So far all my Prosper.com and Lending Club loans are current. I would be annoyed with loan defaults, but currently the number of borrowers who pay the loan in a month or less is starting to bother me. Why does a borrower bother to take out a loan for one month?
Here are a few instances from Lending Club of early paybacks that wasted my time and tied up my money while trying to find and fund loans:
Loan # 172924
Grate/ Rate: E : 14.82%
My Monthly Expected payment: $0.85
Amount Paid Back: $25.84
ONE PAYMENT RECEIVED before being fully paid back. This person wasted the origination fee and a check against their credit score and then paid off the loan in one month.
Loan # 188937
Grate/ Rate: A : 8.32%
My Monthly Expected payment: $0.78
Amount Paid Back: $25.33
ONE HALF INTEREST PAYMENT RECEIVED before the loan was fully paid back.
Prosper.com has the same prepayment issue. One of my loans has already been fully paid. It was fully paid in less than one month. Of course this loan was a very small so it was at greater risk of early payment.
From the Lending Club FAQ:
What if one of my borrowers prepays a loan?
Borrowers can prepay their loans at any time with no penalty. If a borrower prepays a loan, your money will be transferred to your Lending Club account where you can reallocate it to new loans or withdraw it to your bank account.
From the Prosper.com Borrowing FAQ:
What happens if a borrower repays their loan early?
Borrowers can make extra loan payments or repay the loan entirely at any time without penalty.
- Lending money for only one month wastes lenders’ time and causes money to be idle longer negatively impacting return.
- Borrowing money to only pay it back in one month wastes a borrower’s time and potentially costs money because of the origination fee. Additionally borrower’s credit score could move lower due to an unnecessary hard credit check.
Borrowers, please do not borrow a P2P loan from Prosper.com or Lending Club only to pay it back in one month. It is a waste of your time and possibly money and it certainly wastes lenders’ time and money.
Lending Club and Prosper.com need to consider changing the terms of service to add an early payback penalty if a loan is paid back in less than six months.
Update:
I am not referring to people paying off a loan after six months or a year. These borrowers mentioned all paid off their loans in one month or less! There are legitimate reasons to pay off a loan after several months or to pay it down as quickly as possible — I understand that. Paying it off in 15 days means that they really did not need the loan in the first place.
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I have over 200 loans with LC. So far only 2 people have fully paid (those exact same 2 in fact). While it is disappointing to miss out on that prospective income, I’m not worried that this is a trend that will continue.
These two loans make 2 out of about 50 loans at lending club that I have which have paid off in one month or less. I find it annoying that someone would pay off the loan before even the first payment comes due. It must mean that they really did not need the loan in the first place. If this happened very frequently it could become a drain on you return.
I am not asking for a large penalty if it is paid off in less than six months — maybe just one month of interest — to cover my ROI for the time it takes me to find another loan.
Thanks for stopping by to comment…
Very good point.
Matt wrote an article about pre-payment risk a few months ago…
http://prosperlending.blogspot.com/2007/07/analysis-of-pre-payment-risk-on-prosper.html
I’ve been a Prosper lender for more than two years now, and prepayment is just one aspect of the game you’ve gotta get used to. I know it’s annoying, but if you’re going to do P2P lending you’ve got to be constantly on the lookout for new loans to reinvest in anyway, so not much harm done. Hey, it beats borrowers not paying!
For what it’s worth, I’ve only had three or four out of about 250 loans prepay within just a couple of months without any warning in their listing description.
Thanks DCS for stopping by and commenting. I am glad to hear that you have only had 3 or 4 out of 250 borrowers do this to you.
HollowOak, I put you at the top of the new post of links related to the Lending Club quiet period announcement.