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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 »

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.