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Glenn Chapman wrote an article about P2P lending which can be found at Yahoo.com News. Included in the article were Prosper.com, 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 Prosper.com 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 Prosper.com 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 Prosper.com 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 LendingStats.com:

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? Read the rest of this entry »

I ran across Rex Dixon’s blog. He is the Social Media Director at Lending Club. I think that means that he blogs, searches forums and blogs to comment, and does other cool stuff that most of us do for free. (Are you jealous too?) Anyway, Rex Dixon blogged on Lending Club and he did disclose that he works for Lending Club.

Speaking of Lending Club and Who is Who, I must note that if you go to my review of my initial Lending Club experience, the CEO of Lending Club (Renaud Laplanche) responded. Thanks Renaud!

Anyway, in Rex’s post on Lending Club, he stated nothing out of the norm. To just take an excerpt:

Caught in the wake of the credit crisis, people in every community across America are looking for alternatives to traditional banks and credit institutions to help meet their financial needs. Over the course of the last six months, lenders have earned an average 12.2 percent annualized return after fees and losses.

Members of Lending Club have loaned and borrowed more than $3.5 million within the network, growing 100 percent monthly since it launched six months ago. To help people identify lending and borrowing opportunities, Lending Club uses its proprietary affinity-matching technology, LendingMatch ™. See these statistics for more information.

Rex often posts in the P2P No Bank Forums.

Lending Club is offering a 5% ROI bonus in the form of a “Thank you!” to investors who lend more than $5,000 before February 3rd 2008. If you lend $5,000 before the deadline, you will receive a bonus of $250! If you use my Lending Club Affiliate Link and open the account with $1,000 initially, you will receive an additional bonus of $50! That will add up to an extra 1% to your P2P lending ROI. The best news is that the more you loan, the more bonus you will receive, so if you loan a total of $10,000 before the deadline, you will receive a $500 bonus payout. Even better you can take the bonus out in cash or reinvest it at Lending Club.

How would the Bonus Impact your Lending ROI? Read the rest of this entry »

Wiseclerk mentioned the fighting over the Wikipedia article on Prosper. (The disagreement can be seen on the Wikipedia talk page. ) This reminded me of the wikipedia scanner. The wikipedia scanner checks Wikipedia edits versus the IP address of the editor and looks up the domain to find out possibly what company or governemnt agency made the change. Some interesting examples of Wikipedia Scanner usage include:

• BBC shows the CIA edited the page for the President of Iran
• Diebold axed a section of a page which included criticisms of its voting machines
• Someone in the Democratic Party HQ modified Rush Limbaugh’s page

So what did Wikipedia users with Prosper Marketplace IP addresses edit on the Prosper wikipedia page? Read the rest of this entry »

Zopa, the P2P Lending company from the UK has now opened its virtual doors in the United States. Zopa has been providing a P2P marketplace in Italy and the UK for some time now. The rates that they are offering to borrowers (currently starting at 8.75%) for unsecured loans are quite low and can go as low as nothing with help. The rates provided to lenders, although greater than a government CD, are not outstanding, but Zopa’s differentiating factor from other P2P lending sites is that Zopa loans are guaranteed.

To summarize and simplify Zopa’s somewhat complex model, let me walk you through the steps as a lender — How Zopa Works:

1. Register and open an account with one of the member credit unions.
2. Lend money to the credit union at a flat and guaranteed rate which is higher than a CD, but is also backed by the FDIC up to $100,000.
3. You pick a small portion of your return (called help) and give to a particular borrower(s) to lower the borrower’s monthly payments.

So again it is a guaranteed flat rate of return which is greater than a 1 year CD, unless you choose to lower the return to give the difference away. The return is less than you might earn with Prosper or Lending Club, but you do not take on the credit risk, so your principle is not at risk. You are lending money to the bank and not directly to the individual in this case. So to inject the P2P aspect of the lending, Zopa allows you to give away a bit of the differential between the rate at which they loan out the money and interest that they are paying you. So if you loan Zopa, er, rather the credit union via Zopa, lots of money, you can discount the rate at which your uncle, bother, or sister (or the girl who has a cute picture — and I expect to see lots of attractive pictures posted at Zopa) borrows money by you giving the borrower a bit of the return to lower their payment. According to the marketing material, everyone wins. Well, as long as the lender is happy tying up their money for a full year at rates just slightly higher than a government bond - or less than government bond if the lender prefers to give more juice to borrowers. And of course Zopa wins who takes no risk on the transaction since Zopa is actually a middle man between the credit unions and the individuals.

The True Irony of Zopa

Did you catch that last bit? My review of Zopa is that it is ironic that a web 2.0 P2P lending site is actually serving as middle man between borrower and bank and lender and bank. Zopa has injected themselves into the middle of a transaction that you could have more directly entered. Very ironic, but at least they do seem to offer good rates and an interesting concept.

Update: Zopa Borrowers Receiving Negative Interest Rates on Loans

More than ironic… What is the point of using Zopa lending to a relative? If your purpose is to gift a relative some money by lowering their rate by lending your money at less than the going rate, might I suggest you simply gift the relative some money instead and cut out the middle man?

Read the rest of this entry »

I recieved my informational email from Zopa announcing that they are in the testing phase. Zopa is promising to be different than the existing Person to Person lending sites such as Prosper.com and Lending Club in some interesting ways:

• No risk for investors.
  Your funds will be federally insured. No more worrying about whether your borrowers will pay your loan back.
• Pick who you want to help.
  Investors will choose exactly who they want to help.
• Set your rate.
  Investors will choose how much they want to earn, up to a ceiling.
• No waiting.
  Borrowers will get their loans immediately upon approval.
  Lower your monthly payment.
• Borrowers can actually reduce their loan payments after they’ve borrowed. They’ll do that using rich profiles…

How will we do all this? By using some very cool technology and a terrific partnership with leading credit unions. More coming soon! And we do mean soon…

I am very curious about how the federal insuance will work. I want more details on that. It seems like that will encourage reckless lending. “Rich Profiles” sounds like a great cconcept for borrowers but again I need more information to effectively evaluate this. The other two bullet points do not seem enough different to shift the market.

Zopa is also requesting potential borrowers sign up to assist with the testing phase.

We could use some borrowers to pound on the site, take out loans, and make sure all our bells and whistles are…ringing and whistling.

If you were thinking of borrowing on Zopa, have good credit (FICO 640+), and are a U.S. resident 18 or over, drop us a line:
questions@zopa.com

Edit: Zopa was mentioned in a WSJ article today and in the WSJ blogs where the comments are critical of Prosper.

Richard Branson, the master of promotion, launched Virgin Money in the United States with much fanfare as expected and wearking a “Go Fund Yourself” T-Shirt. CNN honored Sir Richard with a photo gallery, a news article, and a video. As the WSJ recently mentioned, Virgin Money was originally Circle Lending. I was surprised by the data provided by the Boston Globe on the size of the family loans originated through Virgin Money.

Branson promotes the site to potential family borrowers by mentioning that the default rate drops from 14% to 5% when the lender-borrower relationship i formalized through a third party such as Virgin Money. Borrowers receive money at a lower interest rate and can build credit through the loan since payment information is Read the rest of this entry »

Elaine Appleton Grant at the Boston Globe writes about P2P lending in her article “Lending to relatives? Read this.“ Elaine starts the article out with a catchy and sympathetic (at lest for lenders) story of a brother who did not bother to pay a sister $500 for a used car sold on credit. In short, the sister repossesses the car from her brother because he never pays. Elaine goes on to explain such services as Virgin Money, Prosper.com, Lending Club, Zopa and GlobeFunder.

The most surprising part of the article to me was that Virgin Money is providing secured P2P loans (backed by property) and loans with values up to $1 million dollars. Also, Virgin Money is providing reverse mortgages. This sounds like a great idea where the parent may be in need of cash and have equity in the home. Combine that situation with children who may not agree on money matters and this could explain to financially illiterate Johnny why his sister Jane, who supported mom for 10 years at $500 per month, receives more of mom’s home value upon mom’s death.   Of course, the major problem with that scenario is if nice Johnny visited mom everyday while Jane was off traveling the world. Oh, well, P2P lending through a bank cannot solve all family problems.

The article ends with a great quote about family loans:

John Napolitano… recommends lenders overcome the squeamishness of asking a relative to document a loan. “People don’t document loans, because they feel stupid saying ‘I want to have you sign this note,’ ” he says. “But even dumber is sitting there at Thanksgiving dinner with the guy who hasn’t paid you in a year.”

By the way,  Elaine Appleton Grant asked about family lending on LinkedIn before writing this article.

Lending Club announced lots of goodness on their blog this morning. Overall, the updates sound positive. I have grouped the updates together and summarized them below:

• Affiliate program: The first item of interest to me is the affiliate program was formally announced that I had previously mentioned. The deal is $25 for the affiliate and the person referred — the same as Prosper’s affiliate program.
  

  Make Yourself and Your Friends $25 Richer: Many of you have taken advantage of our $5 referral bonus to date. To sweeten the deal, we have increased this to $25 for both you and your friend for each loan application or funded lender’s account resulting from a referral. In addition, if your friend transfers an initial deposit of more than $1,000 to start lending, we will increase the bounty to $50 for both parties. Moreover, we have made inviting friends easier: you can now type in your friends’ email addresses manually in addition to being able to import your webmail contacts. If you prefer, you can send a referral link around, or publish it on your site. Here it is:

  https://secure.lendingclub.com/refer.action?referrer=PersonalLoanPortfolio

  note: replace my Lending Club ID with yours.

  Lending Club still needs to address a few of the items that were were discussing at the P2P No Bank forums where this was originally informally announced, but this is an excellent set of changes to introduce to the P2P lending market.

• Features for Lenders: Lending club also introduced two features for lenders. You can now ask the borrower a question and view loan performance statistics. The stats are looking great so far, but at under 400 loans to date I would not draw any great conclusions. Also, a statistics page is not nearly as great as how Prosper releases the data for analysis, but again this is a good start.
• Profile Changes: You can update your profile and change your bank account.
• Policy Changes: Finally, although these changes my be technical in nature, I am grouping them as policy changes because they are fundamental to the Lending Club market. Lending Club is now allowing a Lending Club participants to both borrow and lend and take out multiple loans. As I have mentioned before, I am not keen on borrow and lend as a strategy, but there may be more legitimate reasons to both borrow and lend money. The multiple loans do not bother me much and the functionality is likely something that users are requesting. If Lending Club did not allow multiple loans, borrowers would go to another service like Prosper to request a second loan anyway, so they might as well offer this service.

To summarize, this is a great collection of updates at Lending Club which shows that they are ready to be a much larger participant in the P2P lending market.

Update: The Lending Club program was updated to a $50 bonus if you fund your lending account with $1,000.

Although not yet formally announced, Lending Club now has an affiliate referral program. Rex Dixon, Director of Social Media Content at Lending Club, has confirmed it in the P2PNoBank Forums. I believe the deal is the same as Prosper’s referral program — $25 for both referrer and the new person who signs up using the link. However, the details are still vague, so check back at the forum while Rex answers more questions about the affiliate program. I’ll also post a summary of the clarifications.

Update: The referral program is now $25 to $50 cash bonus. $25 for funding your account with $500 or receiving a loan and $50 for funding your account with $1000

Create your Lending Club affiliate link like the one below replacing your Lending Club ID with mine: https://secure.lendingclub.com/refer.action?referrer=PersonalLoanPortfoliocom

Please note that I do not recommend using the email system at Lending Club for referring people until they have addressed the issue of the second link to Lending Club not containing the referral code. I mentioned this issue on P2P No Bank forums. Instead you should construct your own email using the link format above to insure that both parties receive the credit.

Update (11/21/2007): Rob from lending club posted some clarifications on the Lending Club affiliate program.