Peer-to-Peer Lenders Are Attracting Prime Borrowers

CU360
April 16, 2008 | COMMENTS

Individual lenders on peer-to-peer (P2P) networks might not have sophisticated risk-management tools, but their decisions sometimes bear distinct resemblances to those of many financial institutions.

At San Francisco-based Prosper Marketplace, the most notable parallel has been a sharp movement in the past year by lenders away from subprime to prime borrowers.

The growing use of the company's site by people with good credit shows that P2P lending has become "a better financial option for people with great credit, or prime credit, than what they're finding out there in the marketplace," Chris Larsen, Prosper's co-founder and chief executive officer, tells American Banker .

Individuals use the site to make three-year unsecured loans, generally receiving higher interest rates than they might earn by putting their money in savings accounts. Typically, these rates are lower than what traditional institutions charge for personal loans, which helps the site attract price-sensitive borrowers.

The percentage of prime loans granted in December by Prosper lenders nearly doubled from January, to 43.5% of the site's volume. The percentage of subprime loans dropped by over three-quarters, to 4.5%. The percentage of loans requested by prime borrowers increased by nearly one-half, to 12.4%, while the percentage of requests by subprime borrowers fell by about one-third, to 41%.

Prosper rates borrowers using Experian credit scores. People with scores of 720 or more are considered prime, those with scores of 600 to 719 are considered near-prime, and those with scores below 600 are considered subprime.

Though the vast majority of Prosper's borrowers continue to seek money to pay off credit cards, Larsen said a growing number of borrowers are coming to his site because banks are turning them down for home equity loans.

With home values falling and banks become more wary about letting people borrow against their declining equity, "the home equity business has been shut down," Larsen said. As an alternative, many people have begun seeking out unsecured personal loans, and some are turning to Prosper instead of more traditional financial institutions.

Early this year the company started asking applicants for more information about why they want a loan. Although Larsen couldn't quantify how many people have come to Prosper because they can't get a home equity loan from a bank, he said Prosper's rates are competitive with what banks charge for personal loans.

Though the lenders and borrowers choose their own rate for each loan made through Prosper, the November average for prime loans was 10.2%. For many consumers, "it's the first time you've had reasonably priced installment loans," Larsen said.

Industry-wide, home equity loan volume fell about 8% in 2007, to about $968 billion, after increasing steadily for several years, according to Bobbie Britting, senior analyst at TowerGroup.

"The institutions in the past year really just tightened their belts," Britting said. "There are fewer people now that qualify at the new terms that lenders are offering."

Borrowers like home equity loans because the terms are often better than those of personal loans, but some people are seeking personal loans because home equity loans are no longer an option, Britting said. She expects home equity loan volume to rebound this year once the industry's credit concerns begin to fade.

Lending Club —another peer-to-peer lending site that recently expanded service to all 50 states—is also seeing an increase in loan applications, according to John Donovan, chief operating officer. Many Lending Club borrowers are prime, though that's likely because people with credit scores that are too low aren't allowed to request loans, Donovan said. The site boasts that it has rejected $66 million of requests from applicants whose credit ratings did not make the cut.

"Ours is a prime platform," Donovan said. "Anyone who can get a loan on our platform can get a loan through a bank or other sources."