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The peer to peer lending business model aims to be disruptive to the traditional banking system by capturing the spread between “deposit” rates (usually 0-1% in the recent environment) and the rates at which banks lend those same funds (
8-30%). Bypassing the banks – and connecting investors directly with borrowers – P2P lending offers an attractive rate for both. (Detailed P2P lending information is available here.)
Research into loan performance by type of loan:
A variety of personal loan usecases are available and borrower-selectable. While such selection does not alter the terms or rates of the loans (which are set by platforms using a credit-profile-dependent proprietary online payday loans Colorado Springs risk-pricing model), each particular usecase has a corresponding aggregate performance of all of the seasoned loans whose borrowers have chosen to identify their loan as being for a particular usecase. For example, the usecase “debt consolidation” accounts for approximately 50% of all loans originated to date. (It is worth noting that borrowers may select/signal any of the usecases – but are, in actuality, free to use the proceeds of their personal loan in any way that they see fit.) Examples of personal loan type/usecases:
- Debt Consolidation
- Credit Card Debt Consolidation
- Home Improvement Loans
A Note on Business and Small Business Loans
While peer to peer lenders do offer small business loans (up to a maximum aggregate of $25,000 outstanding at any one time), these loans are issued on a personal basis to the (presumptive) owner of the small or medium business. The personal loan, while it may be used for business purposes, is dependent upon the credit of the principal who applies for the loan and is a personal obligation of that principal. Borrowing via an Employer Identification Number or Federal Tax Identification number is not permitted – only individuals with SSN’s may take out small business loans. Thusly, P2P platforms advertise these loans as “Personal Loans for Business Use”, much in line with the post-credit-crunch practices of traditional banks who are reluctant to lend to small or medium enterprise without a personal guarantee from a business principal.
Research into performance by credit characteristics of loans:
Borrowers who meet the peer to peer lending platform’s initial credit underwriting criteria may request a personal loan. Not all loans are guaranteed to fund, as investors must “fill” the loan requests of borrowers by signaling their intent to purchase a specific amount of the resulting note, should the request be filled. Requests are considered “filled” (and therefore a loan may originate) at a net funding of 70% of the requested loan amount (though borrowers retain the right to cancel their request at any time – or for any reason – prior to the loan’s actual origination).
Investment into loans by analysis of credit and performance characteristics:
Peer to peer lending investors are provided a large amount of anonymized data from the credit reports of the borrowers, including an overall credit score range (say, 740-760), a debt to income ratio, a count of the number of 90 day delinquencies in the last 7 years, notation of any public records on file either within the last 10 years (as well as the last 12 months, to allow for gauge of whether a public record may reflect either a past or a more recent credit issue), total revolving balance, credit utilization ratio, number of current and/or open credit lines, number of recent credit inquiries, et cetera.
While all marketplace data (including all past loans and their detailed credit and performance metrics over time) are available in (relatively) easy to use downloadable format, a platform’s underwriting methodology is the only part of their marketplace which is not fully transparent. This is, naturally, understandable – as risk pricing is largely the only differentiator / “secret sauce” inherent in a P2P transactional platform model.
With that said, however, enough historical performance information is provided such that one may build a layer of underwriting policies on top of a platform’s own underwriting policies – thereby influencing what subset of the total loans for offer in a given P2P marketplace that one may wish to participate in through investment.
Effectively, one may utilize each P2P market’s performance dataset/information to devise a “system for optimization of return and/or avoidance of default” – above and beyond that which they already provide via underwriting.
Competitive Analysis of Peer to Peer Lending Industry
Comparison of, broadly, “loan quality” – as well as default and return performance – based upon particular P2P platform which originates and issues the loans as the comparative parameter is also of interest. Particular interest in the P2P military loan platforms which lend money only to (active duty) military borrowers, who seem to exhibit significantly better loan performance and loan repayment behaviours.
Competitive Analysis of Peer to Peer Loans as an Asset Class
Comparison of “peer to peer consumer loans”, as an individualized asset class – what are referred to in the industry as “marketplace loans” – currently reflects a significant lack of correlation with other classes of assets – a lack of correlation which is of not modest utility vis a vis significant diversification across classes. It should be noted, however, that macroeconomic trends (such as unemployment) seem to correlate with increased downward pressure on peer to peer loan performance.