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Diversification and P2P Lending – Part 2

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[Editors Note: This is a guest post from Christian Hamson. Christian is the Chief Credit Officer at NSR Invest. He has 20 years experience underwriting and building predictive models specificly for unsecured consumer installment loans. He is now using his expertise to guide the NSRInvest Fund and managed accounts.]

An important and seemingly simple question is how many loans should an investor buy to lower the variance on their expected return to a tolerable level. Part one addressed this issue using the information readily available from Lending Club and Prosper. Several blogs and other posts have also addressed this question.

A few examples of blog posts that have addressed diversification:

  1. Lending Robot calculates this number to be 146, using Lending Club historical data and a Monte Carlo methodology.
  2. Peter Renton at Lend Academy calculated a number of ~500 using Prosper data.
  3. Simon from LendingMemo says at least 200 is best.

What I hope to do in this post is to use traditional statistical methods to estimate the number of loans necessary for adequate diversification. [Read more…]

The Difference Between a Default and a Charge-off at Lending Club

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If you have a well diversified p2p lending portfolio then defaults are annoying but they are unlikely to do too much harm. Regardless, we want to minimize them as much as possible.

But what is a default exactly? It has always been a little curious to me that defaults are treated differently at Lending Club and Prosper. At Lending Club a loan moves from late into default before it is charged off whereas at Prosper there is no intermediate category, notes just go from late to charged off.

Why is there this intermediate category at Lending Club? When I asked this question they provided this as an official response:

In general, a note goes into Default status when it is 121 or more days past due.  When a note is in Default status, Charge Off occurs no later than 150 days past due (i.e. No later than 30 days after the Default status is reached) when there is no reasonable expectation of sufficient payment to prevent the charge off.  However, bankruptcies may be charged off earlier based on date of bankruptcy notification.

[Read more…]

The Peer to Peer Lending Default Curve

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Most p2p investors will likely experience a borrower default at some point. I have been curious for some time to see a distribution of when these defaults occur during the lifetime of a loan. Now, Michael from Nickel Steamroller has produced a chart that shows this very thing.

He has taken just Lending Club data for now and he has mapped every default and when it occurs during the loan term. To make the chart more useful he is only including 36-month loans and has excluded all loans that are less than a year old. The Lending Club chart is below and here is a link to the charts page on Nickel Steamroller which is updated daily.

[Read more…]

Analysis of the Spread of Late Payments

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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%. [Read more…]

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