Prosper lenders avoid high risk loans

Earlier this week I put together a list of all the top Prosper blogs. As I was reading, I came across an interesting post from January on Money Walks. The article, Blame the Lenders? Or the Borrowers?, showed that high risk and E-grade loans made up a full 80% of the listings at the time. Money Walks also discovered that lenders were allocating nearly 50% of funds to those risky credit grades. This surprised me and I decided to take a quick look at current open loans.

At the time of this writing there are 2554 open loans. 48% are high risk and 19% are E-grade. A full 67% of loan requests are from these risky credit grades - not quite as high as earlier this year but still very high.

So, are lenders funding these loans? Of the open loans I ran a quick search to see which ones have already been funded at least 75%. Only 8 of 1221 open high risk loans (<1%) are on their way to funding. Not much better for E-grade - 6 of 476 (also 1%). How about AA and A credit grades? 18 of 67 (27%) of open AA loans are at least 75% funded while 13 of 67 (19%) A loans meet the criteria. It appears that lenders have learned their lessons over the past months and are now avoiding high risk borrowers. The money is now flowing to those with good credit. Of course, many of these loans I looked at have just opened so the percentage is not representative of how many will be funded by the time the bidding closes. It does, however, allow us to compare the different credit grades.

The graph above shows the number of loans that are at least 75% funded compared to the number of open loans for that credit grade. Last week Matt explained why it makes good financial sense for some people to borrow from Prosper. Those with good credit and no home to borrow against can usually get a better rate through Prosper on an unsecure personal loan than they can through a traditional bank. It appears, however, that this demographic may be a very small minority on Prosper. Many of those seeking Prosper loans may be borrowers that can not obtain financing through other means. Many months ago, lenders on Prosper may have funded these loans but high default rates have caused changes to investing/lending habits.

It's also interesting to note the size of loans being funded to high risk borrowers. Of the 87 open listings that are at least 75% funded only 4 of them are over $20,000 - all to AA and A borrowers. The largest funded loan to a HR borrower is $10,000 (which one lender put up the full amount despite never bidding on anything but B or better in 58 previous loans - very odd.) Bottom line, if you want to be funded on Prosper today and especially if you want to borrow more than a couple thousand dollars, your chances are pretty slim if you are a high credit risk. It appears lenders have changed their investment patterns in accordance with good risk management tactics.

I realize that more complete statistical analysis can be done on closed loans and perhaps I will do that in a future post. It will be interesting to look at which credit grades have been favored by lenders over time.