Vacation Loans on Prosper & LendingClub
As many of us were enjoying a 4th of July weekend vacation, at Orchard we used it as an opportunity to review “vacation” loans on both Prosper and LendingClub. Both of these lenders offer this as a loan purpose option. Vacation loans are of interest to us because there has always been some discussion on the general idea of a vacation loan and the performance of these loans on the different discussion boards such as Lend Academy. Also, if you Google “vacation loans,” LendingClub comes up in the paid adwords section.
These loans get attention, because they represent an interesting idea: if people need to borrow money to take a vacation, should they take it at all? However, people have always financed vacations. Before Prosper and LendingClub existed, the only option was to put the trip on a credit card and pay it off over time. The interest rates on credit cards are generally higher than those on a marketplace lending term loan. Given this, is there a difference between consolidating debt (which was potentially incurred on a vacation) and using a loan to fund the vacation in the first place? For the borrower, a marketplace lending loan is a great new alternative. For the investor, we’ll have to look at the data to find out if the investment is worthwhile.
Prosper started tracking vacation loans as a separate category in December 2011; LendingClub has been tracking them all along. For the analysis in this post, we will look at December 2011 data and forward for both Prosper and LendingClub.
Below, we show Prosper’s loan distribution by loans for vacation, and those that are not. As expected, vacation loans make up a small percentage of overall loans (~1% of listings.)
The actual volume of listings ranges from ~30-120 listings per month. There are a couple periods of larger volume, but given the relatively small numbers, this is probably due to natural fluctuations and not telling of anything significant.
Some listings become loans, while others do not, as we discussed in this blog post. Of the vacation loan listings, the percentage that fully fund has been increasing in recent months. On average, about 55% are funded. This is lower than the overall average funding rate of 61%. The difference in funded loans is mainly due to a larger volume of loan requests withdrawn by the borrower. This could be because the rates are higher than a borrower would like to pay to fund a vacation – or not any better than the rates on a credit card. Because we are not provided the reason a borrower withdraws a loan, we will not be able to know.
For LendingClub, we see similar patterns. The percentage of loans is slightly lower at 0.5% on average. Keep in mind that LendingClub’s data includes only loans that have funded (i.e. listings that do not become loans are not included in the available data), so the percentages below include only funded loans.
The number of loans funded for vacation purposes on LendingClub ranges from ~20 – 140 loans per month. It appears that there is a bump in the number of loans for vacations during the summertime. Similar to Prosper, given the relatively low volumes here, it is difficult to know if this represents a real pattern.
Prosper’s distribution by credit grade for vacation loans skews to the less risky credit grades in the more recent months. In fact, there are very few vacation loans in the E or HR credit grades. It is unclear how much of this is due to a change in applicant mix versus Prosper’s underwriting strategy. What it does mean is that the average interest rate for a vacation loan on Prosper has gone down over time.
LendingClub vacation loans are skewing in the other direction. It appears that around December 2012, there may have been a change to the underwriting criteria used by LendingClub, because the distribution changes fairly dramatically. There is no way to know for certain, but the more recent vacation loans are in riskier credit grades on average.
With the understanding of the relative size and distribution of these loans, we will now assess the default rates (in this case, default is defined as any loan 30+ days past due). For this analysis, we only look at loans originated from December 2011 – December 2012, excluding more recent vintages. Prosper vacation loans have a slightly lower default rate than other types of loans; LendingClub vacation loans have a slightly higher default rate than other types of loans. Overall, the pattern is not clear given the difference between the two originators. The difference could have to do with either applicant mix or underwriting.
Given that the distribution in credit grades was fairly different for the two originators, we need to look at these default rates by credit grade. However, it is important to keep in mind that the volumes are small, so these results may not be significant.
For Prosper, it appears that the AA credit grade vacation loans have a higher rate of default than other types of loans (this accounts for only 12 loans total – so this finding could easily be an anomaly.) Vacation loans outperform the other loan types in all of the other credit grades.
For LendingClub, we see a similarly high default rate on the vacation A grade loans (which accounts for 107 loans). For the rest of the credit grades, the vacation loans are generally worse.
In conclusion, the number of vacation loans issued by Prosper and LendingClub is small, and therefore it is difficult to say if the patterns and trends we see in the data are due to sample size or the behavior associated with these loans.
Overall, when compared to the alternatives, it might make sense for a borrower to take out a loan to fund a vacation and, according to the data, the performance may be in line with certain investors’ strategies. According to the numbers in this analysis, these loans could be both profitable to investors and an interesting new way for those who are cash strapped to avoid costly credit card debt in the first place. Given how new this asset class is, it makes sense to continue assessing the performance and default rates to see how the data plays out before making an assumption about the quality of these loans.
We hope everyone had a great holiday weekend!