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Late Payments Improving for Credit Cards and P2P Lending

by Peter Renton on May 25, 2011

Yesterday, the Huffington Post reported that last quarter late payments on credit card balances fell to their lowest level in 15 years. This is good news for credit card companies and it could also bode well for investors in peer to peer lending.

Here is an excerpt from the article:

Nationwide, the rate of payments 90 days or more past due on bank-issued cards dropped to 0.74 percent in the first quarter, down from 1.11 percent a year ago.

The delinquency rate is the lowest level since the third quarter of 1996, TransUnion said. It peaked in the first quarter of 2009 at 1.32 percent.

So, we have the rate of delinquent credit cards dropping significantly from 1.32% in 2009 down to 0.74% today. This is despite continued high unemployment and an economy that is growing at an anemic pace. It seems that in general people are more conscious of their debt now than in a long time.

But what does this have to do with peer to peer lending? The same trend appears to be playing out here as well. I did some analysis of Prosper loans from the 1st quarter of 2010 and compared it to the 1st quarter of 2011. I looked at the total number of loans that had already gone late at 55 days after the end of the quarter (as of May 25th each year). This is what I found (the data came from Lendstats).

Time PeriodNumber of loans issuedNumber of late loansPercentage
1/1/10 - 3/31/101,243443.54%
1/1/11 - 3/31/111,744462.64%

Even though the numbers are relatively small it still marks a significant drop in the number of late payers year over year. On Lending Club I have seen a similar thing happening but I don’t have the data to do an exact year over year comparison. However, one of the regular commenters here, Dan B, has been keeping track of late loans on Lending Club for the past six months and this is what he said in a comment last week:

For an overall look at the portfolio of issued loans at LC I look at the total number of “lates”. With the ever increasing volume both in terms of total dollars as well as total loans funded one would assume that the total number of “late” loans would also track the upward trajectory. I’ve been keeping track of that number for the past 6 months or so & surprisingly that hasn’t been the case. In fact the total amount of late loans has DECLINED a little in the past 6 months.

So, despite the record volume of loans issued recently at Lending Club the total number of late loans is declining. This is great news for investors and for p2p lending as a whole. This could be because Lending Club and Prosper are doing a better job in the underwriting process, it could mean more effort is going in to collections or it could just be the average borrower is more conscientious these days. In reality it is probably a combination of these.

Whatever the reason I certainly hope this trend continues.

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Dan B May 26, 2011 at 5:05 pm

I know almost nothing about Prosper since I’ve only been there for 3 months, but from what I’ve read in a number of blogs, any type of “collections” attempt would be a massive improvement from the almost non existent collections during the Prosper 1.0 days. Nevertheless the lack of details when a note does go late at Prosper today is hardly confidence inspiring………….& that’s putting it politely.

Peter Renton May 26, 2011 at 5:32 pm

@Dan, I think Prosper have learned from their many mistakes in Prosper 1.0 and have better underwriting and collections. I have only been an investor for 7 months and in that time I have had two notes go late, but both returned to current status within 30 days.

One criticism I have seen by many on Prosper is the inability to sell notes on Foliofn that have gone late. Apparently you can only sell current notes there. So not only is there less detail about late notes, there is no chance to offload a note once it has gone late. I am not sure why LC allows this and Prosper doesn’t – but that is the reality right now.

Matthew Paulson (P2P Lending News) May 27, 2011 at 8:52 am

Lending Club does a much better job of collections. They do a ton of stuff, emails, phone calls, skip tracing, special repayment plans, etc. They even provide a log of activity between the borrower and Lending Club.

Peter Renton May 27, 2011 at 12:26 pm

@Matthew, I wouldn’t necessarily say Prosper doesn’t also do those things. I think they have made major improvements with collections as well. Although it would be nice to see a log of collection activity like Lending Club.

KenL May 29, 2011 at 2:10 pm

I agree Peter, I think Prosper has shown great improvements in collections over the last 1.5 years. I can’t say who does a better job now with collections, but I think Prosper’s and LC’s performances with collections are now comparable.

Peter Renton May 31, 2011 at 11:09 am

@Ken, Well I think both Lending Club and Prosper realize how important collections is to this whole process. It is all about keeping defaults low and some of that can be mitigated by a strong collections process.

jim marshall February 11, 2012 at 7:01 pm

As a lender in Prosper and a collections specialist I can tell you Prosper still hasn’t focused on collections as much as they should. Its an after thought.
They have done much better on the front end screening. I’ve contacted them directly about hiring another collection agency but they refuse and still rely on one agency with one call center in Alabama for all the defaults. No champion challenger on results, or secondary placement efforts as a true robust collections cycle would dictate. I hope this changes soon.

Peter Renton February 13, 2012 at 3:51 am

@Jim, I am actually trying to put a post together about the collection efforts at both Prosper and Lending Club because I know many investors are interested in this. Hopefully, I can find some useful information that might spur some improvements. Stay tuned.

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