default rate Archives - Lend Academy

Explaining Expected Default Rate and Estimated Loss Rate

October 18, 2013 By Peter Renton Leave a Comment

Whenever you make an investment in either Lending Club or Prosper you are presented with an estimate of your return for that particular investment. But what does that really mean?

The Expected Default Rate at Lending Club

Let’s take a look at this graphic from Lending Club to explain how they calculate projected return. In this particular case I have chosen to invest in one 36-month loan that is rated B4 with an interest rate of 12.99%.

This expected default rate of 4.15% in this example is the expected percentage of principal loss for the entire population of 3-year B4-grade issued by Lending Club today. It is based on Lending Club’s proprietary algorithm and is different for every interest rate. They have built this expectation based on their own experience of their historical loans. They adjust this number from time to time, in fact, just recently (in June) they made a significant adjustment to the expected default rate for every loan grade.

The Mistake Many New Investors Make

The projected return number of 8.14% isn’t the return I will receive for this one investment as some new investors think. This is the expected return I would receive if I invested in a large basket of loans exactly like this one – as in 36-month, B4 loans at 12.99%.

[Read more…]

Another P2P Lending Convert from Mainstream Investing

May 25, 2012 By Peter Renton 3 Comments

Seeking Alpha is one of the leading websites for news on investing. I have been receiving their stock market alerts and free newsletters for some time. That is why I was very pleased to read this article there earlier this week by Zack Miller, an author, blogger and the managing director at a boutique investment firm.

Now, normally I would just mention this article in my weekly news roundup but I wanted to highlight it in a separate post for a couple of reasons. First, the author provides details of the journey that took him from p2p lending skeptic to convert. Second, Seeking Alpha is the kind of publication that many mainstream investors read who have never even considered p2p lending.

Lower Defaults Than Corporate Bonds

I learned a great deal from this article. I had no idea that default rates were so high on some corporate bonds. High risk corporations appear to default at a much higher rate than even the least creditworthy borrowers at Lending Club or Prosper.

If you’re investing in junk bonds (where there is still a little yield), as time goes by, you have almost 50% chance of getting defaulted on. We haven’t seen, nor are seeing those numbers in the p2p loan market.

Here is the money quote that I hope all investors pay attention to:

So, higher returns, lower defaults. That looks pretty good and may deserve to be a new asset class in your allocation or your clients’ allocations.

Go read the article and send the link to all your friends who are still skeptical about p2p lending.

An Apples to Apples Default Rate Comparison

May 14, 2012 By Peter Renton 28 Comments

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. [Read more…]

Trends in Principal Charge Offs For Completed Loans at Lending Club

March 5, 2012 By Peter Renton 28 Comments

Many of us here are obsessed with defaults. We hate to see defaults and we are always looking for ways to minimize them. But not all defaults are created equal.

When you invest $25 into a new loan you have your entire principal amount at risk initially. But as soon as you start receiving payments you reduce your potential losses. I have some loans from August 2009 where I have received more in payments than my original principal, so even if the loan defaults now I cannot lose money.

But what about the entire Lending Club portfolio? How are defaults impacting principal losses over the duration of a loan? Well reader Bryce Mason wondered the same thing and he produced this attractive chart below.

[Update March 6: Bryce realized a small error in his calculations that has altered the chart slightly. The lines of the chart still end up in the same place but have a slightly different slope that is a little steeper at the beginning].

[Read more…]

Another Look at P2P Lending Default Rates

October 12, 2011 By Peter Renton 8 Comments

It has been nine months since we took a close look at p2p lending default rates. Defaults have such an impact on returns for investors that I thought it was time to revisit this topic.

Back in January when we looked at the basket of loans that were originated from July 2009 through June 2010 at Lending Club and Prosper these loans were only 11 months old. Now they are close to 20 months old and past the peak default period. There will still be some more defaults but the impact of future defaults will have far less impact than these early defaults. This is because investors will have received more than half of their investment back on almost all the loans that are current now.

Where do we stand today? As expected defaults have risen dramatically in the last nine months and also as expected Lending Club has a lower default rate (6.83%) than Prosper (8.55%). These default numbers have more than doubled since looking at these loans back in January – back then Lending Club was at 2.75% and Prosper 3.99%. Overall, though, these loans are producing decent (albeit single digit) investment returns according to Lendstats.

Below is the updated table for loans issued from July 1, 2009 through June 30, 2010. All the numbers are current as of today and will certainly change in the future. [Read more…]

What are the Default Rates with Lending Club and Prosper?

January 12, 2011 By Peter Renton 34 Comments

I have been doing a bit of digging around the loan data for both Lending Club and Prosper the last couple of days. Like most p2p investors I am concerned about default rates. Not just my own but default rates for all p2p investors. If p2p lending is going to make it as a mainstream investment alternative we need the majority of p2p investors to be successful. Defaults are a big factor in determining that success.

Take a look at the simple spreadsheet above. I looked at all the loans from July 1, 2009 through June 30, 2010. I would like to go back further but Prosper relaunched in July 2009. Lending Club relaunched with their new underwriting criteria in October 2008, so the above table really does compare apples to apples. Keep in mind, though the median age of a loan in this analysis is just 10 months old.

As you can see there have already been a few charge-offs and there are many more loans that are seriously late. To get my estimated default rate I simply added all the charged off loans with those that are more than 30 days late. This is a somewhat artificial way of estimating the final default rate because not all late borrowers will default. Plus there will be new defaults among those loans that are current right now. But my guess is that after 10 months, most of the scammers have already defaulted and the remaining defaults will be those people who experience true financial difficulties.

Explaining Expected Default Rate and Estimated Loss Rate

The Expected Default Rate at Lending Club

The Mistake Many New Investors Make

Another P2P Lending Convert from Mainstream Investing

Lower Defaults Than Corporate Bonds

An Apples to Apples Default Rate Comparison

P2PXML Brings Standardization to P2P Lending

Trends in Principal Charge Offs For Completed Loans at Lending Club

Another Look at P2P Lending Default Rates

What are the Default Rates with Lending Club and Prosper?

[Read more…]

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