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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 »

The WSJ recently wrote about P2P lending in the article “Doing Loans with Web Neighbors.” The article covers tips for both borrowers and lenders, but they are the basics such as diversify loans and factor in defaults and fees. The article also lists a great story of a borrower who saved a significant amount of money on her monthly payments and raised her credit score.

A year ago, Nicole Newberry was in a financial hole so deep that she had trouble making the minimum payments on her credit cards. Then a co-worker told her about Prosper.com, a peer-to-peer lending Web site… Within 10 days of posting on Prosper.com, Ms. Newberry received a $9,000 loan at 19% annual interest — enough to pay off all her credit cards, which at that time carried 25% to 27% interest rates. As a result, her monthly payment dropped to $330, from $800 before consolidation. Her credit score, once a subprime 580, is now 680 and steadily rising.”

With that kind of credit score increase, I would recommend that Ms. Newberry consider taking out a second loan and use it to pay off the first one. She could drop her monthly payment even further. Prosper only recently announced the option of taking out second loans that would make this strategy possible.

The WSJ article lists the big players in the P2P lending market including:

• Prosper founded in February 2006 with $90.5 million in loans and 440,000 members. (Rate Ladder says $100 million+.)
• LendingClub.com started in May 2006 for Facebook and has since opened up has 20,000 participants and more than $1 million in loans.
• Lending Circle (now virginmoneyus.com) started in May 2007 exclusively for lending among friends and family has brokered more than $200 million in loans.

The article is a good introduction to the P2P lending marketplace, but introduces no revelations. If you are new to researching P2P lending, it is a good article to read. Otherwise, you can skip it…