I planned to blog in commiseration with Tom about being denied for a loan. Tom was denied for a Zopa loan and I was rejected for a GE Money Bank credit card through Amazon. GE Money Bank took 10 days to tell me that they could not verify my identity despite the promise on Amazon.com of a 30 second approval process. I have a 800 credit score and provided all information including a phone number and they could not verify my identity. They did not bother calling to verify and customer service told me the process is computer automated. Ten days for a computer program to return results? I doubt it…

Sorry /Rant Off
I’ll skip the remainder of my planned rant about Amazon’s relationship with GE Money Bank and their horrible off-shore service and move on to saying good bye to quasi p2p lender Zopa. Zopa has closed its lending in the United States due to the credit crunch. Since the loans were actually funded by credit unions, this should make you question the stability of the credit unions backing the Zopa operations. I have friends on the board of my credit union and they have been mentioning the lack of loan opportunities for lending out depositors’ money. My credit union is flush was cash, and these CUs can’t make a few small dollar P2P loans.

The credit crisis should be creating a BONANZA for P2P lending — horrible stock market returns combined with people needing credit.

Another P2P Bank Bites the Dust
The P2P lending space seems to be taking casualties quickly. Lending Club is still not taking loans allowing lender bidding on loans despite the not-so-recent SEC filing due to the SEC imposed quiet period. One shop never even got off the ground and turned to blogs to sell itself likely for cheap. Prosper is raising fees like it is bailing water and Loanio opened very late to little fan fair.

Blogging Proof of a P2P Downturn
It is obvious that the P2P lending space is losing steam as fast as a broken particle collider when Kevin @ Rate Ladder only has five posts from September 2nd to October 4th. Once upon a time, long ago in the P2P lending space — a year ago — he posted daily.

When I hosted the 10th peer lending carnival, Lazy Man and Money and I traded a few emails including one where he lamented the downturn and lack of excitement for the industry. And as I think about returns long-term, despite the recent great performance of P2P loans versus my stock portfolio, now is likely a much better time to buy stocks.

Good Bye Zopa
So good bye Zopa. I know you offered potentially holy grail negative interest loans to borrowers, but it looks like you could not hack a market down turn. I am glad I never signed up for Zopa and do not plan on signing up for any new P2P lending services for a while even if they are paying great referral bonuses.

What is next?
In the near term, I plan to plow my extra cash into a doubling up my emergency fund, doubling down my long-term bet on the US stock market, and buying extra camera lenses. And I plan to spend my time working hard and enjoying my family (and my camera) — not checking the gloomy news or my already-tanked portfolio.

So what do you think about Zopa closing and the state of P2P lending?

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• Zopa Open for P2P Lending in the USA
• Carnival of Peer-to-Peer Lending #10

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?

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 Prospers.org 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.

Yahoo article found via Prospers.org – Independent Prosper Lending Forum.

statistics, Prosper, P2P lending, credit, risk, journalism, Glenn Chapman

Technorati Tags: statistics, Prosper, P2P lending, credit, risk, journalism, Glenn Chapman

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I returned to the Zopa lending site today for a second impression after my initial review of Zopa. I noticed something that knocked my socks off about Zopa’s business model of social lending — some borrowers are not paying interest after receiving “help” from lenders. In fact, some borrowers are “paying” negative interest at Zopa! In other words, they are receiving money for having borrowed money. This is an amazing development in P2P lending!

The proof in the Zopa homepage screen shot below. I cropped out part of the screen (red line) to make the graphic smaller and added three blue checks to show you the borrowers that I am highlighting below as examples. Click the thumbnail below to see it in more detail.

The three borrowers that I am highlighting (blue checks in graphic) are:

1. TinaM who is borrowing $5,000 to go back to school with a started interest rate of 9.99%. Currently TinaM is receiving help of $70.
2. wlaffin who is borrowing $5,000 to pay off credit cards at a stated interest rate of 12.99%. Currently, he is receiving help of $66.
3. Rugsaq who is borrowing $10,000 to grow his transportation business at 12.99% stated rate and is receiving help of $70.

Note that the links are to the profile pages which do not include the loans and the help amounts. The loans, interest rates, and help amounts are listed in the graphic above.

Calculating the actual interest rates…

Since most web-based loan calculators will not allow you to solve for the interest rate, I used Excel solver together with the interest rate spreadsheet from this website. Since I do not know the length of the loans, I must make some assumptions: 1) The length of the loan is two years 2) and the help will continue for the life of the loan. Additionally, for simplification, I have rounded dollar amounts (not interest rates) to whole numbers and I have only linked to my spreadsheets for the first example.

1) If TinaM is paying a stated 9.99% interest on a 24 month loan, the payment is $230 per month with total interest paid of $537. The monthly interest rate is 0.8325% (9.99%/12). (XLS file) Since TinaM is receiving help of $70 per month from lenders, I used the same spreadsheet to solve for (goal seek functionality) the interest TinaM would be paying on a $5,000 loan if her payment was only $160 per month. The actual interest rate TinaM will pay is negative 24.15% and she will actually be paid $1,160 for having taken this loan. (XLS file) TinaM will only pay $3,840 for her $5,000 loan because lenders will giver her a little help.

Perhaps the best method of showing the difference is to show the two graphs of the loans. Note that the interest rates listed are the monthly interest rates. The first graph is the stated rate of 9.9% and the second graph is the effective rate of negative 24%.

2) Using the same calculations and assumptions, Zopa user wlaffin is not paying 12.9% interest annually with a payment of $237. Instead, due to the help of $66 per month, he is receiving a loan at a negative interest rate of 18% and receiving $885 for having taken out this loan.

3) Since Zopa borrower Ruqsaq is requesting a $10,000 loan for business expansion, I am going to change the assumption to a 3 year loan term instead of 2 years to calculate his effective interest rate. At his stated interest rate, he would pay $336 per month and $2,112 total in interest. The actual interest rate he will pay with $70 in help is a negative 2.79% per year. The monthly payment will only be $266 and he will receive an effective payment of $424 for having taken out this loan.

Unfortunately, not all borrowers are receiving much help from Zopa lenders, so negative interest rates are not standard. In fact, many people seem to be receiving little or no help at all. However, the average help according to the home page* is $22 per month, so it is still a good idea to borrow money with Zopa versus other P2P lending sites. The other sites, such as Prosper and Lending Club, do not offer the possibility to pay negative interest on your loan.

* Zopa home page lists $22/month help as average as of December 9th, 2007.

zopa, p2p lending, interest rate, help, money

Technorati Tags: zopa, p2p lending, interest rate, help, money

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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

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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?

Zopa Explained in their own words – To save you from clicking through all the How Zopa Works screens at the offical website, I have posted the marketing text here minus all the nice pictures. And what is up with the cupcakes? All the references to cupcakes seem more like fruitcakes to me…

To show you how Zopa works, we thought we’d tell you a story about Becky and Bob. Becky needs some money, and some help with the loan payments. Bob has some extra money, though he’s not excited about the idea of losing any of it, and he loves cupcakes. The cupcakes matter. Read on…

Becky is a baker and wants to start a gourmet bakery in her neighborhood. She needs $7,000 for a professional-quality oven. She’s got good credit (a FICO of 640), so she’s eligible for Zopa. She applies and receives an unsecured personal loan on Zopa. In the process, she joins one of our partner credit unions with just a click. She gets a great rate – almost half of what she’d pay at a big bank. But she can lower her payments even more…

Becky’s profile tells other Zopa members buying Zopa CD’s that she’d like some help with her loan. She can post an essay, pics of the oven she’ll buy, the logo for her new bakery, even a video of her mixing up her “mystery chocolate” cupcakes. She can even promote her profile off the site, using email, her blog, or her Facebook or MySpace page. That way, friends & family can help her without losing any money – or a friend.

Bob’s parents just gave him $10,000 as a graduation gift. So far, he’s stifled the urge to buy some new wheels…for now. So he’d like to put the money somewhere for a while, and earn something better than he can get in a checking or savings account. But he doesn’t want to lose any of it, and he’ll need it back in 1 year. Enter Zopa. The Zopa CD is a guaranteed and insured investment. It pays a higher rate than comparable choices. So he applies, and in the process joins one of our partner credit unions. But now, the cupcakes come in…

A Zopa CD must help at least one borrower. So Bob finds Becky’s profile. Mmm, cupcakes! He decides to pick her. Bob can set the rate and amount on his Zopa CD. As he sets that, he raises or lowers the help that he wants Becky to receive. Bob’s help becomes a monthly benefit to Becky that reduces her monthly loan payment. That’s good news for Becky!

So our story has a happy ending. Bob gets a great return without any risk, and he helps Becky make better cupcakes. But this is where you come in. If you’ve got some money to spare, Zopa is the place to share it and do some good while you earn a terrific rate, risk-free. And if you need to borrow, it’s most likely your lowest-cost option. And it’s darn sure the friendliest. Why not give us a spin?

… a nutty fruitcake.

What does Zopa Mean? I was wondering this and you can find the answer in the FAQ: “Zone of Possible Agreement and is the overlap between one person’s bottom line (the lowest they’re prepared to sell something for) and another person’s top line (the most they’re prepared to pay for something).” Zopa is also just one letter difference from the Russian word for a$$ — Zhopa.

Zopa is calling this whole concept Social Finance:

We’re coining a term to describe what we do. It’s called social finance. It means we want to improve the tools of financial services–investments, and loans, and so forth–by allowing people to use them to help themselves, and other people, at the same time.

There are lots of variations inside the world of social finance, like online person-to-person (“P2P”) lending, which we pioneered in 2005, and the world of international microfinance, which we admire…

Every bank is about sharing money–your money goes in, they share it with other people, called borrowers. They pay you 2%, then charge them 18%. But it’s not very satisfying, since you don’t know, and can’t say, who you’re sharing with. And too much of that money goes to polish all those marble floors.

Social lending? To me Zopa sounds like the Web 2.0 way to generate lots of publicity for an incredibly complex way to gift people part of your earned interest.

The Zopa official US blog so far does not have anything of great interest. A found ten dollar bill, a free used ping pong table, and a little blustering are not exactly exciting.

Still want to learn more about Zopa? Other posts on Zopa include:

• First Impressions of Zopa at WiseClerk
• Rate Ladder posted on the Zopa launch and a link to his Zopa Profile
• MyMoneyBlog says Zopa is a credit union disguised as p2p lending

Zopa, P2P Lending, Credit Union, Loans, Risk, Investing, Social Lending

Technorati Tags: Zopa, P2P Lending, Credit Union, Loans, Risk, Investing, Social Lending

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• Zopa Closes: More Negative P2P Lending News

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.

• Poll: Are you a P2P Lender?
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• Zopa Borrowers Receiving Negative Interest Rates on Loans
• First Two Months Blogging P2P Lending
• Zopa Open for P2P Lending in the USA