A few weeks ago on the Orchard Blog, we examined the performance of LendingClub loans originated in different time periods by comparing their charge-off rates at equivalent points in the credit lifecycle. Today, we will conduct a similar analysis on loans originated by Prosper and discuss how the 2 platforms have performed over time.
The graph below shows the cumulative principal charged off as a percentage of initial loan amount for annual vintages of Prosper loans. As with the previous post, the older vintages have longer lines, as they have more months of history. Using this data, we can see that Prosper loans booked in 2008 charged off at a very high rate (nearly 25% of principal lost after 3 years), but that more recent vintages have been of vastly higher quality.
One observation you might make after viewing the above graph is that each Prosper vintage has a steeper curve than its analogous vintage on LendingClub. While this is correct on the surface, the picture does not tell the full story. In fact, Prosper and LendingClub do not play in 100% overlapping segments of the consumer credit market. While both originators’ lowest-interest loans start around 6%, LendingClub’s highest-interest loans max out around 26% (at grade “G5”), whereas Prosper issues some loans at just over 31% (rating “HR”). We can presume that this 26-31% segment on Prosper is priced higher to compensate for somewhat higher credit risk and, if included, will drive up the overall loss curves.
To provide a more apples-to-apples comparison, let’s now examine only the Prosper loans issued with interest rates below 26%. As we can see, the 2008 vintage is still rather high risk, but the more recent populations perform much better and are very much in line with their contemporaneous LendingClub vintages.
While vintage curves are interesting and certainly a valuable tool for understanding credit performance, there is often more nuance involved in fully understanding the risk/return profile of a group of borrowers. For instance, a flatter vintage curve by itself is not necessarily always the goal. One must consider interest rates, borrower “mix”, and a number of other criteria that one could potentially apply to capture more of the return with less of the charge-offs.
As the graphs above show, the quality of borrowers on the Prosper platform has improved dramatically since 2008, and it is good to know that there are now multiple places an investor can go to find high-quality yield at varying levels of interest rate and risk.
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