It has been nine months since we took a close look at p2p lending default rates. Defaults have such an impact on returns for investors that I thought it was time to revisit this topic.
Back in January when we looked at the basket of loans that were originated from July 2009 through June 2010 at Lending Club and Prosper these loans were only 11 months old. Now they are close to 20 months old and past the peak default period. There will still be some more defaults but the impact of future defaults will have far less impact than these early defaults. This is because investors will have received more than half of their investment back on almost all the loans that are current now.
Where do we stand today? As expected defaults have risen dramatically in the last nine months and also as expected Lending Club has a lower default rate (6.83%) than Prosper (8.55%). These default numbers have more than doubled since looking at these loans back in January – back then Lending Club was at 2.75% and Prosper 3.99%. Overall, though, these loans are producing decent (albeit single digit) investment returns according to Lendstats.
Below is the updated table for loans issued from July 1, 2009 through June 30, 2010. All the numbers are current as of today and will certainly change in the future. [table id=19 /]
We should also keep in mind that Prosper and Lending Club have changed their underwriting algorithms since they issued the loans in that period so today many of these loans would not make it on to the platform, or they would have a different interest rate. So, most likely defaults would be lower and ROI higher if investing in a similar bucket of loans today.
What was interesting to me is that late loans at both companies is running at about the same percentage. But it is safe to assume that defaults at Prosper will remain significantly higher than Lending Club which is understandable given the higher risk borrowers and higher interest rates being charged there. But according to Lendstats Prosper investors are being rewarded for taking on these higher interest loans with an estimated ROI of 9.01%.
Finally, Michael at Nickel Steamroller has been producing some great work recently and he has a bunch of new charts on his site now. I pulled the default rate chart for the same period analyzed here. The red line is Prosper and the blue line is Lending Club.
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.