As any follower of the marketplace lending space knows, the primary use case for consumer borrowers today is debt consolidation – presumably revolving credit card debt that generally carries punitively high interest rates. Based on data from the Federal Reserve, these rates average 13% but can be much higher.
Since 2012, Prosper and LendingClub listings have always been predominantly for debt consolidation:
Much of the recent massive growth has been for borrowers indicating debt consolidation as the intended use of proceeds. It’s important to remember that the borrower simply indicates how the funds will be used; there is no post-funding confirmation. This means that a borrower can claim that the loan will be used to pay off debt but then use the money for something else with no repercussions from the originator and no recourse for the investor.
One way to determine if a borrower is actually going to use the funds to consolidate debt is to compare the actual debt amount from the credit bureau to the amount being requested. Both Prosper and LendingClub provide a wealth of data on every borrower's credit profile, including the amount of debt the borrower had at the time of application. For both Prosper and LendingClub, the average amount of revolving debt for loans that were issued to borrowers wishing to consolidate debt, has stayed relatively constant. It is slightly higher for Prosper, but generally similar.
Comparing the amount requested to the total amount of debt, we find that both Prosper and LendingClub have few loans where the amount requested exceeds the amount currently owed – both under 10% in all quarters.
Given that a subset of borrowers do request more debt than they actually have outstanding, it would be interesting to see if the default pattern is different. While the group is relatively small, it is still large enough to warrant some research. We looked at just the loans from 2012 and Q1 2013 in order to include only those with enough performance history to provide valid results. In the graph below, the blue bar represents the average interest rate by category and the red bar represents the default rate (defined as at least 15 days late).
For both Prosper and LendingClub, we see that the population requesting more than the outstanding debt has a slightly higher default rate. This default rate does seem to be slightly offset by a higher interest rate on LendingClub. While every investment strategy is based on many variables, for those looking to minimize default rates, this may be an interesting criterion to consider. What we've looked at here is just an example of how using the information from the borrower on an application in conjunction with the information provided on the credit report can be powerful in drawing insights into future behavior. These insights are only possible because of the open and transparent data provided by Lending Club and Prosper.