Prosper investor I hope you will continue to pay Prosper your monthly loan payment.

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Manny K April 3, 2012 at 8:57 am

I’m thinking of lending money on Prosper.com but i don’t fully understand the risks involved in default. I like knowing that the investor has been personally vetted face-to-face. Where can I learn more about the process and default. I could not readily find these risk-related matters on the Propser.com website
Thanks
MK

Reply

Peter Renton April 4, 2012 at 1:26 pm

@Manny, Obviously Prosper and Lending Club do not ever meet with their borrowers face to face – it is an online transaction. If you want to learn more about the process and defaults I can recommend a couple of resources for you. First, you should check out the Prospectus for each company which is available on their websites. Second, I have written about the borrowing process for both companies here:
/borrowing-2/what-to-expect-when-applying-for-a-personal-loan-at-lending-club/
/borrowing-2/what-to-expect-when-applying-for-a-personal-loan-on-prosper/

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