Last week, Matt at Steadfast Finances penned this post that asked the question whether older borrowers mean safer loans for peer to peer lenders. He displayed this graphic that clearly showed that older workers (those aged 55 and over) have been the only group that has improved their employment situation since the Great Recession began.
So, I decided to look at the p2p lending numbers and compare the ages of various borrowers with their overall ROI. I fired up Lendstats and ran a bunch of queries. Now, age of the borrower is not something that is recorded with each loan, the closest we have to work with is the number of years of credit history, from which you can infer an age. The chart below demonstrates my findings. It shows the different credit history ranges and the number of percent above or below the average their ROI falls.
Here is the methodology I used to generate this chart. First I used the Prosper loan filter on Lendstats and recorded the total ROI of all loans on the platform. This gave me a baseline number to work with. Then, I just ran inquiries based on a minimum and maximum years of credit history. I recorded the difference between the total ROI of all loans and the ROI for each subset as per this chart. I then repeated the process with the Lending Club loan filter. The Y-Axis on the chart shows the number of percent the ROI is above or below the ROI for all loans. For example, on Lending Club the total ROI for all loans since inception according to Lendstats is 3.78%. The total ROI for all loans since inception with a credit history between 0 and 4 years is 1.57% (which is 2.21% below average).
One can assume that the majority of people started their credit history between the ages of 18 and 21. So, if you add the number 20 (a rough average of when people started their credit file) to their length of credit history you will get an approximate age of people. What is curious is that the over 55 set appear to have similar returns to the 20-24 year old crowd. This surprised me and it doesn’t gel with the chart from Steadfast Finances.
When you dig into the numbers a bit more you can see that over 55 set (or at least those with 35 years or more of credit history) had a very small number of loans (around 1% of the total number of loans). So with a small sample size like that a few defaults can really skew the numbers. But having said that, some other numbers confirm this higher risk. While their income was slightly higher than average, their revolving debt was much higher and their number of delinquencies was also higher. They may have been the only group to have increased employment during the recession, but those people taking out p2p loans in this group were above average risks.
The Key Takeaway
This doesn’t mean you shouldn’t loan to anyone in that age group. But if you decide to include people with a credit history of 35 years or more be extra careful. You want someone who has not only been in the job a long time but is also in a growing industry that is unlikely to see layoffs or forced retirements, Low revolving debt and no recent delinquencies would also be good. Personally, I want to stick with what the numbers tell me. If you focus on people with a credit history between 5 and 34 years you are eliminating less than 10% of the loans on either platform and you will be giving yourself a much better chance at an above average ROI.
Of course, you could just focus on the 25-34 year credit history group but that will eliminate the vast majority of the loans on the platform. I think it is best to stick with the broader selection of 5 to 34 years and then combine other peer to peer lending filters to create a subset of loans that will likely produce an above average ROI. From this subset, you can then look at each loan individually to decide if it is worth your investment.