Rate Ladder is promoting a P2P loan from the blogger “The Penny Saved.”

See the loan request.

Honestly, the interest rate of 16% is rather poor considering that the Prosper lending guidance is a negative 18% due to the C credit rating.

Normally, I won’t even consider anything with a lending guidance that takes the estimated rate of return below 6%. After all, I am in P2P lending to earn higher returns. However, it is occasionally the lower credit score loans that can offer a higher return if you have good reason to believe that the person will pay back the loan. Everyone using only standing bid orders will miss out on a loan like this, so it may offer an outsize return.

I decided to check out some posts at the website to see how this blogger thinks:

• Positive: A good understanding of supply and demand is a good thing. Penny understands energy market economics which is a good thing. Raving about oil companies charging high prices would be a bad thing.
• Slightly negative: How Penny can add one to his scoring system make 1 go to 2 and 0 go to 1.5 at the same time is a complete mystery. See the scoring jump from item one to item two and then not move between item two and three. It is just so wrong that I must be missing the scoring explanation.
  • Item #1: “Score: Not Hypocrite view 1, Hypocrite view 0″
  • Item #2: “Score: Not Hypocrite view 2, Hypocrite view 1 .5″
  • Item #3: “Score: Not Hypocrite view 2, Hypocrite view 1.5 “

  I even had to double check what I posted is correct. Yes, that is right and no the scoring system does not make any sense.

• Positive: Researching purchases in great detail is a good thing. It likely means that he is not taking this loan lightly.
• Neutral: Reasonably good investment tips although I am not sure what “Bear Stears” are. I think a Bear Steer might be a bear sans gonads, but I am not certain. I have been know to make typos too, so I won’t hold this one against you.

I am not quite certain about the loan request yet, so I decided to request the answer to a few questions before putting my money on the line. I sent a question asking Penny for details on the mortgage loan considering that he is a home owner and we are in the midst of a nasty mortgage/credit crisis. Secondly, I asked about how soon he plans to pay off the loan since the long is listed in the description for improving the borrower’s credit score. If you have been reading Personal Loan Portfolio for a while, you know that I hate early P2P loan payoffs.

I’ll let you know later the answer to my questions and if I bid or not. See the loan request.

…..

Bored of P2P Lending?

• Go find a little inspiration by watching Oprah’s Stanford Graduation Speech. The video helped out my wife with her graduate class.
• I am curious to see how this fresh google search functionality is going to impact search results. Long tail search terms might have just become even more accessible to reach traffic.

• The Penny Saved Answers My Prosper Loan Questions
• Review of Lending Club Update: New Portfolio View, FICO Score, & More
• Examining the Lending Club Risk Rating Score
• Lending Club Announces Lots of Changes
• What NOT to say in your Personal Loan Application

I often read that borrowers in one state or another are more likely to default on Prosper loans. I decided to investigate if there is any truth to the likelihood that some states are worse credit risks than others. The example that often comes to mind is Georgia which has a high default rate. Currently Georgia has nearly 8% defaults and about 10% late which is a higher than average rate of late loans, but nine states have more loans that are two or more months late than Georgia.

My interest in state by state loan default rates prompted my article Pennsylvania Loans: What were early Prosper lenders thinking? At the same time, I noticed how state interest rate caps vary widely from state to state — Pennsylvania 6% and Georgia 36%. I decided to see if the interest rate caps could partially explain the difference in Prosper loan default rates by state. My theory is that a lower interest rate cap prevents high risk borrowers from funding in a particular state, therefore a state with lower interest rate caps should have a lower loan late percentage.
So on February 6th and 7th, I pulled all the late stats on lendingstats.com by state. For comparison purposes, I counted every loan two months or more late as “late” to calculate the correlations. I could have used only defaults or all late loans, but the point is consistency for comparison. I also collected the average age of loans in days, the total loan amount, the average credit rate of borrowers, and the average interest rate on loans. Since my primary goal was to compare the late loans to interest rate caps, I threw out a few states that have multi-tiered rate cap limits such as Massachusetts.
H ere is an example of the data for each state:

State: Alabama
Interest Rate Cap: 36%
Number of Loans: 418
Total Loan Amount: $2.23M
Average Loan Amount: $5,334
Average Age of Loans (Loan Days): 292
Average Credit Score: 4.94 (Lending Stats converts the letter score into a number to generate an average.)
Average Interest Rate: 21.22%
Percentage two or more months late: 16.55%

Link to the spreadsheet of summarized state by state Prosper loan data.

So which factors are most correlated with late Prosper loans? The average credit score is the most correlated with the late loan percentage by state (0.73). The second and their most correlated statistics were the average interest rate and the number of loans respectively. The fourth most correlated factor was the state interest rate cap (0.27). Below is the table with the correlation statistics for each factor analyzed. You can click the table to enlarge the graphic. Details are also in the spreadsheet.

I also correlated among the various statistics by state. There were some interesting correlations such as the expected strong positive correlation (0.8) between the interest rate cap and the average interest rate.

Although, it was interesting to examine how much of an impact the default rate on Prosper loans might have been effected by state interest rate caps, I expected a stronger correlation.

I still did not prove whether or not the Prosper loan late percentages vary by state. Maybe next time…

Problems with the analysis: 1) I only used factors that were quick and easy to pull off of the summary page by state on lendingstats.com so other factors such as DTI were not used. 2) I pulled the data over two days because it was tedious, so that extra day for a few states could have impacted the late statistics. 3) Correlation does not prove causality.

• Pennsylvania loans or what were early Prosper lenders thinking?
• Glenn Chapman on P2P lending at Prosper, Virgin, Kiva and Zopa
• Lending Club Statistics: Denying Most Loans
• One Year Review: My Prosper Lending Experience
• My first late loan at Lending Club

As I promised, I have extended some loans with Prosper (although I am not quite up to $500 yet). Since everyone can see Prosper loans and which ones I bid on — see my loans at Lending Stats — I decided to have some fun with it by holding a review contest of my loans.

If you provide constructive and specific criticism/advice on 4 or more of the loans I selected (or bid on), I will enter you in a drawing for a finance book. Also, in an attempt to find more advice, if you mention my request for advice and link to this article in your blog, you can receive a second chance to win. All details at the end of the post.

Let’s move on to the the Prosper loans selected and funded each at $50. I stayed with Grades C or higher, no current delinquencies, a low number of recent inquiries, and a low total dollar amount, and DTI ratios of lower than 45%.

• $5,000 for a honeymoon trip to Europe. I don’t like that they could not save up for the trip since that is what I have done for my world travels, but the loan is small the numbers good. It funded at 10.9%.
• Grade C trying to cut down debt with a $6,000 loan. 24% DTI.
• AA with 2% DTI wanting to reinvest $5,000 in Prosper. I still think borrowing to lend is poor strategy, but it looks like he can pay the loan back regardless.
• Grade C with 23% DTI wanting $4,100 to pay off debt and buy a washer. This one has a few flags like 5 delinquencies in the last seven years and a 91% bankcard usage rate. Right now I am wondering why I funded this one, but I think I decided to go with it anyway because the total loan value is small, it had a higher interest rate, and she has good payment history on a previous Prosper loan. *Crosses fingers*
• Grade AA with 30% DTI needs $12,000 for refinancing debt.
• Grade B with 22% DTI wants to help his mom pay off a credit card with a $1,300 loan.
• Grade C with 11% DTI asks for a little help ($1,500) after Christmas. (currently pending review)

Here are the loans that I have bid on that did not fund:

• Grade C with 39% DTI needs a $6,000 loan to pay for a special education certificate. I bid 15.49% and it funded at 14%.
• Grade A with 20% DTI asked for a loan of $10K to pay off credit cards and fix the foundation. I bid 16.85% and it funded at 16.75%
• Grade A with 43% DTI requested a loan of $10,000 to purchase inventory. I bid 14.9% and it funded at 14.6%.
• Grade A with 24% DTI received a loan to pay off some university debt. It funded at 14.75% but I only bid 15.75%.

I found it fun to bid on the Prosper loans, but it was a little tedious being outbid. I had to return several times to invest. However, I think it was my fault because I started bidding just below the current bid necessary rather than the lowest I was willing to pay for the loan. I like the new rate guidance and I tried to keep the estimated return above 7.75% but a few were slightly lower.

Thanks in advance for your advice on my Prosper lending — see more Prosper advice for new lenders here. If this contest goes well, I will try it again in the future.

You can select one of the following books if you are selected at random from all the qualified answers and/or links:

• Because I think it is a fun book and in honor of the upcoming Prosper Days, I selected Freakonomics as the first book choice.
• The second option is a great book that has recently been revised — A Random Walk Down Wall Street.
• I added a book that some borrowers might be interested in: How to Get Out of Debt, Stay Out of Debt and Live Prosperously.
• I subscribe to the approach in the book The Automatic Millionaire, so it is my final selection for this contest.

Details on the advice request contest: Please provide specific advice on why you think I should not have bid on a particular loan or why you think that I should have bid lower on a loan that I bid on but did not win. Please provide feedback on at least four of the loans that is different or more detailed than anyone posting before you. The advice should be actionable for deciding on future loans. If you post that “Type X loans are more likely to default” or other justification please provide a link to the statistics proving your statements.

You can post your advice below in the comments or you may post the advice on your blog with a link back to this posting. You must provide me a valid email address when you post your comment so that I can contact you. You must respond within three days with your shipping address to my email or I will email another randomly selected winner. I will end this contest exactly 14 days after I post March 1st, 2008. You must provide advice to receive the second chance to win with the link. If you link to this post, you must either email the link to your post or it must show up in my wordpress dashboard. Only a total of two chances to win per individual are allowed. I will ship your book from Amazon via using the cheap shipping. I’ll send you the confirmation and I can’t be held responsible for shipping and handling. Additionally, you may point me to your favorite Finance Blog that has an Amazon affiliate link and I will purchase it via their link.  I will announce the winner with a link to your blog (if you have one) and a link to the finance blog you asked me to use to make the purchase via Amazon. I reserve the right to not link to any blog I decide has objectionable or completely off topic content. I will change the rules if I find it necessary to keep the game fair, but won’t jerk you around.

• Requesting Advice on P2P Lending
• More Time for P2P Lending Advice
• P2P Lending to Students with DUCK9: Heard of it?
• Contest for Prosper Loan Reviews Still Open
• Free Kiva Gift Certificate Experiment Results

Lending Club updated their interface today with some great improvements. They announced a few days ago in their blog that these changes were coming along with a reminder of the Lending Club 5% bonus program. Also mentioned was the number of lenders on Lending Club doubled in the last month!

But I am writing today about the changes to the Lending Club interface. (Before and after screen shots below.) Many of the improvements are items that I requested in my initial Lending Club review. My suggestions included in the update were:

1. More advanced search engine with better filters
2. Improved view of loans and portfolios (although not quite how envisioned, but I like the improvement as implemented)
3. Adding the FICO score to the loan
4. Removing loans in your portfolio from the search results.

Other great ideas added that I noticed were:

1. Improved loan browsing function (<previous | return to search results and | next>)
2. Much clearer dashboard of your money and loans.

I have before and after screen shots for many screens for you to compare the improvements. But first, I would like to summarize that I like this set of updates. Also, now that I have the overall portfolio view, I appreciate having the individual portfolios separated. This allows the lender to track different lending strategies separately. Since it seems my suggestions may have been heard, I’ll post a few more ideas:

1. I would like to see more 30 day late payment history than two years.
2. On the account activity page, referral payments need to be listed. Right now, my inputs do not equal my account value due to referrals.
3. When I open a loan that I have already extended credit to, it should be clearly indicated at the top of the loan so that I do not double fund the same loan. (Creating my second portfolio today I noticed loans in the first portfolio are not indicated.)

Before and After Screen Shots

The new Lending Club account summary page is much better than the old view. It includes links to all your loans and all your portfolios.

The old view of the dashboard is very similar to what is now the current portfolio view:

There is a new view to view all loans in the portfolio. This is great for a quick view of the status of all your loans on one single screen.

The new Lending Club Loan search screen allows for great filtering on several characteristics including FICO range, current delinquencies, and debt-to-income ratio. See the righ-hand side of the screen for the differences.

The old loan search screen:

The new loan detail screen has the great improvement of adding the FICO score range (highlighted in red). I like having that appear better than simply the loan grade because it is always difficult to remember which grade matches which score. Plus, with the risk adjustments, each grade does not exactly match a particular FICO score.

The previous Lending Club loan detail screen looked like this:

• Examining the Lending Club Risk Rating Score
• One Year Review: My Prosper Lending Experience
• Loan Money on Prosper to “The Penny Saved”?
• Update on New Lending Club Screen Difference
• Lending Club Posts Rejected Loan Statistics

According to the poll conducted with the readers of Personal Loan Portfolio, I am investing my next $500 with Lending Club. Lending Club won 64% of the votes (28 votes), a clear majority versus Prosper.com’s 18 percent (8 votes). Despite, my original conclusions that Lending Club is an inferior investment to the S&P 500, only six votes (including one of my own) selected the S&P 500. And Zopa was even further behind in the voting with only 2 votes. As an aside, I must report that I had one Harvard Business School voter who voted for Lending Club.

Update: Can Lending Club can beat the S&P 500 with this “Thank You” bonus?

Poll results:

I was happy to receive 44 votes on my first poll considering that Personal Loan Portfolio is only about one month old. Thank you to everyone who voted in the poll. I will transfer money to Lending Club tomorrow to select my next loans as promised. The good news is that there will likely be more loans to select from this time since Lending Club has extended ts reach.

I am surprised that so many people voted for Lending Club when I could have otherwise provided my thoughts on another P2P Lending service such as Zopa or Prosper.com.

lending club, investing, investment, p2p lending, p2p loans, poll

Technorati Tags: lending club, investing, investment, p2p lending, p2p loans, poll

• Where Should I Invest My Next $500? You Decide
• Poll Results: Lending Club will Survive
• Lending Money via Prosper to Increase Returns
• Lending Club ROI Bonus: 5% extra return as a “Thank You!”
• Added Another $500 to My Lending Club Account

Recently, I created my first loan portfolio at Lending Club. I recorded the loan portfolio creation process and decided to share it in case you have not experienced Lending Club personally. I added some narration to explain the basics of the process. The video is cropped in several places to keep it short — under three minutes total.

This video is me creating my first loan portfolio at Lending Club…

I should have mentioned in the narration that it defaulted the value of each loan to $25 but this is easy to change. By the way, I posted more information on the Lending Club Risk Score a few days ago.

Let me know what you think of the video and if you found it useful. Although, obviously it will not be that useful if you have already experienced the Lending Club loan portfolio creation process yourself.

If you are interested in investing in P2P loans with Lending Club, you can sign up here. If you sign up to lend, you will receive $25 if you fund your account with less than $1000 and $50 if you fund your account with more than $1,000. If you sign up as a borrower and your loan funds, you will receive $25.

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Technorati Tags: lending club, tutorial, loan, p2p lending

• Lending Club ROI Bonus: 5% extra return as a “Thank You!”
• Signing up for Lending Club over Prosper (at first)
• Review of My First Loans with Lending Club
• Examining the Lending Club Risk Rating Score
• Review of Lending Club Update: New Portfolio View, FICO Score, & More

In honor of Prosper.com’s post mentioning the wisdom of crowds, I have decided to allow the readers of Personal Loan Portfolio to decide where I invest my next $500*. The poll is listed below…

Update: People’s Choice Poll Results and Analysis Posted.

Should I invest my next $500 in P2P loans at Prosper.com, Lending Club, or Zopa or skip P2P lending all together and invest in a total stock market index fund. I have already admitted that I believe that a total stock market index fund is superior investment to P2P loans. I have already invested in Lending Club loans, but not Prosper or Zopa loans. Therefore, I would personally like to invest in Zopa or Prosper loans so that I can have more P2P lending sites to compare to in my experience.

Please comment on the reason for your selection…

I will let you know what decision was taken after the poll closes on Thursday December 13th, 2007 at 9PM. (I am not certain, but I believe that is Central timezone.)

poll, vote, investing, investment, prosper, lending club, zopa, stock market, money, p2p lending, wisdom of crowds, index fund

*Since I am trying to follow the wisdom of the crowd, I must recieve more than 20 votes for me to follow this advice, so please help me solicit advice by passing long this poll to other people who may be interested in voting. If less than 20 votes are received, I will not follow the poll.

Technorati Tags: poll, vote, investing, investment, prosper, lending club, zopa, stock market, money, p2p lending, wisdom of crowds, index fund

• Poll Results: Investing Next $500 with Lending Club
• Advice for Potential a New Peer-to-Peer Lender
• Lending Club IRA: Why it is good for your retirement
• Review of My First Loans with Lending Club
• Poll Results: Lending Club will Survive

Based upon my recent request, I received some useful advice from several P2P lending bloggers that I was grateful to receive before investing in my first loans with Lending Club. I am also excited to share this advice with other potential lenders. First, let me offer my own advice that I wrote on another site I just started – Five Prerequisite Investments to P2P Lending. I listed out the top five places you should put your money before even considering lending with Prosper or Lending Club.

Quick Tip: if you have not already signed up, use these links to Lending Club or Prosper for a free cash bonus upon account funding.

I received advice from the bloggers at Prosperous Land, Prosper Lending Review, Rate Ladder, Lazy Man and Money, and My Microfinance (link removed because website no longer available). So what advice did these bloggers have for newbie lenders?

Note: All the sections below are quoted directly from the bloggers responses with the exception that the italics are my questions and occasionally the blogger only mentioned the resource by name, so I added the link to the resource.

Kevin at Rate Ladder responded with a link to his newbie advice and this tidbit:

to start with I would stick to 0 current [delinquencies] and 0-1 inquiries in the last 6 months

Lazy Man and Money offered this advice:

What do you know now that you wish you knew before you started P2P lending?
- That the Experian default rate that Prosper gives as a guide really shouldn’t be used as such.
Do you use Prosper and/or Lending Club and why?
- I use Prosper. It was there first and I’ve been a member for a long time. I’m not a big Facebook user, so Lending Club rubbed me the wrong way from the get go, requiring Facebook membership at launch.
If you have a blog, what one post on your blog should someone read before investing in P2P lending and why?
- You already have it with my Revealing the Keys for Prosper Success.
What is your favorite P2P lending resource for information? (not including your own blog)
- www.rateladder.com. Brilliant writer, brilliant thoughts.
Has your overall plan been through changes since you started P2P lending? If so, how and why?
– Yes it has. I went by the Experian default guidelines, but now I go
by the guidelines that are mentioned in my Revealing the Keys to Prosper Success post. I have actually stopped adding new money to lend as P2P represents enough of my portfolio.
Any other advice you would like to include?
- I really don’t have any other new advice since [the post Revealing the Keys to Prosper Success].

Mike from Prosperous Land wrote:

What do you know now that you wish you knew before you started P2P lending?

I wish I had a better understood the risk factors for defaulted loans. If I had known then what I know now, I would’ve passed on my most troublesome loans.

Do you use Prosper and/or Lending Club and why?

I like the marketplace aspect as well as the unprecedented access to statistical information that Prosper provides. My success or failure is based on the hard work I put into understanding the statistics and risk factors associated with my bidding.

What one post on your blog should someone read before investing in P2P lending and why?

Tips for Borrowers
While the post was targeted toward borrowers, it contains great advice for lenders on what to look for in loans.

What is your favorite P2P lending resource for information? (not including your own blog)

Right now, I use the forums on prospers.org and I also use p2pnobank.com to keep track of blog posts. I used to use the official Prosper forums, but they’ve been gutted and are no longer useful for experienced lenders.

Tom and Matt, who both blog at Prosper Lending Review, both responded. First Matt’s response:

What do you know now that you wish you knew before you started P2P lending?

I always research things out pretty thoroughly before investing in them. When I started P2P lending I had a pretty good idea of the mechanics of how it worked and what the potential returns for in different credit grades. The primary thing that I have learned along the way that would have been really nice to know before starting investing is the relative importance of different items in the credit data. Early on I relied almost exclusively on Credit Grade and # of late payments in the credit history. Along the way I learned the importance of # inquiries, DTI, and % utilization. I now consider # of inquiries to be a very important figure and am considering using it as a potential way of bargain shopping in lower credit grades which I have previously avoided.

Do you use Prosper and/or Lending Club and why?
I use Prosper. I have kept my eye on Lending Club, but to date have not investing in P2P other than Prosper. There are several reasons for this. When I started P2P investing Lending Club was not around, so there wasn’t really any choices other than Prosper. Now, Prosper is the platform that has been around long enough to have a performance track record. Also, I enjoy browsing through and picking individual listings, it has evolved into a hobby as much as an investing experience.

I am looking seriously at the upcoming Zopa launch. They are partnering with Credit Unions to introduce things like FDIC insurance into P2P lending which could have an interesting impact.

What one post on your blog should someone read before investing in P2P lending and why?

For entertainment value, and interestingly enough some people are investing in P2P primarily for the entertainment and social aspects I would read: Prosper Loan scam Story of Jessica Wolcott

For an understanding of the economics of investing in P2P I would read: Prosper: Hands on Education in Risk

What is your favorite P2P lending resource for information? (not including your own blog)

For me primary sources of information are always best. Everything else is just opinion and packaging of that information. I like to go to LendingStats.com to view the raw performance information in a variety of different ways. On LendingStats you can see how others have invested and learn from the mistakes of those who have not done well while learning technique form those who have outperformed.

Although Tom added a few more than the one link requested, they were all quality, so I have included them all. Tom from Prosper Lending Review added:

What do you know now that you wish you knew before you started P2P lending?

I still consider myself new to P2P lending. I was introduced to Prosper by my brother in June so I have less than 6 months under my belt. I’ve been slow to add funds to my account and would recommend the same to all new lenders. That’s actually good advice for any investment. Go in slow until you understand the risks associated with the potential rewards.
Do you use Prosper and/or Lending Club and why?

I’m a member of both Prosper and Lending Club and have written about them both on Prosper Lending Review. In addition, I’ve recently started blogging about personal finance on Lending Club. They are both great companies and have incredible potential. The P2P lending market is growing rapidly.

What one post on your blog should someone read before investing in P2P lending and why?
First, if you are going to invest hundreds or thousands of dollars, I’d recommend you read more than one article.

My brother Matt and I co-author Prosper Lending Review. I’d recommend anyone who is going to put money into P2P lending read all his articles. He has some really great advice. In particular I’d recommend starting with these in rough order of importance:

# How does Prosper compare to other investments?
# Prosper: A hands-on education in risk management
# Borrowing money to lend on Prosper: Wise or Foolish?
# When to bid on Prosper loans
# Are all Prosper loans within a credit grade created equal?
# An analysis of pre-payment risk on Prosper loans
# Credit Scores on Prosper – Part 1 of 2
# Why would a borrower use Prosper instead of a traditional bank?

What is your favorite P2P lending resource for information? (not including your own blog)
There are a bunch of great blogs about Prosper which I reviewed here. I also recommend LendingStats.com and Eric’s Credit Community. Several have started adding information about Lending Club as well but, for now, the best Lending Club resource is their own site and blog.

Jeff from My Microfinance posted the advice on his blog (link removed 32/5/2008 because 404), which I have reproduced here:

What do you know now that you wish you knew before you started P2P lending?
How to truly assess someone’s credit risk beyond the ‘numbers’. One thing I’ve learned is that someone who cannot type a decent explanation of why they need the money with minimal spelling and grammatical errors isn’t worth investing in. I would rather have someone who is rated F4 (Lending Club) who takes the time to list the details of the request than someone who is less risky (say an A3) who gives a one sentence sales pitch. Borrowers, as I used to tell my Prosper borrowers within our group, need to treat their listing like a sales call. Put your details and passions out there and the right lenders will flow in. Trust the facts, ask questions when uncertain and let your brain work harder than your gut when lending! Your portfolio will love you for it!

Do you use Prosper and/or Lending Club and why?
Prosper doesn’t return emails, phone calls or address concerns. Not only that, they hide lies within inflated numbers they advertise to people (good old truth within a limited spectrum of time and scenarios if you read the fine print). Lending Club… Within minutes of announcing our move on our (at the time very limited and young blog) blog we heard from Rex, Renaud and Rob from Lending Club congratulating us and asking for feedback as friends of the effort! You want to talk about empowerment, get involved with Lending Club’s effort as they have a solid platform that avoids the sub-prime credit market and focuses on a reliable scope of borrowers with full credit profiles and privacy afforded to all. Prosper… They can go jump in a lake for their lack of caring about the ‘community’ and more about the profits. Prosper used to help people, used to be pro-actively communicating with people… Now they just sit in the clouds. I would never recommend Prosper to anyone based upon several testimonials about the collection process (lack thereof) and lack of service and concern they afford even the best lenders (Fred93 comes to mind) when a problem is discovered. Lending Club is highly recommended by us whether you are a ‘good credit borrower’ or a P2P lender wannabe. It’s safer, friendlier, more privacy-focused and has a far better chance of long term stability and success with it’s management team/personnel at the helm!

What one post on your blog should someone read before investing in P2P lending and why?
I would recommend the passionate example-driven notice of our ‘change of teams‘ (link removed 32/5/2008 because 404). It was a fun-filled blog in which I laid it all out in plain detail as to why we prefer and stand with Lending Club in the P2P battle. I loved giving the kick in the nuts to Prosper when I wrote it. Heather and I cracked open a good bottle of wine that night in celebration of the ‘color change’!

What is your favorite P2P lending resource for information? (not including your own blog)
P2PNoBank would definitely get the nod. Not only does it aggregate other P2P blogs, but it’s very minimalist either as a stand-alone site or RSS feed in your reader. Definitely the Grand-pappy of P2P news in my mind. Another blog that stands out would be Lending Club’s blog as Mike Smith, Maneesh Sethi and other bloggers contribute not only P2P, but Personal Finance thoughts for people to chew on.

Thank you to all the bloggers who responded. And a reminder to all potential P2P loan investors to watch out…
Beware of Bad Advice for Lending

Browsing some forums, I found several examples of poor P2P Lending advice, so be careful in your reading. For example, on WiseClerk (link to posting) I found Vinnie who gave the good advice of only lending 2-3% of your portfolio per loan and then dropped the advice bomb:

AA and A borrowers on prosper default at a significant rate, so that you cannot make a significant profit. The highest profit, after 9 months default, is on D loans.

Vinnie is talking about three year loans as near certainties after only nine months and stating that AA borrowers are a greater credit risk than D borrowers. Prosper Lending Review reports the average ROI of AA and A loans of 9.5% and an average return of 7.5% for D loans. Kevin of Rate Ladder explains why Vinnie might be seeing great returns to start out on his D loans but they might not last — due to exponential decay. Vinne is using a small sample to make generalizations, but his small sample is doing well so far. He may have picked a few winning Ds and a few lousy As but that does not create a high default rate for As nor a higher ROI for Ds in general. You can prove it yourself on LendingStats.
Good luck to all the newbies in your P2P lending. I hope that you enjoyed this collection of advice.

Anyone have any additional advice? Please post it in the comments. Thanks!

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Photo credits: Laughlin, Solo with Others, and Andrew.

Technorati Tags: lending, money, investing, Prosper, Lending Club, advice, banking

• Requesting Advice on P2P Lending
• Review My First Prosper Loans and Win a Book!
• Carnival of Peer-to-Peer Lending #10
• More Time for P2P Lending Advice
• Advice for Potential a New Peer-to-Peer Lender

I extended my first $400 worth of loans with Lending Club on Sunday night. I intended to lend $500 but could not find enough people that I wanted to extend credit at this time. I decided to give a quick report of what worked well and what could have been better about the my first Lending Club experience.

Update: I posted a video of the Lending Club Loan Portfolio Creation Process and many of these suggestions were added in the January 2007 Lending Club update.

The Good about the Lending Club Experience

1. The Lending Club website was easy to use and understand — including the pie charts in the portfolio tool.
2. The loan portfolio function was an easy way to start with a potential group of loans.
3. It was reasonably easy to change the portfolio before purchasing by adding and dropping loans.

The “Could have been Better” List

1. Lending Club did not seem to have a very large pool of borrowers. I could not even find enough decent loans to put $500 in a well-diversified portfolio — meaning $25 per loan. I extended a handful of $50 loans and my last $100 was not used. This will leave 20% of the money invested in Lending Club idle for at least another week while I try to find loans.
2. To earn a return of anything over about 8%, you must quickly drop in credit grades. If you look at the pie chart for a portfolio with a risk score of 1 of 5, all the loans are class A and B borrowers. With a risk score of only 1.5 out of 5 points on the portfolio rankings, approximately 60% of the loans (estimation based on graphic) are grades D through G and A is not included at all. That is a large difference for a potential difference of 4% in return.
3. Not enough information to quickly filter out poor credit risks on the list of loans available. Very few fields appear on main portfolio review page to quickly delete bad potential loans.
4. Titles of loans are very similar making it difficult to remember which loan details you were examining when you move back to the main portfolio page.

Ideas for Improving the Lending Club Loan Selection Process:

1. The site should allow you to select what additional fields to show on the portfolio review page. For example, credit inquiries and credit utilization would have been very helpful to add to the review without needing to drill into each detail page. I could have eliminated several loans very quickly — one person had 25 recent credit inquiries!
2. When searching for loans in the portfolio, the search returns loans already in your portfolio. I think that this should be an option to turn on or off. I imagine most people want to search to add potential loans that have not already been added.
3. More descriptive titles of the loans — maybe this is the fault of the borrowers rather than the site, but it almost seemed like the titles were selected from a drop down list. When looking at a long list, they became difficult to distinguish by much more than the dollar amount of the loan.
4. Let me add a loan to an existing portfolio. I browsed the site again tonight and found one loan to fund, but it seemed ridiculous to have a portfolio with one loan, so I did not bother funding the loan.

Verdict on First Lending Club Experience

I am not as excited as I expected to be about my first lending experience with Lending Club. The list of the potential loans to fund seemed too small and my estimated return is only slightly above 9%. I need to take on more risk to make more money, but right now I seem to be more afraid of the credit risk than enamored with the potential return.

My current portfolio will not beat the stock market on average. Purchasing $500 of the total stock market index would be a much better investment because it is more diversified, contains less credit risk, and is more tax efficient. Additionally, Lending Club loans are less liquid than an investment in a stock index. At this time, I classify my first loan portfolio as an experiment rather than a rational investment.

• Lending Club ROI Bonus: 5% extra return as a “Thank You!”
• Advice for Potential a New Peer-to-Peer Lender
• Blenders Borrowing-to-Lend: Earn money on good credit?
• Examining the Lending Club Risk Rating Score
• Where Should I Invest My Next $500? You Decide

Lending money to someone can be a difficult decision. The only two items that should come to mind are the interest rate and likelihood of repayment. Income should be factored into the probability of repayment, but there is more at play than is visible in a profile on Lending Club or Prosper. Take the example of Britney Spears’ lavish spending. Her monthly income is $737K but she has managed to save nothing and spends more than $100K per month on gifts and travel. Britney has a high mortgage payment, but would have a reasonable debt to income ratio. Risk is a much more complex decision than simply the Debt to Income ratio since Britney’s behavior leads one to believe that she might be a high credit risk.

Britney Spears and her lavish spending are in good celebrity company. Michal Jackson, the King of Pop Music, is on the verge of losing Neverland ranch, which has been in financial risk for several years now. Michael is such a poor credit risk, that he is not even living up to obligations promised to the only person to provide him financial support after his infamous trial — Bahrain Prince Abdulla Al-Khalifa.

Other celebrities who were poor credit risks include MC Hammer who files for bankrupcy on $13 million after his second album flopped. His poor spending habits lead him to spend more than $75 thousand on mirrors and $2 million on marble floors for a house. Even worse were his purchases of 17 luxury cars, 2 helicopters, and million dollar investments in race horses. According to Foxnews, Lindsey Lohan spent more than $2 million on clothes last year and TLC was also a financial fiasco. Although, there are positive examples, Usher is said to have spent less than 10% of all the money he has earned. In addition to Usher, other rappers seem to be doing better since MC Hammer:

Rapper Jay-Z owns a stake in the New Jersey Nets, co-owns the Rocawear clothing line and is president of Universal Music Group’s Def Jam Recording.Sean “Diddy” Combs has interests in Bad Boy Records, the clothing lines Sean John and Sean by Sean Combs, a movie production company and two restaurants.

And Def Jam Records co-founder Russell Simmons owns a management company, a clothing line called Phat Farm, a movie production house, TV shows, a magazine and an advertising agency.

The three men are worth approximately $547 million, $358 million and $340 million respectively.

So if Britney Spears (or Michael Jackson for that matter) appear asking for a loan on Prosper on Lending club, it would be a good idea to run the other direction.

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• Lending Club Posts Rejected Loan Statistics
• Congress Examining Credit Card Practices
• My Mortgage Refinancing Experience: Post Mortgage Crisis Delivery Fees
• Change in Lending Club Cash Burn Rate Due to Quiet Period

If you have been reading my recent posts at Personal Loan Portfolio, you know that I am in the process of formating a P2P lending strategy. However, lending does not seem to be a good business to be in recently. Countrywide, one of the nation’s largest mortgage lenders, is hemorrhaging jobs and money due to poor lending practices. Countrywide is not alone — see the recent financial results at Morgan Stanley , Citibank, and Merrill Lynch which have all been negatively impacted by their mortgage backed securities investments. These recent results make for a frightening lending environment.

Today, MSNBC is reporting that mortgage foreclosures rose 30% in the third quarter of 2007 over the second quarter. The level is double the third quarter 2006. That makes the overall US foreclosure rate one out of every 196 households. How does this rise in foreclosures impact your Prosper lending strategy?

First, why the increase in foreclosures? Too many borrowers bought more house than they could afford by taking out an adjustable rate mortgage (ARM). ARMs give the borrower a lower introductory mortgage rate on the assumption that the borrower will 1) sell the house before the rate adjusts upwards or not long after the rate change, 2) the borrower will earn more money in the future and thus be able to take on the additional payment or 3) refinance at a lower rate or under better terms in the future. Too often, I believe that the reason that borrowers took on ARMs was that they simply did not understand the interest change.

An upward rate adjustment of only 2% could add over $600 per month on a $500K mortgage payment[1] — but the story is even worse if the borrower had received a special introductory rate. Add to the picture rising gasoline prices, rising home owner’s insurance rates, and inflation. This makes the foreclosure rate very understandable in the markets that had high price home appreciation, especially considering that many people can no longer sell their house at a profit in the slow moving and declining market. According to BankRate.com, a borrower has a 1 in 3 chance of losing their home if they took out an ARM and had an initial interest rate of less than 4%. Unfortunately, foreclosure even impacts those who borrowed wisely according to the Center for Responsible Lending:

The center’s property value analysis was based on academic research indicating that a foreclosure lowers the price of neighboring properties by 0.9 percent on average. That impact was higher in poor neighborhoods, where prices dropped 1.4 percent on average.

So how does this effect a Prosper or other P2P lending strategy? Just like real estate, Prosper lending is not only about the overall national economic situation but also the local economic conditions. The previously mentioned MSNBC article, states the highest rates of foreclosures are in particular states:

[T]he highest concentrations were a handful of housing markets; California Arizona, Florida, Nevada, Ohio, Texas and Michigan made up more than half of the total.

To be more specific, the foreclosures are concentrated in specific cities. Another MSNBC article lists the cities with the highest foreclosure rates. For example, Stockton, California had a foreclosure rate of 1 out of every 31 households! Below are many of the top foreclosure markets with a longer list in the article. I would avoid lending in any of these top foreclosure markets because a lender could essentially truthfully tell you that his or her debt to income ratio is currently a reasonable value, but possibly the borrower knows that the rate is changing in the near future and will significantly change the equation. The borrower could be using your loan on a prayer to keep their house in the near future, but with no long term real hope of recovery. I will be avoiding loans to borrowers in any of the following metropolitan markets.

[1] The monthly payment on a $500K mortgage at 4% interest is $2,387. The monthly payment on a $50K loan at 6% interest is 2,997. A difference of $610 per month.

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• Stanley Bing: Who is to Blame for the Subprime Credit Crisis?
• Blenders Borrowing-to-Lend: Earn money on good credit?
• WSJ writes about P2P Lending
• My Mortgage Refinancing Experience: Post Mortgage Crisis Delivery Fees