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Social Lending -- Just How Many Loans Can Go Late Before We Worry?
With this new world of social lending, just how many bad debts will a lender be willing to take? In our 3-part social lending series we took an in-depth look at the industry and the companies in the space but with the area so new, it was difficult to anticipate the percentage of bad debt that would be forthcoming.
Andy Swan has been documenting his travels into social lending and his latest post discusses the bad debt in his account with Prosper. We originally wrote about Swan when one of his borrowers, a Slim123, defaulted on the loan. Today Andy's back with an overall update where he shares the following bad debt in his portfolio:
- 15 day late (2)
- 30 day late (2)
- 60 day late (1)
- 90 day late (1)
This amounts to 6 of the 49 total loans which results in a current bad debt at 12%. Swan ends the post with, "It’s almost as if the kind of people who take out loans on prosper are in some type of credit situation. I feel a “write-down” coming in Q2." I have requested updates from Prosper, Zopa and Lending Club regarding late payments and defaults and will post once received.
we could knock them back into an earlier beta version for every ding they get :)
The social lending sites are pretty open about default rates.
Lending Club has a statistics page here. According to the page, only 3 of nearly 800 loans are late. Of course, Lending Club has only been around since May 2007 so most of the loans have not had a chance to mature.
Prosper's statistics page contains a bunch of good info.
With Zopa you just by a CD with a 5.1% interest rate. It's insuredby the National Credit Union
Administration so you don't lose any money if your borrowers default.
Tom from Prosper Lending Review
Allen, I think it's very important that you include Andy's stated loan-making strategy before you start casting doubt on Prosper's, or peer to peer lending in general's, effectiveness:
"We focus our lending efforts on people who [...] Have a lower credit score (and are thus willing to pay higher interest rates)"*
While Andy does try to mitigate that risk, he's still purposely lending to the highest-risk group available.
Using Prosper's own (very useful) dynamic statistics page, we can see that of all loans made since March 28th(when Andy made his first loan)**, 8.17% are late. BUT, only 4.53% are over 1 month late. Furthermore, out of the total number of late loans, ~60% are loans made to D, F, and HR credit ratings, the low credit score group Andy loaned to.
When you loan to a high risk group, you have to be willing to accept the potential negative consequences of that risk. Andy decided to limit that risk, but I think he staked too much importance on loaning to people with no delinquencies on their credit report, forgetting that past performance is not always a good indicator of future actions.
By Andy's own admission, he's gained 10% on the 5k he loaned. Hardly cause to start waving the bad debt flag, especially if the 2/3rds of his bad debt that are 1 month late or less come back to current, with late fees.
I've been keeping my own coverage of social lending services updated. I hope you'll find it useful.
*Andy's initial post.
**Statistics from Prosper
If anybody using a social lending service needs collections, please contact me. My collections team has a 98.75% success rate and for when we can't collect, we do provide body parts so that you get some satisfaction of knowing that your loan was "paid" for with interest.
Hi Allan,
check out the charts of the developments of Prosper late loans at:
http://www.prospers.org/blogs/Fred93/2008/01/19/prosper_com_late_loan_stats_update
Older loans are reaching a delinquency level of over 20% and that is after the first of 3 years duration.
On the other hand default levels vary between the p2p lending services. While Prosper has high defaults, Zopa (UK) and Smava have low levels.
Wiseclerk
http://www.p2p-banking.com