I was tooling around on Eric’s Credit Community last week when I came across the interesting chart above. It is an analysis of all the late payments on mature loans on Prosper. Basically, it analyzes all the loans that have reached maturity (those loans that were originated prior to Dec 17, 2007) and looks at the spread of those loans that actually went late.
This is very useful information to have for p2p investors so you can gain some understanding of the likelihood of a loan going late once it has reached a certain age. By analyzing close to 7,000 loans that went late we can get some idea as to the pattern (these were all three year loans). The raw data for this chart is here. Based on this data, we can see that by 18 months 79% of the loans that were going to go late were already late. At 12 months that number is 63%.
The Unknown Factors
There are several unknowns when looking at this data that need to be pointed out:
- The biggest unknown is that most of these borrowers endured the worst economic crisis in 75 years with unemployment roughly doubling in a little over a year. This would obviously have had an impact on late payments and might have skewed this data somewhat.
- There is no breakdown on the different grade of loans. It is quite possible that a portfolio filled mainly with higher grade loans will have a different pattern to one focused on lower grade loans. Eric’s does provide some analysis on late loans of various grades here but there is less detail than in the chart.
- With new underwriting standards now at Prosper, in place since July 2009, there have been far fewer defaults and fewer late payments. What impact these new underwriting standards have had on the monthly breakdown of late loans is yet to be determined.
- We don’t know whether a loan that was late actually defaulted or became current again and was fully paid off.
The Key Takeaway
The key point that I see from this graph is that it is likely in your own portfolio of three year loans that you will receive more late payers in the first 12 months than you will in the middle or last 12 months. Obviously the number will vary depending on the individual portfolio but we can surmise this. You will likely suffer more defaults early rather than later in the lifecycle of a loan.
This doesn’t mean you are out of the woods by the 12 month mark. But if you are getting discouraged with a few defaults and a subsequent drop in your Net Annualized Return, you can find some reassurance with this data. One final point to keep in mind: there is a time lag between a loan going late and it actually defaulting. Both Prosper and Lending Club give borrowers 120 days to get their loan current, so no defaults will hit your account until at least month five on any of your loans.
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.