Despite sub-prime loan worries rocking the economy, peer-to-peer loans are gaining some traction. You’d think loans between individuals would be much riskier than loans from a bank, but it turns out that individuals can be more risk averse than banks when it comes to lending out money. If you look at Prosper, the leader in P2P lending with more than $100 million in loans out so far, only 7 percent of its loans in October were sub-prime, despite their higher interest rates.
Prosper is about to get a lot more competition. After more than a year of waiting, UK-based Zopa got the go-ahead from regulators to launch its U.S. Website last week. Zopa, which doesn’t allow sub-prime loans at all, has a 0.1% default rate, whereas Prosper has a 3 percent default rate.
And Lending Club, which started as a Facebook-only application, just got clearance today to operate nationwide. (It had been awaiting approval from half a dozen states, including big ones like California, Michigan, Illinois, and Pennsylvania). Lending Club launched six months ago on Facebook, and opened up its own Website three months ago. In that time, its members have issued 489 loans worth $3.5 million. Of that amount, only $16,000 worth are between 16 and 30 days late on payments (see stats here). It also does not allow sub-prime loans.
Lending Club’s loan portfolio is too small and its loans have been out too short a time to really know what its average default rate will be. But if it can match its larger competitors, it should do fine. Social lending is here to stay.
Thanks for the coverage.
One thing that is different from the other p2p lending sites is that Lending Club does require you to be prime (640 minimum credit score). I think this sets us apart from the other p2p lenders out there.
Rex Dixon
Director of Social Media Content, Lending Club
Is Mashable the main source of some (most?) of you and Duncan’s stories?
Articles on Mashable written in the last 48 hours:
lendingclub
meebo
jackass movie
google maps
online ad spending
business week
google tool bar
bebo facebook app
classmates
movable type
zoho
Then they appeared on Techcrunch. Mike is paying you guys to be creative and to write original articles.
I predict that your next articles will be about Myspace Mobile and Facebook Status “is”. Prove me wrong.
LendingClub has some really nice features with fixed rates for lenders based on a credit score, portfolios but is woefully lacking in search/filter capabilities, there is little emphasis on defaults and how they will be handled, they just recently added capability to ask questions of borrower.
It’s just too new to pass judgement and they go to add some filter capability soon. I have noticed recently that there are more borrowers with delinquencies and defaults showing up now.
Prosper is the leader for now as it has great capabilities for search/filter but the downside was that there were too many people bidding down loans to ridiculous rates for “unsecured” loans. These newbies are now getting stung with defaults but it takes 3-6 months later. This has been addressed to some extent because now Prosper gives you data on past historical loan performance matching your current proposed loan. Reality is more built in so “newbie” lenders don’t go overboard bidding down loan rates. Prosper added portfolios recently as well, nice but slightly flawed in how I would optimize its use.
Zopa is a joke, the best they are offering is 5.25%… why would I invest my money at a rate I can get a 6 month CD with some online banks.
They need to rethink their business model.
I like competition and I have accounts with all three but I can think of several more tweaks that would beat all of them… hmmm any vcs listening.
Hello everyone,
I have been a lender and borrower on Prosper for many months and have had great success with their peer-to-peer system. It’s a great idea and it works. Capitalism at its finest.
I’ve had the opportunity to interview the CEO of Prosper myself and conduct plenty of research which I’ve thrown up on my site for anyone who is interested in learning more (link below).
http://jutiagroup.com/archive/category/prosper/
Best,
Stephen
http://www.jutiagroup.com
What are the federal approvals required for these ZOHO or Lending Club to operate like financial business.
Please help with some info. Thx.
not ZOHO ….it is ZOPA ….
I’m a lender on Lending Club and Prosper and can say that P2P lending is quite a bit of fun and can be profitable as well. Congrats to LC on their expansion.
The P2P lending space is growing. In addition to Zopa, GlobeFunder just launched recently and Loanio is expected to launch early 2008.
Tom
http://prosperlending.blogspot.com
Sorry for the stupid question, but how is the lender protected/guaranteed to get his money back from the borrower?
@1 - Rex,
I’m really digging your site. The layout and navigation is really smooth. I’d also like to know specifically how you protect lenders from defaults.
@8 and @9
The risk of doing P2P lending is that your not shielded from defaults by the Borrower, but is mitigated by the interest spread.
@1
What is the average spread that a lender on Prosper receives?
How do you monitor the Borrowers to protect yourself and your lenders from any adverse changes in their ability to repay debt?
Does anyone know of a similar website that pairs small business owners/startups with VC/angel investors?
Thanks
I would take LendingClub’s stats with a grain of salt. The oldest loans were originated at the end of May, so there hasn’t been a lot of time for defaults to take place. Also, given the rising popularity of the service, the majority of those loans will have been in force much less than 7 months. I pulled the csv down from Lendingclub, and the average loan age is only 75.85 days (only 2 1/2 months).
To provide a more fair comparison, I looked at some of the Prosper.com data on lendingstats.com. 2,869 grade AA-C loans were originated on Prosper.com between July 14 - December 13. I chose grades AA-C because Lendingclub only allows those with a 640 credit rating or higher to participate. Using Prosper.com’s AA-C grades approximates this restriction. The average age of these loans is 75.7 days. I selected the dates to provide approximately the same age as the lendingclub.com loans.
Of the 2,869 Prosper.com loans, 0.87% were late, 0.82% were 1 month late, and 0.09% were 2 months late (total of 1.78% late). None of them were any later than 2 months and none of them have defaulted. Even if I went back to May 24 on Prosper.com, only 3.61% of the loans are late and still no defaults. During this time frame, 3,796 loans were originated with an average age of 100.9 days.
I think after the loans on lendingclub.com have aged more, the statistics will likely be very similar to those of Prosper A-CC grade loans. I was all ready to open up a lendingclub.com account, but then came to the realization that the service hasn’t existed long enough to provide an accurate statistics. Also, in the process of creating my account they were unable to verify my identity. They were never able to resolve the issue and I would have had to manually verify my identity. With all the problems I had in in opening the account, I decided to take a look at Prosper and decided it was better to go with them anyway since they were more established and could provide better statistics.
@9 Permeate - our standards are set high, and than our Lending Match (TM) technology helps to match lenders and borrowers. Another thing - we launched on Facebook back in May as it had the best affinity relationship (groups) set up already for us. Basically - Wouldn’t you trust lending to an alumni or friend that was in a group vs lending to a total stranger? Now that we are out of fb we have made some relationships with major universities and other organizations. Same idea applies here. Coupled with the above and our no sub prime lending (640 FICO minimum) - our standards were set high for a reason. To answer - this hopefully will protect most lenders from running into a default situation. It won’t protect all, but we do our best to build trust in your loan decision (as a LC lender).
@10 - David Litsky - I don’t know much about Prosper except the links that get sent to me with them in the articles. I won’t comment on them due to that.
As far as the second part of your question. Each person is different, and yes, circumstances could change from when they first applied for a loan as a borrower - ie.. loss of income, etc - this could be addressed by a future module of our software as we have updated a lot since our initial release back in May.
@13 - Sorry about that — What is the interest rate spread range that a lender on Lending Club receives, net of any fees?
As for lending to people you know versus lending to strangers is a double edged sword. The benefits of “knowing” your borrower is partially offset by personal tensions that may arise if something goes wrong. I like how you have the ability to add additional modules to your software, to further mitigate the risks of lending.
This sort of reminds me of something I wrote about back in 2001… P2P banking and other wacky ideas:
http://reviews.cnet.com/4520-6450_7-5020264-2.html
@11
see http://www.FundingUniverse.com
I am a long time, somewhat large lender (about 50th on lendingstats.com) on Prosper. I think what Zopa, Lending Club and Prosper are doing is great but agree with a comment above that the kinks have not been worked out yet. If I had to do it over again, I would wait.
The original article quoted a 3% default rate for Prosper loans - that may be only for the highest quality loans. According to the site, 11% of loans are > one month late (more than half of that > four months late) and 4% have defaulted. that means about 15% of loans (and probably more as loans age / mature) are likely to default (note the collections process is still weak for these loans).
Currently the returns do not come close to justifying that level of risk.
Zopa is interesting because it takes that risk out while still earning a CD like return. Maybe not as intriguing, but still an interesting way to participate and earn a decent fixed income return.
I have had just a few loans with Lending Club and not a great experience, but my sample size is too small for me to have much of a perspective on it.
I have tried Prosper and it seems to be okay. I did not have the success I anticipated so I stopped lending. I am a pawnbroker by trade and I think I will stick to collateral lending. Much, much, much more profitable. If there are any vc’s listening, I think p2p lending using collateral may be worth looking into. It’s a win-win situation because you have backup for defaulted loans. I would be willing to bet people would be willing to lend more money on collateral than a pawnbroker or some other collateral lender. I have some insight on this issue and would be willing to operate in this space if anyone is interested. It could open up the door for subprime borrowers who can’t make the credit grade. It would secure lenders who lend their money and lenders would get a much higher rate. I charge 25% interest monthly on loans and if they default, I sell the collateral to recoup my funds. With the help of ebay, craigslist, etc., I have no problem with liquidity in collateral. Food for thought……think about it.
@12
Jorge, thanks for the analysis. That is an interesting and useful way of looking at the late data. From your numbers, it looks like the completely-comparable loss rates for Lending Club and Prosper are 0.22% for LC and 1.78% for prosper.
Did I get that right?
I agree with John R. @17 on the risk/reward imbalance on Prosper. I wrote recently about the surprising returns offered by Prosper at various credit scores on an actual basis. Given the risks there is little reason to lend to anyone other than people with a AA rating. That being said, does an average interest rate of 10.36% make sense for someone that meets the criteria for being AA (Experian > 760)?
See my post at http://finantech.wordpress.com.....sper-flat/
I agree w/Crunchazoom (not surprising since he agreed with me). To add, the average interest rate for a AA lender after defaults (3.31%), adjustments (.17%) and Prosper servicing (.49%) is 6.98% according to Prosper’s site (when you remove the defaults Prosper uses, which bias the results since they have a limited time frame and do not include AA who have any late payments or credit inquiries).
Talk about a good way to lose moiney!
Lendingclub is developing well. 2007 was a year that saw many p2p lending services launch. There are more then the 4 mentioned in the article above. They can be grouped in mainly too categories:
- “pure” p2p lending (e.g. Prosper, Lending Club, Smava, …
- community and social aspects oriented (e.g. Kiva, MyC4,…)
Zopa US is a hybrid somewhere in between while Zopa UK is in the “pure” category.
2008 will be interesting
Wiseclerk
Editor Wiseclerk.com
Keep your eye out for CommunityLend to dawn in 2008. Will be Canada’s first P2P lending service. Can’t wait.
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You mention Zopa’s stated default rate being low, but in Zopa’s case the default rate is irrelevant because lenders purchase one year CDs that are risk free from Credit Unions and do not directly extend loans to borrowers. Zopa have quite a different model from the other P2P lending sites. In fact, interestingly for borrowers, I noticed that ,a href=”http://www.personalloanportfolio.com/31/zopa-borrowers-receiving-negative-interest-rates-on-loans/”>some borrowers are receiving negative interest rates on loans once they are given help from lenders. However, many lenders are not interested in Zopa because of the low returns, so there may not be much help to pass around to borrowers.
Once you consider taxes, P2P lending does not seem to be a great investment since loans pay interest which is taxable as income. Returns on stocks are either dividends or price appreciation which are both taxable at a lower rate.
To #3, Zopa is NCUA insured, so its rates are more comparable with online bank accounts and others, not with P2P lending sites like Prosper and LendingClub, which aren’t insured.
@19
Patrick,
I’m not sure exactly what the late rate for LendingClub was at the time of my analysis. Right now, the statistics site says the late rate is 0.44% so it was probably slightly lower than that when I posted my comment about 2 weeks ago.
I would like to report another European p2p lending experience: Boober. Actually 2 projects, one in Holland, the other one in Italy.
Boober has been working since last February in Holland, and it opened in Italy two months ago. Italians seems to be interested in Social Lending because lending money by the bank is not profitable at all (1,09%) and asking money to the bank is too expansive.
For further infos get a look to:
Boober Italia
Boober Holland
or contact the Webmasters
I would like to report another European p2p lending experience: Boober. Actually 2 projects, one in Holland, the other one in Italy.
Boober has been working since last February in Holland, and it opened in Italy two months ago. Italians seems to be interested in Social Lending because lending money by the bank is not profitable at all (1,09%) and asking money to the bank is too expansive.
For further infos get a look to:
Boober Italia
Boober Holland
or contact the Webmasters