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Fractional and Whole Loans on LendingClub

By David Snitkof
January 13, 2014

Since the inception of Online Lending, investors of all sizes have been drawn to participate. Even those intending to invest relatively small amounts have been able to build diversified portfolios due to the availability of fractional lending, where the minimum investment is $25 per loan.  Over the past year and a half, the platforms have also enabled whole-loan investment, helping larger institutional investors to rapidly amass larger portfolios by purchasing entire loans.  In today’s post, we look at the relative size of the fractional and whole loan pools on LendingClub over time and verify if there are still good investment opportunities for both types of lenders.

Whole & Fractional Origination Growth

In the graph below, we show the monthly origination volume on LendingClub*, split by whole and fractional listing type.  As we can see, whole loans first became available in October of 2012.  While whole loans at first slightly decreased the availability of fractional loans, both pools have grown consistently since the beginning of 2013.

lc-orig-bywholefrac

LendingClub seems to be conscientiously managing the relative size of the whole loan pool, keeping it around 25% of total originations with little deviation, after an initial ramp-up period.

lc-whole-pctoforig

 

Credit Quality and Loan Characteristics

Any time that listings are separated into 2 distinct pools of availability, investors may naturally be concerned about how the pools are selected and whether fractional vs. whole listings differ in any material way.   LendingClub has said that this process is random within each credit sub-grade and not designed to favor whole or fractional investors.  Let’s evaluate this by looking at two key characteristics.

In the below graph, we examine the average FICO by credit sub-grade, comparing whole vs. fractional loans during the time from October 2012 to the end of 2013.  As we can see, the whole and fractional average FICOs in each sub-grade are nearly identical.

lc-avgfico-bygrade-wholefrac

In this next graph, we look at the average borrower interest rate by credit sub-grade.  The whole and fractional average interest rates in each sub-grade are also nearly identical.

lc-avgint-bysubgrd-wholefrac

In Conclusion

There is no question that peer to peer lending has drawn increased attention and investment from large institutional investors seeking to purchase whole loans.  However, based on the data we have explored above, fractional investors on LendingClub continue to have a large and growing pool of listings in which to invest.  In addition, the quality and characteristics of fractional loans appear to be nearly identical to those of whole loans, suggesting that LendingClub is allocating its listings equitably.  Decades from now, we may look back on the creation of fractional investment in consumer loans as one of the major transformative innovations in the history of finance.

 

* Note: for the purpose of this analysis, we excluded “policy code 2” loans as well as those that did not meet the credit policy