Glenn chapman on p2p lending at prosper virgin kiva and zopa

Glenn Chapman wrote an article about P2P lending which can be found at News. Included in the article were, Virgin Money, Kiva, and Zopa. Below are a few excerpts from Glenn Chapman’s article and my comments. Glenn Chapman begins the rehashed material article with a great feel-good tag line:

The Internet is directly connecting investors and borrowers, letting them take banks out of the lending equation and put their money where their hearts and dreams are.

Never mind the details that Zopa is actually adding a layer of bureaucracy between the bank of the people involved rather than removing it in its US based model:

Zopa feels US investors are steering clear of risk so, in contrast to its London-based service, the firm guarantees lenders will get their money back. Lenders at Zopa put their money into the equivalent of certificates of deposit, selecting borrowers they want to direct funds to and picking interest rates from pre-set ranges. Zopa banks on its borrower-screening savvy to minimize losses.

On to the information listed in the article because this was my reason for posting about Glenn Chapman’s article in the first place…

If a Prosper borrower fails to pay back a loan the default is reported to credit agencies and eventually sold to collection agencies. The default rate on Prosper loans is a meager three percent.

There are several items related to that people complain about 1) censorship (see my article on Prosper editing Wikipedia and the comments at the WSJ) 2) poor collections (link to one of Prosper’s Top Lenders Collections Issues) and 3) the default rate is higher than expected and advertised.

Prosper claims the default rate is 3% which is only technically true by the definition of a default and includes all loans — even very recent ones. The 3% default figure does not take into account that the average three-year loan is only less than one year old. Prosper statistics on Lending Stats can easily prove this. Take a look at the below graph generated from

Prosper’s statistics are technically correct per their definition — less than 3% of Prosper loans have been put in the status of “defaulted.” However, for a Prosper loan to go into default, it must be more than 4 months late and only once per quarter are all loans which are more than four months late are classified as defaulted.

Considering that the average age of a loan listed currently at Prosper is only 284 days (approximately 9.5 months) and that it takes four or more months to be considered in default, there are many more loans that are going to default in the near future. See this prosper statistics page which shows default rates on loans originated in the first several months of the site to be in excess of 20%. That is right, the default rate is probably going to actually be more than 20% after three years. A default rate of 1 in 5 loans is horrible. Banks would be out of business, but Prosper does not share in the risk only the people lending.

How Many Prosper Loans are Late?

A better question for Glenn Chapman to ask might be “How many loans are late?” The answer would be 13.16 percent even over the short period of less than a year!

  • Defaulted – 2.69% – The figure Chris Larsen quotes in the article.
  • Four + Months Late – 4.31%
  • Three Months Late – 1.53%
  • Two Months Late – 1.5%
  • One Month Late – 1.74%
  • Less than one month late – 1.39%

Even if you just count the loans that are three or more months late, the default rate is much higher than 3%. Ask any banker how many unsecured loans more than three months late he expects to recover. Not many. Update: Fred89 posted a more thorough analysis of the Prosper default rates on forum. (You must register to see the posting.)

If you need more information and analysis of why Prosper loans defaulted at such a high rate, see LC’s analysis of the state of affairs at Prosper. However, item number four, the groups, has been corrected by Prosper since that time. That is enough of criticizing Glenn Chapman for the five minutes of research that he could have done on any number of Propser statistics websites, forums or blogs.

Kiva’s model is philanthropic, letting investors of modest means back entrepreneurs in the developing world with interest-free loans… “Not all of us can afford to open a school in South Africa like Bill Gates can but they can afford to lend someone 25 dollars,” Ramsey said.

I cannot argue with those statements, but it might be important to note the major difference between most P2P loans with Kiva and other sites — No ROI. Kiva is completely philanthropic and the best you can hope for is the return of your initial investment with no interest. While Zopa is only slightly (and as much as a lender wants to be) philanthropic. A return on your investment is possible at Zopa, but is much lower than the other sites (and with less risk) since lenders invest in credit union backed CDs.

Virgin Money is sticking with the CircleLending model of managing loans between family members.

Those statements on Virgin Money seem to be consistent with what has been reported in the past including in a recent article at the Boston Globe on P2P lending and my understanding. Because Virgin Money just lends between friends and family, there is not a great deal of information on the topic posted on the web other than generalized statements such as those included in the article.

Overall, it seems to be a standard article on P2P lending. I wish that more journalists would push beyond the marketing statements made by P2P lending companies, especially in the case of Prosper, where statistics are easily available at multiple web sites.

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