Comparing Returns on 36-Month and 60-Month Loans

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Last year both Lending Club and Prosper introduced 60-month loans for borrowers. Before that the only loan term available was 36-month loans.

These 60-month loans have become very popular on Lending Club these days accounting for more than 1 in 3 loans originated in the last year. On Prosper they have accounted for just 10% of loans since they were introduced in October last year. I should also note that Prosper introduced 12-month loans at the same time but there have been just 300 of them originated which is not a big enough sample size, in my opinion, to allow for meaningful analysis.

It has been 15 months since these loans were introduced on Lending Club and 10 months since they were introduced on Prosper so I thought it was time to take an initial look at these loans and see how they have been performing. Given the fact that there is some extra risk involved for p2p investors I would hope that there would a corresponding higher return.

I fired up Lendstats and ran a few queries looking at 36- and 60-month loans on each platform originating between October 1, 2010 and August 24, 2011. Even though Lending Club has been providing these loans since May 2010 I decided to look at just these last (almost) 11 months in order to get an apples to apples comparison. The table below gives us a snapshot of what has been happening.

Loan TermLoans31+ Days lateAverage Interest RateEstimated ROI
36 mth - Prosper64202.80%21.54%9.65%
60 mth - Prosper6610.45%18.93%12.92%
36 mth - Lending Club102030.78%10.63%7.03%
60 mth - Lending Club57531.13%15.07%9.78%

With only 661 60-month loans on Prosper it is difficult to draw any major conclusions on the performance between the two sets of loans although the 60-month loans do appear to have an ROI that is currently trending higher. The one curious thing about Prosper is that the average interest rate on these 60-month loans is lower than on their 36-month loans. The reason for this is that the 60-month loans are only available for grades AA-D and these loan grades carry the lowest interest rates.

A 2.75% Premium for 60-Month P2P Loans

On Lending Club we have a good dataset with thousands of loans being originated in both categories. Here, you can see that according to Lendstats the ROI is trending 2.75% higher for investments in the 60-month notes. This is roughly 2% less than the premium that is given to these loans at Lending Club but still high enough in my opinion. Keep in mind that Lendstats takes into account these late loans in their ROI calculations.

There is a concern that the number of loans that are 31 days late or more is a higher percentage in 60-month loans than in 36-month loans on Lending Club. I would have expected a similar or lower percentage. This is something I am going to watch closely. At an average loan age of just over five months we still have four and a half years to go before most of these loans will reach maturity.

I have been investing in both types of loans for some time and after seeing this initial data I will continue to do so. I will be revisiting this data from time to time to make sure the ROI difference is maintained and I will be sure to share my results here. It will be several years before we have any definitive data but the next time I look at these loans I want to see this gap in the ROI maintained.

I know plenty of p2p investors who ignore 60-month loans because of the greater risk. Right now, I am still comfortable investing in these longer term loans. But I think we need to keep a close eye on them going forward. What do others think?