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.

Interest Rate Groups Are the Key

When you look at a Grade A loan on Lending Club it could carry an interest rate of anywhere between 5.42% and 9.63%. On Prosper the ranges are even larger. So, instead of looking at loan grades we should really be looking at interest rates.

P2PXML assigns a Rate Group to every loan based on the interest rate; assigning each loan to a bucket with a range of 2%. So, Rate Group 1 has a range of 0 – 1.99%, Rate Group 2 is 2 – 3.99%, and so on. Now, there has never been a loan issued below 4% so for our analysis we started with Rate Group 3 (R-03) – the bucket for interest rates between 4 – 5.99%).

To make a true apples to apples comparison, in my analysis I only included 36-month loans issued by both companies after July 18, 2009 (the end of Prosper’s quiet period). Then I tallied up the total number of loans in each rate group and what percentage of those loans had defaulted. You can see the results of this analysis in the chart below.

There is No Clear Winner on Default Rates

It is interesting that there is no clear winner here when it comes to default rates.  Lending Club does a little better than Prosper for interest rates below 12% and then Prosper is better between 12% and 18%. It is a bit bizarre that Prosper’s best performing Rate Group is actually R-09 (16 – 17.99%) where there have been 1089 loans issued and just 16 defaults.

I cutoff the comparison at an interest rate of 22%, even though this meant eliminating over half of the loans issued on Prosper, because I was focused on interest rates where both companies issued many loans. Lending Club issues very few 36-month loans above 22% – just 26 have been issued since July 2009.

You can take a look at the table below which has the data used to create the chart. You can see that Lending Club has the bulk of their loans between 6 and 16%. Prosper, on the other hand, has a pretty even spread between 6% and 22%. What is not shown is that Prosper had 10,296 loans with a rate of 22% or more out of their total number of 18,448 three-year loans. So around 56% of Prosper’s loans are not included in this analysis.

[Update: It was pointed out in the comments that this table would be more useful with loan age included. I have added that now in the table above and you can see it gives a more complete picture. Prosper has a more mature portfolio in every rate group except for R-09 which explains in part why they are doing so well in that rate group. So, from this we could say that Prosper is doing a better job in their underwriting than originally thought.]

Underwriting is a Moving Target

While this is the closest we have come to a true apples to apples comparison on default rates it certainly isn’t perfect. For one thing the underwriting rules and interest rates are constantly changing so a loan that may have been 9.5% last month could be 10.5% this month.

Also it should be noted that until December 2010 Prosper had an auction-based model where interest rates were “decided” upon by investors. So that certainly skews results as well and may account for default rates that are somewhat inconsistent with risk.

I am interested to hear from others on this. Did you expect any differences here? Is this analysis even worthwhile? Please let me know in the comments.

Every Saturday I bring you the latest news from the world of peer to peer lending. These are the best of the news articles and blog posts from around the web that I shared on Twitter this past week.

This has been a busy week for me with the launch of my new P2P Lending Wealth System video course but I still managed to stay up on the latest industry news. It was good to see Michael from Nickel Steamroller back (after a few weeks away from blogging) with an update on his Lending Club and Prosper investments. Perhaps the most interesting news of the week was the debut of Somolend at the Finovate conference (where they won Best in Show). Somolend has an innovative take on p2p lending focusing on business loans provided through social connections of the business owners. It will debut for investors in January next year and I will have more about this company before they launch. Enjoy your weekend.

Learn Bonds - Peter Renton on P2P Lending: Are You Asking the Right Question?

Finovate - SoMoLend Debuts its P2P Lending Platform

Random Thoughts - Crowdfunding and Lending Club

Your PF Pro - How I Achieved a 13% Rate of Return Investing with Lending Club

Investor Junkie - Improving Your Lending Club Returns

Euromoney – Crowdfunding industry set to pass $3 billion mark

P2P Money Blog (UK) - P2P companies feature in “Most Trusted Loan Provider”

Money Q&A - Easy Steps To Open A Lending Club IRA With No Fees

Nickel Steamroller - May P2P Lending Update

The White Coat Investor - Peer To Peer Lending IRA Fees

The all new P2P Lending Wealth System is now available. With over four and a half hours of video content I think it is safe to say that it is the most comprehensive training program for p2p investors ever created.

Those of you who have been with me a while here will remember the first version of the P2P Lending Wealth System that launched last December. Well, I have gone and redone the entire course, rerecorded all the videos and added a ton of new content. So it is completely up to date.

The Content

There are twelve videos within four modules – here is the breakdown of the content:

Module 1 – Introduction

Part 1 – Background
Part 2 – The Risks
Part 3 – Before you Start

Module 2 – Investing

Part 1 – Lending Club Introduction
Part 2 – Investing with Lending Club
Part 3 – Prosper Introduction
Part 4 – Investing with Prosper

Module 3 – Maximizing ROI

Part 1 – Measuring Your ROI
Part 2 – Maximizing ROI
Part 3 – The Trading Platform

Module 4 – Insider Tips

Part 1 – Taxation Guide
Part 2 – How I am Investing

You Can Save $50 if You Order by May 31st

The P2P Lending Wealth System was created for the investor who wants to get more out of p2p lending. As I have said on this blog many times I believe p2p lending is the best risk/reward investment available today. Savvy investors know the opportunity that p2p lending provides for great returns. This video course provides step by step instructions on how to achieve these returns.

There is a special offer happening right now to celebrate the launch of the version 2.0 of the P2P Lending Wealth System. If you order by the end of this month you will save $50. The price is going up at midnight on May 31st. Click here to find out more.

Here is a Sneak Peak Inside

Earlier this week I recorded this short video giving a guided tour behind the membership walls of the P2P Lending Wealth System.

If you can’t see the video below you can watch it on YouTube here.

Every Saturday I bring you the latest news from the world of peer to peer lending. These are the best of the news articles and blog posts from around the web that I shared on Twitter this past week.

Probably the most important article of this week was the one on Daily Finance, the widely read site owned by AOL. It was a well researched article that included comments from Joseph Toms, the Chief Investment Officer at Prosper. But the most interesting article of the week from my perspective was the interview with Rebecca Lynn on Xconomy. Ms Lynn is a partner with Morgenthaler Ventures, a venture capital firm that has invested in Lending Club, and she is also on Lending Club’s board. She gave her perspective on why she thinks Lending Club has such great potential. Enjoy your weekend.

Five Cent Nickel - Lending Club Recovered Funds from Defaulted Loans

Xconomy - Xconomist of the Week: Rebecca Lynn on the Financial Services Boom

Texas Enterprise - Brief Evangelizing for P2P

Finextra - An orderly transition to the new branch state

DoughRoller - My Investment Portfolio Update (May 2012)

Prosper blog - Mac or PC? Learn how one borrower made the call with Prosper.com

Lucrative Lending - P2P Lenders Should Expect Borrowers that Won’t Pay

Stand Strong Research - HOW TO INVEST LIKE A BANK: P2P LENDING RETURNS

Lazy Man and Money - Lending Club Update – May 2012

Lend Analyst - 3 More Steps to Increase Lending Club Returns

AOL Daily Finance - Either a Borrower or a Lender Be: Why P2P Lending Keeps Growing

Lucrative Lending - P2P Lender posted 14.71% Loss on Prosper.com: 3 Essential Lessons Learned

The Busy Executive Money Blog - Ready for P2P Investing (Just one big problem!)

Brendan Ross is one of the few financial advisors who gets p2p lending. He is the principal of Ross Asset Advisors based in Los Angeles and I chatted with him recently about his practice and his p2p lending investments. An edited transcript of the interview is below.

SLN: Tell me a bit about your practice. How are you different from other financial advisors?

Brendan Ross: Five years ago I looked a lot like my peers. I used a combination of index funds and a buy and hold strategy to get the maximum return for my clients. Then came the financial crisis and that changed. Now, my clients are looking for a “Sleep Well at Night” portfolio where they don’t have to worry about their portfolio dropping 50% over the course of a year. But they still want a portfolio that grows – they certainly don’t want to have the same amount of money in 10 years time as they do today. Which is really where we have been in the stock market. The S&P 500 is not back yet to the levels that were reached in early 2000. Now, with the huge government debt that we have, it concerns me that over the next 10 years we will continue to move sideways. So the stock market isn’t attractive and the bond market is yielding just 2% to 3%. That means you are getting very little there for all the interest rate risk you are taking by buying bonds.

SLN: So where are you investing your clients money?

BR: I like municipal closed end funds – these funds are yielding 6% tax-free and I like p2p lending.

SLN: Why p2p lending?

BR: You have credit card companies charging people an average of 14% with a default rate around 4%, which gives a 10% return. Now along comes Lending Club and Prosper and they are charging investors just 1% to in effect rent their underwriting model. That is a good deal for investors. Consumer loans are a $798 billion industry and until recently there was very little opportunity for individual investors to participate in this industry.

SLN: When did you get interested in p2p lending?

BR: I have been paying attention to the space from the very beginning. Innovations in finance interest me, so I was aware of both Lending Club and Prosper from their inception. But there were some elements missing, that an institutional investor would want to see, until March of last year with the launch of LC Advisors. This new vehicle from Lending Club was the first to create bankruptcy remoteness, an important technical requirement for many institutions.

SLN: How do you invest in Lending Club and Prosper?

BR: For Lending Club I invest with both of their LC Advisors funds and at Prosper I often use a hedge fund called Colchis to invest in Prosper notes. I think of my Lending Club investment as more like an index fund and my Colchis investment as an actively managed fund.

SLN: It is clear you are bullish about p2p lending. So I am curious to know if you are still treating this as an alternative-type investment with your clients and keeping allocations small?

BR: We are doing larger and larger allocations to p2p lending for clients and less in equities and bonds.

SLN: Why has p2p lending failed to gain much traction with financial advisors so far?

BR: Financial advisors at large firms are typically not allowed to use alternative investments because the liability is too great and at smaller firms advisors find these kinds of investments a hassle to manage and stay on top of from a due diligence perspective. It is just easier to put people into traditional investments.

SLN: Do you talk with your fellow financial advisors about p2p lending?

BR: There is plenty of opportunity for financial advisors to develop expertise in this area. The general pushback from most financial advisors is that it is new and it is just not necessary. They don’t have to offer it in order to keep their clients happy. But for me, I have been investing in Lending Club and Prosper in my own portfolio and like to give my clients the best of what I own.

SLN: What do you think might happen to p2p lending returns if we have another recession?

BR: If I was to guess what would happen to returns if unemployment went from where we are now which is around 8% to say 10% or 12%, well I think returns would drop, but they would stay positive. I would think that a fund like the Broad Based Fund at LC Advisors would drop from around a 10% return today down to the 4%-6% range, still a decent return. Meanwhile the corporate bond market would be down 20% and equities would be down 30%.

SLN: As p2p lending becomes a more mainstream investment do you think returns can be maintained at their current levels or do you expect a decline in coming years?

BR: That is a good question. The only way I can see investors experiencing a sustained drop in returns would be if interest rates went down for consumers borrowing money. Now, I don’t believe that the credit card companies will lose pricing power any time soon and certainly not because of the impact of p2p lending for at least 10 years.

SLN: Anything more to add about p2p lending?

BR: People think p2p lending is new and therefore it is risky, but consumer lending is not new at all. What is new is that individual investors now have the opportunity to get returns that the credit card companies have been enjoying for decades.

The numbers keep rolling on. After posting just over $50 million in total new loans between them in March, Lending Club and Prosper continued their steady rise with $53.7 million in new loans issued in April. The growth remained very strong at Lending Club while at Prosper the growth rate has slowed down somewhat but volume is still heading upward.

Lending Club Now Over $42 Million in New Loans a Month

The growth engine at Lending Club kept chugging along in April. Most of the month saw over 1,000 new loans available for investors on the platform at any one time – this seems to be the new normal now at Lending Club. They have really hit on a winning formula which was evident when I spoke with Renaud Laplanche, CEO of Lending Club, earlier this month. He indicated that they could actually grow much faster if they chose to, but they are limiting their growth to this steady pace. This way, they can avoid stressing their systems (both IT and people) too much and provide better service to both borrowers and investors.

When you look at the numbers Lending Club issued almost $42.1 million in new loans this month. The total number of new loans was up substantially (over 10%) from last month with 3,230 loans issued. This meant for the second month in a row their average loan size reduced – in April it was $13,019. The total loans issued since inception is now around $612 million and with eight months left in the year it is clear that Lending Club will cross over $1 billion in total loans before the end of the year.

Below is their impressive 18-month growth chart for new loans. The black line is the three month moving average.

Prosper Issues $11.6 Million in New Loans This Month

Over at Prosper the rapid growth that they experienced during the last few months seems to have stalled a bit. Over the last year many times there was month over month growth of more than 10% but that hasn’t happened for the last three months. There are some signs that the number of loan listings is improving, though, so I actually think the growth will pick up quite a bit from here, possibly as soon as next month.

Their largest investor, worth-blanket2, had another busy month. According to Lendstats, worth-blanket2 invested over $3.1 million in new loans in April. There was a new kid on the block at Prosper this past month that goes by the screen name of Cash-Flow – they invested over $600,000 to make them the second largest investor in April. The usual number two, Index_Plus, kicked in just over $330,000 and just one other investor (another new entrant), tolerant-responsibility051, invested more than $100,000 according to my research.

So just like March Prosper enjoyed a wide base of investment spread between retail and institutional investors with probably a bit more volume on the retail side. Below is their 18-month chart.

A reader emailed me this month and asked why I didn’t include Peerform in the monthly numbers. I would be happy to, and have extended an invitation to them a couple of times, but they do not wish to disclose their monthly numbers yet. My guess is that once they are doing some substantial volume they will be happy to be included here.

Every Saturday I bring you the latest news from the world of peer to peer lending. These are the best of the news articles and blog posts from around the web that I shared on Twitter this past week.

We have many great articles here for your weekend reading. One of the most interesting articles from this past week was the Technode article about p2p lending in China. The author, Roger Ying, suggests that the p2p lending industry in China could be as large as the traditional banking system, as much as $1 trillion annually but most of that is “underground” and offline. As far as legitimate companies go the author claims there are more than 100 p2p lenders operating in China today, one of which was founded recently by Ying. Enjoy your weekend.

IFA Magazine (UK) - Credit Where It’s Due

This is Money (UK) - Savers’ real rates of return on social lending: How an income tax trap trims interest

Lucrative Lending - 14.23% Net Annualized Return Investing in P2P Loans with Lending Club

Wiseclerk (UK) - Zopa Will Offer More Loan Terms

Wall Street Oasis - Hedge Funds Move into P2P Lending

Lucrative Lending - Nickel Steamroller: Lending Club Portfolio Analysis Tool

The Fiscal Times - 4 Oddball Investment Ideas That Can Make You Money

Financial Times (UK) - Mack moves to cutting edge of P2P lending (free registration required)

TechNode - P2P Lending Industry and a Practioner’s Experiences in Entrepreneurship in China

CNBC - Why Small Businesses Can’t Secure Financing: Opinion

The Independent (Ireland) - New lending idea saves jobs and makes banks irrelevant

Learn Bonds - Which Company has the Best Peer to Peer Lending Returns?

Thomas DeLong – Prosper – April update: Seasoned returns are 24% y/y

April has been a really busy month for me. I have just finished recording a brand new version of the P2P Lending Wealth System. This is my online video course covering all aspects of peer to peer lending that I first released late last year. In version 2.0 every video has been re-recorded and I have added some brand new content as well.

Free Short P2P Lending Video Course

At the same time I have created a free short video course. The free course will be three short (10-15 minute) videos that introduce new investors to p2p lending and provides some guidance on the best way to get started.

The videos are designed for viewing in sequence as they build on each other, so you will only be able to view them by registering your email address. Then links to each video will be emailed over the course of a week or so. In these videos I cover the main questions that new investors have when starting out at Lending Club or Prosper.

A Site Redesign

Finally, the Social Lending Network is getting a makeover. Late tonight I will be installing a new design that will make the site easier to navigate, particularly for new visitors. If all goes well, by early Friday morning you will see the new look.

Next week I intend to launch the free short video course and then version 2.0 of the P2P Lending Wealth System will be available the following week.

Stay tuned.

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.

Of course, this leaves more questions than answers and also leaves out an important piece of information. Defaults and charge-offs affect your account in different ways.

Defaults and Charge-offs Impact Your Account Differently

When a note moves to a status of default it will reduce your Net Annualized Return (NAR) but not your account balance. When a loan moves from default to charged-off the outstanding principal is removed from your account and your balance is adjusted accordingly. This two stage process can indeed take up to 30 days to complete although sometimes, particularly in the case of a bankruptcy, it can all happen on the same day.

If you have a relatively new account your NAR may be impacted dramatically by your first default. In my new Roth IRA account, where I invest in loan grades D-G, my first default sent my NAR down 2.26% whereas in my main taxable account that is nearly three years old a recent default sent my NAR down 0.07%. In both cases my account balance reduced by less than $25. This big difference is because the loss in a new account is so large compared with the total interest gained that is has a large percentage impact.

Of course, you can avoid defaults altogether if you sell loans on the trading platform as soon as they become late. But that is a post for another day.