Your guide to peer to peer lending

Review of the January Numbers for Lending Club and Prosper

by Peter Renton on February 2, 2011

It is probably an understatement to say January was a good month for p2p lending in this country. We had Lending Club setting an all time record in loan originations at just under $15 million for the month, and Prosper set a record for loans issued since they emerged from their quiet period.

Let’s dig a bit deeper into these numbers. First, we’ll start with Lending Club. Their previous monthly record, set just in December, was $13.4 million. They well and truly beat that with $14.8 million in new loans. What is even more impressive with these numbers is that they were achieved with very little in the way of new promotional incentives for borrowers or investors.

The chart below shows Lending Club loan origination numbers since January 2010. Last month was slightly more than double the loan volume from a year earlier. The line you see in the chart below is the three month moving average and apart from a little blip in November it has trended almost straight up.

Lending Club loans Jan 2010 to Jan 2011

Now let’s look at Prosper. Not quite as impressive, but an improvement nonetheless. Since their change in December it looks like things have been going well for the number two p2p lender. Loan volume is up and loans are being funded quickly. The chart below is not as pretty as Lending Club’s but it does show improvement the last couple of months, with the three month moving average increasing sharply.

If you dig into the numbers behind this chart there are a couple of points of concern right now for Prosper. The first is that since Prosper’s change the percentage of funded loans has gone up considerably. For most of last year the percentage of loans posted on Prosper that received funding hovered between 18% and 25%. In December that number jumped to 36%, and in January it looks like being well over 60% (as of this writing some loans were still pending). To be fair, Prosper has definitely improved their underwriting standards but we still don’t know what impact this higher percentage will have on the long term performance of these loans.

The second concern for Prosper is the number of loans on their platform for investors. While the number of loans to invest in improved as the month wore on, getting to over 70 at one stage, it remained for most of the month somewhere in the 30-50 loan range. Lending Club on the other hand had well over 300 loans on their platform most days last month. Prosper needs to work on getting that loan number higher so investors will have more choice when selecting loans.

I have no idea how Prosper’s management feels about these numbers (I have requested an interview with senior management there but it hasn’t been forthcoming as of yet) but I can imagine Lending Club is very pleased with their performance. With February being a short month, I expect we will see a slight dip from both companies, but I hope we continue a strong upward trend after that.

{ 11 comments… read them below or add one }

Aaron February 3, 2011 at 2:16 pm

I don’t think Prosper is marketing to borrowers very well. Given the percentage of loans going through there you can see that there is WAY too much money parked at the site. I still continue to see listings getting funded with a paultry description (sometimes times no description) underneath. It’s pretty scary when most investors are bidding on a credit score alone. I wonder if they are even checking for a pulse on their borrowers.

What boggles my mind is that more borrowers are not tripping over themselves to get their listing on the site.

Peter Renton February 3, 2011 at 3:35 pm

@Aaron, I think you have hit the nail on the head. There seems to be so much money in the automated plans that none of the loans are ever expiring due to lack of funds. Looking at the listings today, some of the AA loans at 5.55% are taking a while to fund, but anything over 10% is funding within a day or two. It seems that few people are reading the loans at all.

Of course, borrowers still have to meet Prosper’s risk standards to qualify for a loan but if anyone with half decent credit wanted a loan they would get funded right now. I am most concerned what impact this will have on returns down the line.

Mike February 3, 2011 at 9:57 pm

Lending Club has a similar issue with their A level loans, especially since they reduced the interest rate on that tier a few months ago. I see redued investor activity in them, especially the higher grade A’s (A1-A3). I, for one, don’t invest in any more A loans as I feel their relatively low return is not worth the risk.

Dan B February 3, 2011 at 10:14 pm

I’m not sure how much there is to really “read” or how much reading will help to make an investment decision on Prospers’ higher risk loans anyway. After reading many thousands of notes on LC in the past 15 months I’ve read pretty much all the stories. People like to feel unique, with their individual stories & what have you but the reality is that the stories are pretty much the same………….most of which can be summed up by blah blah, I screwed up, blah blah I was stupid, bs, bs, blah blah. None of it is verified so it’s just storytelling & frankly the stories have gotten repetitive & not even a bit compelling.

Furthermore these individual stories, reasons etc. do nothing to tell me whether you’re likely to pay this loan back or not………….which after one gets over the novelty, is the only thing that most serious investors care about. And a lot of these higher risk investors somehow will end up not doing so. The only question really is whether the lender will end up being compensated adequately for lending to these people who clearly have few if any other options.

Aaron February 4, 2011 at 12:05 am

I agree with Dan that the stories are largely irrelevant, but I still make use of the description line. (I would add that banks largely don’t care what your story is either.)

The reason I use this is because I am biased to the listings where the borrower puts forth some effort to get their loan funded. I know there is no data to support this, but it seems logical that those individuals that put time and effort into getting the loan are more likely to pay it back then those who don’t give a damn. I used to (when there was greater selection) go exclusively to loans that 1)fit my filtered fundamentals 2)had a description to what the loan was for 3)listed all personal income 4)listed itemized monthly expenses 5)had a photo to go with the profile and/or loan listing. These people are “putting themselves out there” so to speak and in my mind are less likely to disappoint than those that ask for money with no information at all. Granted this description is skewed more to Prosper as I have been there for a long time. I am new to lending club so I am still building my strategy there.

Also, I kind of doubt that those people with 700+ credit scores have little to no options.

Dan B February 4, 2011 at 5:13 am

I don’t know Aaron. If these people with 700+ credit scores had other options then why are they taking loans with 17-28% interest rates plus origination fees? Or do the interest rates not really matter at all because some aren’t planning on paying much of it back? And why would people with other options be messing around with such small loans? I mean $5-6k seems pretty
common at Prosper, or am I mistaken?

Aaron February 4, 2011 at 11:23 am

@Dan I don’t think it’s 17-28%. As of right now on 2/4/11 at 11:06am CST, there are 30 listings that are C or better on the site. I don’t consider anything D or less as these usually have lower than a 700 FICO. These loans range from 5.99%(AA 3yr) to 19.99% (C 3yr). The vast majority of the listings are on the lower end. I just calculated the mean and it is at 9.62% (borrower rate). Granted this may be a bit skewed to the lower end because these listings with lower rates may fund slower, but it looks as though they are still being funded regardless.

As to your next question, if they don’t plan on paying it back, then why make any payments at all? I haven’t had any loans miss the very first payment. *Knocks wood*.

As for the loan sizes, it used to be the case that $5-6k was common, but when Prosper moved away from their auction model, the requested loan amounts have increased dramatically. $10-20k is now the norm. I suspect this explains some of Peter’s numbers on this post for a dramatic increase in origination $ for Prosper.

Peter Renton February 4, 2011 at 11:45 am

Aaron is right about loan size. The average Prosper loan size has increased from $4,767 last year to $7,193 this year, a huge increase. I think savvy borrowers are working out that on Prosper you can bump up your loan and you will still get funded.

Most 700+ FiCO people pay less than 20% on their loans. Even if you have decent credit but you miss a payment on your credit card you can easily get bumped up to a 30% interest rate. So, a 20% loan can really help you get back on your feet, or it is certainly a better alternative than adding to your 30% debt.

As for people who don’t ever intend to pay their loan back, there will always be some people like that. But if you look at the numbers, even if you take the people who default within the first four payments you are looking at well under 1% of all loans and while I haven’t analyzed this in depth, I would suspect that the majority of these people are in the sub-700 FICO class.

Dan B February 4, 2011 at 1:31 pm

For kicks & because a part of me is into self-flagellation I funded an account at Prosper about a month ago. Just a $600 indulgence to placate the other part of me which has an enormous ego that believes that he’s smarter than all of you combined :)
Anyway, my point is this. I just looked at the 16 notes that I purchased (half of which are still pending, but that’s an irate outburst for another time). In any case, & without getting into unnecessary details, my average yield is 24.5%, all are 3 year loans, & the average loan size is $7300. I don’t know what the average credit score is but none of these notes have supposedly had a delinquency in the past 7 yrs, & no public records as well.
Now perhaps you guys are correct, but I can’t wrap my mind around why these people who are all working & responsible enough that they haven’t been late in 7 yrs (hell they have me beat!),……………… would be doing asking for a $7300 avg loan at 24.5% in this interest rate environment. Perhaps one of you can explain what compels someone to do this if they have any other options at all.

Peter Renton February 4, 2011 at 3:21 pm

Ok Dan, I will take the bait. Let me create a possible scenario to illustrate. A couple have always lived pretty much paycheck to paycheck but for the most part they have always pay their bills on time. They want to get ahead. So they start a business on the side. They put in $5,000, funded mainly by credit cards, and off they go. The business does not do so well and they decide after 12 months to pull the plug. They are left with about $7,500 in debt and no way to pay it off. Credit cards are close to maxed out and creditors are calling. They don’t want to declare bankruptcy because that will ruin any chance they have of getting ahead for a long time.

What do they do? Well he takes a second job and they take out a p2p loan at 25%. With the new loan they pay off their creditors and even pay down a little high interest credit card debt. With the extra income they can afford the extra monthly payments and even have enough to pay down some of their other debt. There is light at the end of the tunnel.

Am I way off base here? I expect there are hundreds of thousands of people like these out there, who have few, if any, other options.

Dan B February 4, 2011 at 7:32 pm

That’s very good Peter. I can see a future for you as a type of “tv consumer advocate”……………..I’m picturing an audience composed of 70% women over 40, hanging on your every word. :) Pre-screened audience members can come up on stage to tell their story & you can moderate as well as have “experts” come in & interact with the audience. I know a guy that can even set you up with some “shills” in the audience to spice things up if you’d like.
Hey, just trying to help you out. :)

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