By researching publicly available information from the two largest P2P loan marketplaces, Prosper and Lending Club, investors can lower their risk, increase profitability, and forecast future performance of their loan portfolio.  Both sites offer raw market data to investors for analysis.  By doing so, they gain investor trust and provide and incredible asset to those interested in coming up with a targeted investment methodology.  By statistically analyzing this data, investors can predict how profitable a borrower’s loan will be, based on whether they pay rent or mortgage, which state they live in, their income, and many other key factors.

In order to perform analysis on this raw data, investors need a medium to display the data in a way suitable for statistical analysis.  Lendstats.com is a popular, free site that provides all of this information in a powerful dashboard format, and is updated daily.  The site can be a bit daunting for the first time visitor.  In this guide I will break down each major section of the site to help make it clear how you can use the information for investment research.

The Lendstats home page is a dashboard with various charts showing aggregate loan statistics from Lending Club and Prosper.   The first graph shows Originations Per Month for both marketplaces.  One challenge in creating a well diversified P2P portfolio is the amount of time it takes to find notes that fit your investment strategy.  The more originations that exist, the greater chance you have of finding a suitable note.  Further, the origination rate can give insight into the health of each marketplace, showing whether the market is increasing or decreasing in available investments.  At this time it appears that LC is greatly outpacing Prosper in loan originations.

The next chart is a Performance Summary, where LC and Prosper aggregate note performance is compared by year and loan credit rating.  The average ROI for each P2P lending site can be affected by how well the site screens potential borrowers and the diligence of their collections efforts when a loan becomes late.  Further, the ROI gives you some indication of what type of return an investor in that market may receive.

Each site has their own grading system for rating the credit-worthiness of borrowers.  This section is most useful when comparing grades within a site instead of across sites.  Also notice that with Prosper you see metrics for Repeat Borrowers and “Blenders”, or borrowers who are also lenders.  These are typically highly sought after due to their good performance.  LC does not publish these two metrics – in fact if you want to borrow and lend on Lending Club, you have to create two separate accounts with two different email accounts.  Prosper’s site was created with more of a social network feel, where investors and borrowers are assigned anonymous nicknames and have their own public profile information available to all.  The remaining charts on the home page provide various “Top Ten” lender metrics from Prosper using this profile information.  These let you view the portfolios of the best and worst performers on the site, allowing you to look into some of the strategies these investors employ.

Now let’s move over to the Prosper Stats page.  On the top of the page the first thing you’ll see is a set of begin / end date parameters.  As you probably noticed on the first page, P2P investing was a lot more like the wild west before 2010, so its generally a good idea to set the begin date filter for something in 2010 or later to get results relative to today’s market conditions.  Once you’ve set that, you have a number of other criteria that let you slice and dice the entire portfolio of all loans within the date range specified.

Just to the right of the data parameters you’ll see a checkbox to “view complete performance breakdown by” and a dropdown box to the right.  This powers a detailed table that you can see if you scroll to the right of the browser window after submitting your filter criteria.  The default view breaks the information down by loan and credit criteria, but you can also view by state/city, occupation, and date.  Using the state/city filter, you can see how borrowers from specific locations in the US have performed for investors.  Of course, this is very relevant today since the recession and home loan crisis have affected regions across the country with different levels of severity.  Just be careful to check the Total Lent column when using the Complete Performance Breakdown table – you want to be sure enough loans appear within your results to be statistically significant.

Just below the filter criteria and beside the Enter button there is a radio button selection where you can tell the tool to show you active loans that fit your filter criteria.  This is a great way of being able to take direct action upon loans that fit your specific investment criteria.  These results appear below the Performance Summary section after you submit your filter conditions.

One very powerful tool on this page comes from the section labeled Loss Factors.  Once a loan becomes late, it decreases in value due to the increased risk of default.  Not only are you less likely as an investor to recover 100% of your expected proceeds, but if you were going to sell your note to another investor, the market would dictate you would have to sell it at a discount.  Lendstats looks at how late a loan is and automatically devalues it using these loss factors.  So, for a given portfolio shown by your filter criteria, you can see the overall Rate of Loss in the Loan Performance Summary.

The last, and perhaps most interesting, feature is Lendstats ability to analyze a specific investor’s portfolio.  For Prosper,  you can do this by searching for your lender name.  Just to the right of the data parameter filters, there is the word Find and a drop down which defaults to all_loans.  Switch that drop down to lender, put your lender name in the text box and press the enter button.  Now you can analyze your portfolio performance and see the impact late loans are having on your investments using the loss factors and other criteria.

The Lending Club Stats page works pretty much the same as the Prosper page, with some differences in the filter criteria.  Also, in order for Lending Club users to analyze their current portfolio, they need to look for the section labeled Data Options and click the Analyze your Portfolio option.

Then, login to your LC account, click Notes in the top navigation, then look in the lower right of the page for a link labeled Download All.  This exports your portfolio (with no personally identifiable information) into a .csv file which you upload to Lendstats.

I encourage you to spend time digging further into the loan information on Lendstats and create a strategic plan for your peer to peer loan investment portfolio.  Like any other type of investments, you shouldn’t just rely on your gut, but employ statistical analysis to help maximize your profit potential.

This year I decided to enhance my backyard by extending the patio and putting in an outdoor kitchen.  The drought last year also did some damage to my landscaping, so I need to do some replanting.  I put together my budget and got bids from a few contractors.  This will be a pretty sizable investment and while I have the cash on hand to pay for it, I really don’t want to have to let go of that much cash in one transaction.  Over the past few months I have been really diving into investing in P2P loans, so I decided to make this an opportunity to see what the borrowing experience was like.

First, I got my free annual credit report.  I didn’t want any incorrect information on my record to cause me to not get the best rate when applying for the loan.  For $8 I got my FICO score and was happy to see it is now over 850.  Over the past few years I focused on paying down debt, so now all I have is a mortgage.  Everything looked fine, so it was time to apply for the loan.

So far all of my P2P loans are invested through Lending Club, so that’s where I went first.  Their website was advertising rates as low as 6.78%.  Lending Club made me create a new borrower account with a different email address to apply for the loan, instead of allowing me to use my existing lender account.  That’s seemed a bit goofy, but not a big deal.  They asked how much I wanted to borrow, the purpose, and my credit score range.  Then they asked for my contact info, date of birth and income.  When I submitted everything they gave me confirmation of being pre-approved and offered a 8.99% rate for a 3 year loan or 12.12% for a 5 year loan.  I was disappointed to not get their advertised best rate, but I’m sure their rates differ according to loan purpose.  Most folks borrowing money from P2P sites are requesting debt consolidation loans, while mine was for home improvement.  The rate seemed OK for an unsecured home improvement loan, but I wanted to see if I could do better.

I went and created a Prosper account, filled out the basic information just like on Lending Club and they offered me 6.49% on the three year loan.  That was good enough for me, so I went ahead and continued to the next step.  I filled out a description to include on my listing for investors to read.  Prosper prompted to to supply extra information to convince lenders this would be a worthwhile investment.  Prosper then asked for my bank account information to make sure when the loan funded they knew where to send the money.

The loan listing includes a metric called Verification Stage, which signifies how much information about myself I have provided to the service.  The more information you provide, the higher the stage, and the more likely your will gain investor trust and have your loan fund.  Your loan listing is given 14 days to reach 70% funding for the loan to originate.  The listing has to go through a manual review before it is made live, so I’ll give an update once that is complete.

So far the process has been fairly simple and it looks like I’ll be able to get a reasonable rate for an unsecured home improvement loan without having to deal with a bank.

*Update March 26, 2012*

So, it has been almost two weeks after submitting my application for a loan on P2P lending site Prosper and have a few updates to share.  First, I received an email the afternoon after applying for the loan stating the following:

Thank you for posting your loan listing on Prosper.

To ensure compliance with fair lending laws, we do not allow borrowers to include references in their loan listings to their race, color, religion, national origin, sex, marital status, age, sexual orientation, military status, source of income, immigration / residency status or plans for having a family.  We have removed your listing description because it contained one or more of these prohibited references.
You can view your listing by signing in to your account. https://www.prosper.com/account/common/login.aspx Although the description has been removed, your loan listing’s other details will be available for viewing.
Thank you!
Prosper
www.prosper.com

I’m trying to think about what I wrote and it must have been that I referred to “my wife’s” income in the description, presumably giving away my sexual orientation.  Unfortunately, I was not given an opportunity to resubmit an edited version, so my listing was posted with no description at all.  I’m guessing that may give me less of chance of having my loan fully funded within the 14 day posting period.  Guess we’ll have to see how it goes.

The same day I received another email requesting additional documentation:

• Valid Government Identification Card with Picture (Driver’s License, State ID or Passport)
• Voided check or a statement from the bank account you entered on Prosper
• Form W-2 and pay stub

By submitting this information, my Verification Stage would improve, indicating to interested investors that I have provided additional documentation to back up the claims in my listing.  The email said I could just reply with scanned copies of the requested documentation, so that was easy enough.

The next day I received an email stating they needed a “current Pay Stub dated in the last 30 days, including your name, the business name, and both pay period totals and year-to-date totals”.  Well, that’s odd.  I went ahead and just sent it over again.  Later that week I received a post card with a secret code on it which I was told to go and enter onto the site as verification of address.

While your listing is in the funding stage, it is actually sort of fun to check it every once and while and watch the investors offer you their money for the loan.  You’re shown who offered to fund the loan, when they made the offer, and how much they committed.  Most of the usernames are nicknames so you don’t know who they are, but the site still has a social network feel, where you can visit their page and even “friend” them.

Well, here it is on day 13 and my loan is only 44% funded.  I doubt I’m going to get the loan since it has to reach at least 70% in the first 14 days.  Looking at my listing, it showing I’m still only at Verification Stage 2, but since I’ve submitted everything that has been requested, I should be at 3.  I’m sure that’s why a lot of people haven’t committed their funds to the loan.  Unfortunately, there is no checklist showing me the required documentation and what has been received versus what is outstanding.  So, I have no way of knowing what documentation is missing.  I’m going to have to call Prosper during business hours tomorrow and figure it out.

The help page says I will be able to resubmit the listing after the 14 days expires for no additional charge.  Fair enough, but that’s sort of a pain.  I’d recommend to anyone trying to get a loan on Prosper to make sure their verification stage hits 3 after they submit all of the documentation during the first 5 days or so after their loan is posted.  If it doesn’t call up there and figure out what’s going on.  I should have been more proactive to make sure of this.

I’ll throw up another post to update how this turns out.

*Update 3/27/2012*

So, I called Prosper yesterday about why my verification stage was still 2 and they basically said the verification staff was overrun with reviews and was not able to get to it yet.  They recommended that I withdraw the current listing and just put it back up again, which I have done.  I still have my verification stage 2 status and I see a lot of people jumping on funding the loan today.  I suppose the lesson is if you need the money quickly, this may put you in a crunch.

*Update April 6, 2012*

I’m excited to report I was able to finally get my first peer to peer loan funded through Prosper.  As discussed previously, my Verification Stage was stuck at 2 for more than two weeks.  I called Prosper support for a second time and the analyst told me they were missing one of my verification documents.  The frustrating part for me was I had already sent it to them 3 times, including the first time they asked for it a few days after I applied for the loan.  He stayed on the phone with me and had me send it again and verified receipt while on the phone.  Within a half hour my Verification Stage moved up to 3.

The rate of investments in my loan increased pretty dramatically once that happened and within a few days my loan reached 100% funding.  I also noticed some investors start making heavier investments in the loan ($1,000+), so presumably these are investors with pretty large sums of money on the platform.

After reaching 100% funding, the money only took a couple of days to reach my bank account, minus a $60 origination fee, via electronic transfer.  By default, Prosper set me it so that every month my payment will be automatically drafted from my checking account.  Undoubtedly this helps to reduce to their loan delinquencies, and something I liked to see as a p2p loan investor.

Overall, I was pretty satisfied with my experience borrowing money from Prosper and would recommend this service to others who are seeking a small to mid-sized loan.  Of course things would have gone a lot smoother if they would have processed my verification documents faster.  I found it sort of fun to be able to login and watch investors bid on my loan during the listing period.  Prosper’s website was intuitive and I found their communications via email stepping me through the loan process easy to follow.  Both times I called into their help desk the support analysts were friendly, though the second person I talked to seemed much more helpful.  Now I’m excited to complete my home improvement project, which should be done by the end of the month.