Under the theme of financial independence for the 4th of July, NPR has aired a feature about Prosper. Marketplace's Amy Scott interviewed Prosper CEO Chris Larson, a couple of lenders and one borrower. You can listen to the radio spot here - A new way to get a loan. Prosper has been featured on NPR several times before including this interview with Chris Larsen.
NPR features Prosper
Under the theme of financial independence for the 4th of July, NPR has aired a feature about Prosper. Marketplace's Amy Scott interviewed Prosper CEO Chris Larson, a couple of lenders and one borrower. You can listen to the radio spot here - A new way to get a loan. Prosper has been featured on NPR several times before including this interview with Chris Larsen.
Are all Prosper loans within a credit grade created equal?
The easiest way to categorize risk is by credit grade. At Prosper you can search and filter loans by credit grade. Many lenders, including me, pay particular attention to higher credit grades while excluding the lowest credit grades completely.
Today we ask the question: Are all loans within a credit grade created equal?
Let's start with some statistics. The following are the average lender rates by credit grade. Note, this is not the actual interest earned by the lender, just the rate the borrower agrees to pay the lender at the time the loan is made.
Here are the same statistics for all loans that are current:
Now, lets take a look at the numbers for the loans that have defaulted:
So, what do these numbers tell us? Well, if we look at loans in the B through HR categories, the loans that defaulted had a 1.7% through 2.6% higher interest on average than other loans in that credit grade. What this means is that prior to defaulting lenders considered these loans a higher risk and didn't bid down the interest rate as low as they did for other loans.
The difference is even more pronounced when you look at the difference in interest rates between loans that are current versus loans that have defaulted. Lenders put as much as a 3.74% risk premium on loans that ended up defaulting - clearly lenders were seeing something they didn't like in the listings compared to other listings of the same credit grade.
There are two things that we should learn from this data. The first is that it is probably not a good strategy to look for the highest rates in each credit grade. If you consistently seek out the highest interest rates in each credit grade then you are going to have a higher rate of defaults then if you were sticking to loans that are closer to average or below average for those credit grades.
The second lesson that we can learn from this data is that there are other important pieces of information when looking at a loan. It is important to look at the whole picture including number of delinquencies, debt to income levels, income, public records, and revolving credit balance. Basically you want to ask yourself questions like:
Today we ask the question: Are all loans within a credit grade created equal?
Let's start with some statistics. The following are the average lender rates by credit grade. Note, this is not the actual interest earned by the lender, just the rate the borrower agrees to pay the lender at the time the loan is made.
| Credit Grade | Interest |
| AA | 10.59 |
| A | 12.65 |
| B | 14.91 |
| C | 17.60 |
| D | 20.78 |
| E | 24.05 |
| HR | 24.03 |
Here are the same statistics for all loans that are current:
| Credit Grade | Interest |
| AA | 9.43% |
| A | 11.41% |
| B | 13.83% |
| C | 16.50% |
| D | 19.53% |
| E | 22.98% |
| HR | 23.06% |
Now, lets take a look at the numbers for the loans that have defaulted:
| Credit Grade | Interest | Percent Above Average Loans | Percent Above Current Loans |
| AA | not enough data | n/a | n/a |
| A | 12.85% | 0.2% | 1.44% |
| B | 16.62% | 1.71% | 2.79% |
| C | 20.24% | 2.64% | 3.74% |
| D | 22.65% | 1.87% | 3.12% |
| E | 25.77% | 1.72% | 2.79% |
| HR | 25.93% | 1.9% | 2.87% |
So, what do these numbers tell us? Well, if we look at loans in the B through HR categories, the loans that defaulted had a 1.7% through 2.6% higher interest on average than other loans in that credit grade. What this means is that prior to defaulting lenders considered these loans a higher risk and didn't bid down the interest rate as low as they did for other loans.
The difference is even more pronounced when you look at the difference in interest rates between loans that are current versus loans that have defaulted. Lenders put as much as a 3.74% risk premium on loans that ended up defaulting - clearly lenders were seeing something they didn't like in the listings compared to other listings of the same credit grade.
There are two things that we should learn from this data. The first is that it is probably not a good strategy to look for the highest rates in each credit grade. If you consistently seek out the highest interest rates in each credit grade then you are going to have a higher rate of defaults then if you were sticking to loans that are closer to average or below average for those credit grades.
The second lesson that we can learn from this data is that there are other important pieces of information when looking at a loan. It is important to look at the whole picture including number of delinquencies, debt to income levels, income, public records, and revolving credit balance. Basically you want to ask yourself questions like:
- Does this person have enough resources to pay back this loan?
- Does their past credit history show they can be trusted with credit?
- Does their purpose for the loan make sense to me?
What you will find is that some lenders will stick to the higher credit grades to lower their risk, but then they seek out the loans within that credit grade that pay the highest interest rate to the exclusion of all other criteria. Some lenders, for example, might set a standing order that would bid on loans only if they are at a higher than average % for that credit grade. Then they wonder why they are having a higher than average default rate in their portfolio. The answer is that lenders have allowed them to close at higher interest rates because they correctly assessed that they were higher risk loans in spite of their good credit grade.
eHub interviews Lending Club CEO
Emily Chang from eHub conducted an interesting interview with Lending Club's CEO Renaud Laplanche. Here are a few noteworthy quotes:
Motivation to start Lending Club: When I started my first company in 1999, I charged the first few expenses on my credit card. Over the next few months, I had put $20,000 on my card, but was surprised that I was paying 18% interest despite my good credit score. I was too busy to shop around for lower rates and read the fine print. Instead, a few friends offered to lend him the money he needed, at a 10% interest rate. This experience set the founding principles of Lending Club...
Current company composition: We now have 21 people and will be adding another 20 in the next 6 months. The 3 main team members are myself (Renaud Laplanche), John Donovan and Joaquin Delgado. We have a diverse background of entrepreneurship, financial services and technology: before founding Lending Club, I founded TripleHop Technologies and sold it to Oracle in 2005. John Donovan developed and managed credit and debit products for Mastercard for 17 years, and Joaquin Delgado was my CTO at TripleHop and has a PhD in Computer Science, specializing in matching algorithms and user profiling. We also have team members who joined us from eBay, Oracle, Wells Fargo, Razorfish and Photobucket.
Current web traffic: We launched 4 weeks ago and all traffic is gated through Facebook at this point, but we’re already seeing more than 1,000 unique visitors per day.
Future of Lending Club: We launched exclusively on Facebook on May 24, 2007. In the next 6 months, we will be focusing on making the platform even easier to use and adding a few key features, and will also be expanding beyond Facebook. In the next 2 years, our goal is to make person-to-person lending mainstream: we want to make it so easy, simple and economically efficient that it is the first option borrowers think of, before even thinking of charging their credit cards or walking into a bank. On the lending side, we will continue to promote loan portfolios as a separate asset class that investors should consider when reviewing their asset allocation strategy...If we do this right, and we convey the value proposition clearly, in 10 years from now the mere idea that people once used to walk into a bank to get a loan or carried credit card balances will seem odd.
Thanks Emily for a great interview and the insight into Lending Club.
Motivation to start Lending Club: When I started my first company in 1999, I charged the first few expenses on my credit card. Over the next few months, I had put $20,000 on my card, but was surprised that I was paying 18% interest despite my good credit score. I was too busy to shop around for lower rates and read the fine print. Instead, a few friends offered to lend him the money he needed, at a 10% interest rate. This experience set the founding principles of Lending Club... Current company composition: We now have 21 people and will be adding another 20 in the next 6 months. The 3 main team members are myself (Renaud Laplanche), John Donovan and Joaquin Delgado. We have a diverse background of entrepreneurship, financial services and technology: before founding Lending Club, I founded TripleHop Technologies and sold it to Oracle in 2005. John Donovan developed and managed credit and debit products for Mastercard for 17 years, and Joaquin Delgado was my CTO at TripleHop and has a PhD in Computer Science, specializing in matching algorithms and user profiling. We also have team members who joined us from eBay, Oracle, Wells Fargo, Razorfish and Photobucket.
Current web traffic: We launched 4 weeks ago and all traffic is gated through Facebook at this point, but we’re already seeing more than 1,000 unique visitors per day.
Future of Lending Club: We launched exclusively on Facebook on May 24, 2007. In the next 6 months, we will be focusing on making the platform even easier to use and adding a few key features, and will also be expanding beyond Facebook. In the next 2 years, our goal is to make person-to-person lending mainstream: we want to make it so easy, simple and economically efficient that it is the first option borrowers think of, before even thinking of charging their credit cards or walking into a bank. On the lending side, we will continue to promote loan portfolios as a separate asset class that investors should consider when reviewing their asset allocation strategy...If we do this right, and we convey the value proposition clearly, in 10 years from now the mere idea that people once used to walk into a bank to get a loan or carried credit card balances will seem odd.
Thanks Emily for a great interview and the insight into Lending Club.
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