The Peer to Peer Lending Default Curve

Most p2p investors will likely experience a borrower default at some point. I have been curious for some time to see a distribution of when these defaults occur during the lifetime of a loan. Now, Michael from Nickel Steamroller has produced a chart that shows this very thing.

He has taken just Lending Club data for now and he has mapped every default and when it occurs during the loan term. To make the chart more useful he is only including 36-month loans and has excluded all loans that are less than a year old. The Lending Club chart is below and here is a link to the charts page on Nickel Steamroller which is updated daily.

The chart is probably what most people would expect. The vast majority of defaults occur in the first 18 months, with the biggest spike occurring between month 5 and month 11. And once you get past month 21 there are very few defaults even for the higher risk loans. Also, as expected the C-G grade loans are defaulting in much higher numbers than the A & B grade loans even though they are approximately half of all loans.

The astute reader may question the X-axis numbers. We all know it is impossible to have a default in month one (or month two, three or four for that matter) because it takes 120 days of non-payment to create a default. Lending Club does not record a default date on their data export so what Nickel Steamroller has done is estimate the default month by taking the total payments to date and dividing by the monthly payment.

So if someone had a monthly payment of $100 and the total payments made is $300 dollars and there is a default or charged off status on their account, it is estimated that the default occurred in month four. In other words there were three successful payments before the default.

Less Than 0.2% of P2P Borrowers Are DeadBeats

Since inception through September 6th, 2010 Lending Club had originated approximately 16,000 loans. Of that total just 26 loans defaulted without a single borrower payment. I hear many investors who worry about these kinds of borrowers but each note you own has literally one chance in 600 of that happening.

One point to keep in mind when looking at this chart is that it doesn’t represent all loans. The average age of loans here is around 19 months so there will be some loans that will default that are not included here. So, I will be revisiting this chart from time to time to see if the same trends continue.

Nickel Steamroller is working on Prosper data as well but has nothing ready for release yet. For Prosper investors you can check out the Lendstats charts page which has some interesting charts on late loans at Prosper.

[Update: After I published this post some people indicated they would like to see the above defaults chart in a percentage form, with defaults expressed as a percentage of the total number of loans available at each age period. For example, the number of defaults at 10 months would be expressed as a percentage of all loans that are 10 months old. This gives a clearer indication of the default curve for every loan. What is interesting is that the C-G grade loans have kept the same curve but the A&B loans are relatively flat through month 28. The new chart is below.]

  • 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.