An Apples to Apples Default Rate Comparison

One of the problems with comparing default rates at Lending Club and Prosper is that you are really comparing apples with oranges. What do I mean by that?

Each company has a completely different underwriting model and they grade loans differently. Does a AA-grade loan on Prosper match up with an A-grade loan on Lending Club? It depends. If the interest rate, loan terms and the credit data of the borrowers are all similar then I would say yes. But I have heard from many borrowers who have received very different interest rates from both companies when applying for a loan with identical terms.

P2PXML Brings Standardization to P2P Lending

Earlier this year I wrote about the release of P2PXML, an attempt to bring an open standard to analyzing p2p loans. P2PXML is an open source project by Michael from Nickel Steamroller and it is very useful in doing a legitimate comparison between Lending Club and Prosper. The problem has been these companies store data in very different ways so even though you can download the entire loan history from each company it has been difficult to make realistic comparisons.

P2PXML stores the data from both companies in exactly the same format. It is not perfect because not all the same data is available from both companies but it does provide enough information to make the first real apples to apples analysis of default rates.

Interest Rate Groups Are the Key

When you look at a Grade A loan on Lending Club it could carry an interest rate of anywhere between 5.42% and 9.63%. On Prosper the ranges are even larger. So, instead of looking at loan grades we should really be looking at interest rates.

P2PXML assigns a Rate Group to every loan based on the interest rate; assigning each loan to a bucket with a range of 2%. So, Rate Group 1 has a range of 0 – 1.99%, Rate Group 2 is 2 – 3.99%, and so on. Now, there has never been a loan issued below 4% so for our analysis we started with Rate Group 3 (R-03) – the bucket for interest rates between 4 – 5.99%).

To make a true apples to apples comparison, in my analysis I only included 36-month loans issued by both companies after July 18, 2009 (the end of Prosper’s quiet period). Then I tallied up the total number of loans in each rate group and what percentage of those loans had defaulted. You can see the results of this analysis in the chart below.

Chart showing default rate comparison between Lending Club and Prosper

There is No Clear Winner on Default Rates

It is interesting that there is no clear winner here when it comes to default rates.  Lending Club does a little better than Prosper for interest rates below 12% and then Prosper is better between 12% and 18%. It is a bit bizarre that Prosper’s best performing Rate Group is actually R-09 (16 – 17.99%) where there have been 1089 loans issued and just 16 defaults.

I cutoff the comparison at an interest rate of 22%, even though this meant eliminating over half of the loans issued on Prosper, because I was focused on interest rates where both companies issued many loans. Lending Club issues very few 36-month loans above 22% – just 26 have been issued since July 2009.

You can take a look at the table below which has the data used to create the chart. You can see that Lending Club has the bulk of their loans between 6 and 16%. Prosper, on the other hand, has a pretty even spread between 6% and 22%. What is not shown is that Prosper had 10,296 loans with a rate of 22% or more out of their total number of 18,448 three-year loans. So around 56% of Prosper’s loans are not included in this analysis.

RategroupInterest ratesPros. TotalPros. Default %Pros. Loan Age (mths)LC TotalLC Default %LC Loan Age (mths)
R-034 - 5.99%673.0%13.813200.8%12.6
R-046 - 7.99%6641.7%19.190950.9%11.0
R-058 - 9.99%15003.8%19.542451.5%11.1
R-0610 - 11.99%14343.3%16.968963.1%14.5
R-0712 - 13.99%7773.2%14.174184.2%12.2
R-0814 - 15.99%9435.5%14.747095.8%13.6
R-0916 - 17.99%10891.5%9.922704.9%12.1
R-1018 - 19.99%9435.9%15.67635.0%8.5
R-1120 - 21.99%7357.9%14.71839.8%7.8

[Update: It was pointed out in the comments that this table would be more useful with loan age included. I have added that now in the table above and you can see it gives a more complete picture. Prosper has a more mature portfolio in every rate group except for R-09 which explains in part why they are doing so well in that rate group. So, from this we could say that Prosper is doing a better job in their underwriting than originally thought.]

Underwriting is a Moving Target

While this is the closest we have come to a true apples to apples comparison on default rates it certainly isn’t perfect. For one thing the underwriting rules and interest rates are constantly changing so a loan that may have been 9.5% last month could be 10.5% this month.

Also it should be noted that until December 2010 Prosper had an auction-based model where interest rates were “decided” upon by investors. So that certainly skews results as well and may account for default rates that are somewhat inconsistent with risk.

I am interested to hear from others on this. Did you expect any differences here? Is this analysis even worthwhile? Please let me know in the comments.

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.

LendIt Fintech conducts three conferences a year for the leading fintech markets of the USA, Europe, and Latin America. LendIt also provides cutting-edge content all year long via audio, video, and written channels.

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.

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Dan B
Dan B
May. 14, 2012 11:46 pm

Although all the numbers were post July 2009, were there substantial differences in average loan age between Prosper & LC within each of the groupings?
What was the reasoning behind not including any 60 month loans in your report? Was it because there were very few Prosper 60 month loans older than 3-4 months?

Jerry Batoski
May. 15, 2012 7:15 am

When I started researching information about P2P Lending back in early 2010, I was a bit put off by Prosper’s auction model and assumed it was riskier. I thought Lending Club had a sounder implementation of investing in loans and went with them instead.

Since then I’ve been seeing Prosper turning around, showing better returns on investments, and based on this post seems the default rates between the two leading companies are comparable. I’ll need to do more research, but my next large deposit might well be with Prosper to further diversify my p2p lending investments.

Peter, I know you have funds with both companies, which do you plan to put future investments into?

Mike McG
Mike McG
May. 15, 2012 9:18 am

@Jerry Batoski

This is a quote from Peter from his blog post titled How do you fund your P2P investments?

“I can tell you where my money has come from. I have been moving money from a combination of the stock market and bond market. I will continue to take money out of these until I have at least $100,000 invested at both Lending Club and Prosper.”

From his last quarterly report it seems he has a little ways to go to get both accounts funded up to 100,000. So my guess is that he will continue funding both fairly evenly for now. But I guess I have no idea really.

Anil Gupta
May. 15, 2012 11:09 am

I agree with Dan B. The default rate need to be normalized between LC and Prosper for at least the volume of loans and recentness of the loans other wise the volume of loans of a particular grade/interest rate and fraction of recent loans can influence the calculated default rate. In my LC loan analysis (to be posted Thu), I realized that default rate is very different depending on the age and volume of the loans within LC loan platform. I am pretty sure situation wouldn’t be any different across LC and Prosper platform.

Also, unless interest rate was floating (set by market) or loans were actively traded like the public debt market, I don’t believe interest rate truly captures the actual risk of a loan on P2P lending platforms. The interest rate established by LC/Prosper is not only influenced by supply and demand but also the desire of the platform to grow the loan volume and transactions. Unlike public debt market, P2P loan volume and transactions are not dependent on transaction cost only. If a platform want to increase the loan volume available, it will lower the interest rate to attract borrowers. If a platform want to show higher return to investors, it will increase the interest rate to attract lenders. It may take a long time for both competing priorities to reach equilibrium.

Brady
May. 15, 2012 6:50 pm

Sleeping on this, I think this analysis may be useful, but for a different reason.

The sticking point for me was the assumption that interest rates across platforms offer a fair comparison of risk. I’m like Anil and don’t buy that assumption. And if rate equals risk, then I presume the only thing LC or Prosper could do differently on an apple to apple loan comparison would be different collection processes.

But, let’s twist things a bit. If historic defaults represent realized risks (loss factors) and interest rates represent prices (maximum returns), then this analysis may give a way to compare the efficacy of LC / Prosper’s pricing models – how well are they setting rates that match investor risk.

Dan B
Dan B
May. 15, 2012 7:23 pm

Peter………….So as I suggested, there were substantial differences in the average loan age within each grouping afterall.

Conclusions? Let’s call it what it is. Given the importance of loan age vis a vis default rates, Prosper clearly WINS this comparison in every rate group……………. with the possible exception of the 3 lowest paying interest rate ones. I say “possible” exception because of the large 8 month disparity between Prosper & LC within the average ages of R-04 & R-05. Therefore the LC lead in these 2 groups may not hold when all is said & done. As for R-03, I draw no conclusions except that I would have left it out of this comparison entirely considering that Prosper’s total sample size is a ridiculously small 67.

Within the parameters of the comparison this is a clear win for Prosper, period.

flyp52
flyp52
May. 15, 2012 7:59 pm

To me the more interesting thing is not the relative default rates between the two companies, but whether their respective pricing algorithms are working optimally. For a sufficiently large sample size we should see a well-behaved steadily increasing default rate as the interest rate rises. The dip around R-09/10 suggests some of those borrowers maybe merited a lower rate? Or some of the R08s deserved higher rates?

Michael
May. 15, 2012 8:15 pm
Reply to  flyp52

Thanks for the mention.

@Jerry Batoski

If you are curious, I currently have 10K in LC and 5K in Prosper almost exactly. I have earned over $1100 in interest. I plan to add 5K more to Prosper by the year end to have 20k total in P2P. I believe I will most likely end up exceeding this 20K goal though. I suspect I will add much more capital to both.

Roy S
Roy S
May. 16, 2012 12:28 am

Peter, do you have any info on the number of deadbeat borrowers on each platform? I have begun to notice quite a few popping up on Prosper’s side of things. My concern is that since the capital used to fund the Notes does not belong to Prosper (as well as LC) that they may be a little less inclined to dig into these loans and figure out why there are some where there are no payments made. Prosper states that they have a 100% Identity Theft Guarantee, but since the lenders have so little information available, we may never know of any instances where identity theft is suspected or proven. And Prosper has little incentive to inform the lenders that a loan was acquired through identity theft. Obviously, like in all aspects of p2p lending, the lenders are in a position of knowing very little and putting a lot of trust in the companies. And then there are just some people who should not be lent to in the first place (e.g. Prosper listing 519588: “This loan will be used to…Pay expenses for my fiance and her daughter to come to me.from Nigeria.”). My experience is that loans are taking longer to originate from the time they are fully funded, and now I’m seeing a greater number deadbeat borrowers–to be expected with a greater loan volume, but I’m not sure that it should be to the extent I’m seeing it. I’m also noticing that they website is continually mentioning that it will be offline for an hour or two a couple times a week. I’m just wondering whether Prosper is really beginning to have difficulties with the increase in loan volume compared to LC, and what your take/views on this are (or anyone else really). Unfortunately, this has been set on the back burner for me lately, and I haven’t had the time to do much digging of my own recently, but I’m beginning to get a little nervous. I’ve even noticed that Prosper has dropped their seasoned returns number to 10.08%. There hasn’t been much change on Lendstats (hovering around 9.2 – 9.3% for the past few weeks for the original 10.69% number Prosper posted for 07/15/09 – 11/30/10 Note orginations), so my assumption is that there are greater default numbers cropping up for newer Prosper loans (12/01/10 – 09/30/11) backed up by Lendstats showing a 1% lower return for Notes issued in 2011 than those issued in 2010.

Sorry to throw a lot at you and not have it be well organized.

Charlie
Charlie
May. 16, 2012 10:10 am

Peter,

Just wanted to say thanks for your hard work and dedication to the p2p lending community. Your blog has a wealth of knowledge that’s increased my comprehension of p2p lending. I think I am addicted to reading your articles. ( ;

Cheers!

Neal S.
Neal S.
May. 16, 2012 11:11 am

@Roy. I’m shocked, shocked, to learn that you wouldn’t invest in the guy from Nigeria, like 17 prosper investors did.

Oh. I see from lendstats that the loan was a total loss.

Dan B
Dan B
May. 16, 2012 4:18 pm

I’d like to join Charlie in also thanking Peter for his work here…………….& also to the thank the many other unpaid contributors here whose commentary/analyses/responses add enormous value & help make this blog the undisputed premier destination for p2p information.

Roy S
Roy S
May. 16, 2012 4:59 pm

@Neal, The borrower was not from Nigeria, just his “fiancee” and his fiancee’s “daughter.” The description further stated that he’d use his Social Security to pay back the loan. My assumption is that it was an old man who has never heard of Nigerian scams and got suckered. I am assuming no fraud on his part–but this doesn’t excuse him from apparently not making an effort to pay back the loan. Further, I don’t blame the lenders. Some lenders have way too much money to micromanage their investments and read every single listing they invest in so it is automated. I do, however, blame Prosper for this one. Either they aren’t even reading every loan before placing it on the platform or the person working for Prosper who allowed this listing to hit the platform isn’t keen on identifying fraud and should be let go. I have yet to invest in a deadbeat borrower (someone who defaults never having made a payment on the loan), but I’m sure it will eventually happen if I invest long enough and enough money.

@Dan, Somehow I get the impression the “unpaid contributors” whose “commentary/analyses/responses add enormous value” is you just really referring to yourself. 😉 Joking aside, I agree that there is a lot of great information as well as great discussions on this blog…even including you, Dan!

Dan B
Dan B
May. 16, 2012 5:59 pm

Roy S…………..Actually I was referring to you Roy. Without your illuminating & anecdotal comments I’d have definitely fallen for pitches like the Nigeria one.
I too am just joking, of course 🙂

Al
Al
May. 17, 2012 12:41 am

I honestly don’t know how anyone can look at this and say Prosper ‘won’, or Lending Club ‘won’. Consider this.

– 56% percent!! of Prospers loans, their bottom 56% I might add, is not in the list. So basically you’re taking the upper half of Prospers borrower credit list and comparing them with the full spectrum of Lending Club’s borrowers. That is not an apples to apples default rate comparison. A better comparison would be to discard Prospers borrowers(640~660 credit score) that would not qualify for a loan on LC, and compare the rest.

– A significant majority of LC’s loan volume is in the lower interest category, which they are doing quite well. So you need to take total loan volume as well as their interest to create a relative number

While this list shows that Prosper may be doing at least a good job, and perhaps even better, of giving Investors a good return as Lending Club, its tough to say they are actually doing a better job of credit evaluation. In fact, if you scale Prospers interest rates, for example combine R3 and R4 or Prosper and compare with Lending Club’s R3, or take Prospers R5 and R6 and compare with Lending Clubs R4, Lending Club obviously looks better. Of course, this is a rough comparison, so don’t take my word for it.

Dan B
Dan B
May. 17, 2012 4:29 am

Al…………Actually, I can honestly say that Prosper won…………within the parameters of the comparison & within the rate groups…………which is what I said. Of course we all realize that 56% of Prosper loans (the higher interest ones) were not included in the comparison, simply because there weren’t any similar Lending Club loans to compare them to. This fact was stated up front by Peter.

I’m sure that everyone would agree that a different comparison with different parameters may provide different results, but in this specific one, the results are pretty clear if one is looking at it dispassionately.

Al
Al
May. 17, 2012 3:00 pm
Reply to  Dan B

Well, if you honestly think company A at 1000 A-C loans at 2.5 default rate and 200 loans at D-F loans at 8.0 default rate ‘loses’ to company B with 200 loans at 3.0 default rate and 200 loans at D-F 7.0 default rate with 56% of their loans not accounted… I guess that’s a unique way to look at it.

Also, unless Prosper says so themselves, assuming 56% of their loans comes from 640-660 credit scores doesn’t seem to make sense. A logical person would assume that a good chunk of those loans are in the 660-690 credit range. If I’m wrong of course I’m wrong, but again, you’re free to make your own conclusions.

Dan B
Dan B
May. 17, 2012 4:41 pm
Reply to  Al

And I honestly don’t know what you’re talking about when you’re talking about loan totals numbering 200. I don’t see that anywhere. Nor do I see anything referencing “loan grades” on the chart. Again & for the last time, I’m talking about the comparison within the parameters of the comparison.

Al
Al
May. 17, 2012 3:33 pm
Reply to  Peter Renton

Hmm, is it verified that the 56% would not have received a LC loan? I honestly think that Prosper is way too good to have 56% of loans between 640-660.

And I think in a future analysis, taking into consideration the number of loans in each bracket would help a lot. There are very little loans relatively in LC’s R10 and R11, as well as R3 for Prosper imho.

Al
Al
May. 17, 2012 3:46 pm
Reply to  Peter Renton

Thank you for the analysis, I think this comparison is evidence enough that I should look a bit more at middle/mid-high rates on Prosper in the future.