P2P Loan websites Prosper and LendingClub connect borrowers and lenders. For borrowers, it allows them to receive a better interest rate and/or to receive funds that otherwise would not be available from banks or credit card companies. For lenders, it allows individuals to loan money to a wide variety of different borrowers, allowing an easy means to find borrowers and a way to diversify into a large number of loans. Even if a loan defaults, the lender will hopefully have enough performing loans to offset the impact of a few bad loans and earn a reasonable return on their investment.
Interest rates at P2P loan websites should be commensurate with risk. The platform itself should already have the loans priced out based on the data they know about the borrower such as their payment history, amounts owed, open credit card utilization, etc. However, lenders do have the ability to do some further filtering on both Prosper and Lending Club. The goal with additional loan filters is to maximize your return relative the amount of risk you are taking. So even if you felt you wanted to concentrate on A borrowers, C borrowers, or whatever, you would apply these further filters to try to obtain a better risk-adjusted return on your investment.
The 5 Best P2P Loan Filters
- Number of Inquiries in Last 6 months is Zero – it is a well-known fact that if someone has not had a hard credit pull recently than they are a less risky borrower than someone who has had their credit pulled frequently. Think about getting a home loan; if you have any recent hard credit pulls, they are probably going to ask you to explain them. They would prefer you not take on car loans, get new credit cards, etc. at the same time you are getting a home loan because that would be more debt that you would have to service going forward.
- Own a Home, Have a Mortgage – someone who owns a home and pays a mortgage (and is not on default on that mortgage) should have some level of financial responsibility. Also, when they received that loan, they probably needed to present all types of paperwork such as pay stubs, tax returns, bank statements, etc. and explain any deficiencies to their loan officer. Some lenders apply this as a filter when they are going after lower-rated borrowers; it is sort of a contrarian indicator that even though they may have a lower rating and yield a higher interest rate, they have some financial responsibility of some higher rated borrowers.
- Loan Size Less than $20,000 – obviously a higher loan amount has a higher payment than a lower loan amount. Also, some investors are weary of someone going to a non-traditional lender like Prosper or LendingClub and wanting to borrow that much money. If you put yourself in the shoes of a scammer or someone who is going to file bankruptcy, you would want to borrow as much money as humanly possible.
- Purpose of loan is for credit card refinancing and debt consolidation only – if the person is telling the truth (a big “if”), then they are not going to be taking on any new incremental debt or payments. They are actually going to be in a better place after the loan because they will have the same amount of debt but lower monthly payments. Think about a home mortgage. You get a better interest rate if you refinance and keep the principal balance the same (or lower it) than if you take cash out and thus have more debt after the refinancing.
- Annual income is $50,000+ – people that make less than this amount probably spend virtually all of their money on basic living expenses like rent and food and are not going to have a lot of money left over to pay your principal and interest. Prosper or LendingClub is also more likely to be able to recover something in the event of a default with someone who has a higher income.
Over time, the various filters should be priced into each loan through the basic pricing model that Prosper and LendingClub to assign an interest rate to different loan requests. However, these 5 loan filters do not yet appear to be fully accounted for.