The Changing Face of 60-Month P2P Loans

There has been quite a shift in volume of 60-month p2p loans in the last few months. Both Lending Club and Prosper are showing different trends and interestingly these trends are in opposite directions.

The above chart shows the percentage of all loans (I did exclude 12-month loans at Prosper to get an apples to apples comparison) that are 60-month loans at both companies since the beginning of last year. For most of 2011 this percentage stayed within a relatively narrow range. But recently that has changed.

Lending Club Reduces the Number of 60-Month Loans

I chatted with Lending Club’s CEO, Renaud Laplanche, last week and one of the things he mentioned was that they have made a conscious decision to reduce the number of 60-month loans on the platform.

They still believe these loans are a great investment but they have been seeing more investor demand for the 36-month loans. So they have made some adjustments and are meeting the demand with more 36-month loans than ever before.

What is interesting to note is that the return spread of these loans has been reducing. Investors typically get a 2.5% premium for the longer loans to justify the additional risk involved. But that 2.5% spread has been reducing as these loans age.

When looking on Lendstats at all 60-month loans issued in 2010 you can see this. The estimated ROI (as of this writing) for all 36-month loans issued in 2010 is 5.75%. For 60-month loans the ROI is 6.49% just 0.74% more. And these loans average 19 months old so they are not even halfway through their loan cycle. It is quite possible that returns on 60-month loans will end up lagging 36-month loans when they have reached maturity.

Prosper Making More 60-Month Loans Available

Over at Prosper it is a different story. Until recently Prosper was very risk averse when it comes to 60-month loans. In 2011 these loans averaged just 9.6% of all loans on the platform (compared with 35.4% at Lending Club).

But in December, right when Lending Club was deciding to reduce their 60-month loans, Prosper decided to increase their 60-month loan offerings. Until recently 60-month loans were only allowed for loan grades AA, A, B and C. But they have expanded that to now include D and E grade 60-month loans.

Prosper only began offering 60-month loans in October 2010 and issued just 33 of these loans before the end of 2010. So, we obviously can’t deduce much return information from the older loans. But we can look at 2011 loans and these show a healthy 2.3% spread between the 36-month and 60-month loans. That may well reduce as these loans age but right now the 60-month loans are holding up well.

Prosper clearly expects these 60-month loans to perform well. All 60-month loans show a lower estimated annual loss than their 36-month counterparts.

Let’s do a direct comparison. Right now a 36-month D-grade loan has an effective yield of 23.4%. There is an estimated loss of 11.9% leaving an annual expected return of 11.5%. Now, when you compare a 60-month with a similar effective yield you get a C-grade loan with a yield of 23.32%. But the estimated loss is just 8.9% leaving an estimated return of 14.42%. Prosper thinks investors on similarly priced 60-month notes will be better off to the tune of almost 3%.

I continue to invest in both 36-month and 60-month loans and being the yield seeker that I am I have ended up with a higher proportion of 60-month loans than average. So I will be watching closely to see how these longer loans perform as they age.

What do you think? Do you invest in 60-month loans? Why or why not? As always I am interested to hear your comments.

  • Peter Renton

    Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s largest digital media company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.