Yesterday, the Huffington Post reported that last quarter late payments on credit card balances fell to their lowest level in 15 years. This is good news for credit card companies and it could also bode well for investors in peer to peer lending.
Here is an excerpt from the article:
Nationwide, the rate of payments 90 days or more past due on bank-issued cards dropped to 0.74 percent in the first quarter, down from 1.11 percent a year ago.
The delinquency rate is the lowest level since the third quarter of 1996, TransUnion said. It peaked in the first quarter of 2009 at 1.32 percent.
So, we have the rate of delinquent credit cards dropping significantly from 1.32% in 2009 down to 0.74% today. This is despite continued high unemployment and an economy that is growing at an anemic pace. It seems that in general people are more conscious of their debt now than in a long time.
But what does this have to do with peer to peer lending? The same trend appears to be playing out here as well. I did some analysis of Prosper loans from the 1st quarter of 2010 and compared it to the 1st quarter of 2011. I looked at the total number of loans that had already gone late at 55 days after the end of the quarter (as of May 25th each year). This is what I found (the data came from Lendstats).
Time Period Number of loans issued Number of late loans Percentage
1/1/10 - 3/31/10 1,243 44 3.54%
1/1/11 - 3/31/11 1,744 46 2.64%
Even though the numbers are relatively small it still marks a significant drop in the number of late payers year over year. On Lending Club I have seen a similar thing happening but I don’t have the data to do an exact year over year comparison. However, one of the regular commenters here, Dan B, has been keeping track of late loans on Lending Club for the past six months and this is what he said in a comment last week:
For an overall look at the portfolio of issued loans at LC I look at the total number of “lates”. With the ever increasing volume both in terms of total dollars as well as total loans funded one would assume that the total number of “late” loans would also track the upward trajectory. I’ve been keeping track of that number for the past 6 months or so & surprisingly that hasn’t been the case. In fact the total amount of late loans has DECLINED a little in the past 6 months.
So, despite the record volume of loans issued recently at Lending Club the total number of late loans is declining. This is great news for investors and for p2p lending as a whole. This could be because Lending Club and Prosper are doing a better job in the underwriting process, it could mean more effort is going in to collections or it could just be the average borrower is more conscientious these days. In reality it is probably a combination of these.
Whatever the reason I certainly hope this trend continues.