ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Personal Finance»
  • Investing in Stocks, Bonds, Real Estate, More

Peer-to-Peer Lenders: How Lenders Can Evaluate Borrowers and Investment Potential in P2P Lending

Updated on October 29, 2013
Increase your investment and borrowing options through peer-to-peer lending.
Increase your investment and borrowing options through peer-to-peer lending. | Source
The Lending Club Story: How the world's largest peer to peer lender is transforming finance and how you can benefit
The Lending Club Story: How the world's largest peer to peer lender is transforming finance and how you can benefit

Want to learn more about the investment potential of peer-to-peer lending? Take it from one of the most successful in the industry.

 

Most peer-to-peer borrowers are people who, for whatever reason, were rejected for credit by local banks or financial institutions. However, due to the intricacies of credit score evaluation, many of the people who are rejected for traditional lending are still excellent investment risks. The peer-to-peer lending platform allows these people to seek financing from individuals rather than institutions, with the added benefits of having an individual review the information and take into account the potential borrower's background and the reasons for any credit issues.

As a lender, though, how does one decide which borrowers are good risks? What do all of those numbers mean, and what should they ideally say? Peer-to-peer lending platforms, such as Prosper.com and related sites, generally offer the following information on any potential borrower. While most have a kind of grading system based on a credit score, the grade alone is not a reliable decision-making criterion.

DELINQUENCIES

Just like a bank, the first thing we're going to look at are the potential borrower's delinquencies and related negative information. Lending platforms generally give the number of delinquencies for the last seven and ten years, as well as the dollar amount that is still delinquent. In addition, they will show the number of public records up to 10 years ago, which will include any bankruptcies or foreclosures for that time period, and the number of inquiries during the last 6-12 months.

Credit scores are heavily influenced by delinquencies, but the influence is decreased the longer it's been since a payment was made on the account. In addition, negative information can be outweighed, to some degree, by positive information. Because of this, someone can have several outstanding delinquencies, but if they also have trade lines in good standing their credit score my still be good. They may also have delinquencies they have not attempted to pay on for a couple of years, in most cases those debts have been charged off, and the account has been inactive long enough so as to not impact the score very much. On the flip side, if someone had several delinquencies but worked hard to pay them off over a couple of years and have just finished paying, their credit is still suffering from the negative impact of a recently active delinquent account. As a lender, would you rather have the person who actually paid off all of their debts, or the one who has simply managed to improve their credit score by adding on newer, non-delinquent debt? Automated bank systems will choose the latter, but many individual lenders may prefer the former.

On the same token, bankruptcies and foreclosures have a lessening impact on a person's credit as time goes on, but many lenders understandably do not feel secure lending to these people. However, someone whose score has been negatively impacted by inquiries while they were being turned down by banks may have never shown any irresponsible or failed management, but their scores may have been lowered by them too much to get a bank loan.

CREDIT LINES

The lending platform should give lenders information regarding the potential borrower's trade line history, including the origination date of their first line, how many they've had total, and how many are still active. In addition, many will show the dollar amount of available revolving credit, and what percentage of those credit lines is currently being used.

The main item to look at here is the percent of credit usage. Credit scores are their best when the usage ranges around 5-20%...on each credit line. If that percentage falls below or rises above that percentage, the credit score is impacted. A peer-to-peer lending platform will show you the total number of credit lines and the overall usage, though some credit cards may be charged way over 20% of the credit line while others are far lower, resulting in a percentage comfortably within the target range, but that might not appear so to banks. In addition, some home equity lines of credit will cause a home's entire value to show up as revolving credit, with the result that some people may show 90%+ usage when they are really relying on credit cards far less than that.

Credit scores may also be impacted by the number of closed trade lines. Every closed line of revolving credit will impact the credit score, and if someone closes multiple lines in a given year they are likely to see drastic dips in their score. This does not bode well in a bank system, but may appear to the individual lender as someone simply trying to simplify their life and get it under control.

INCOME, EMPLOYMENT, AND HOUSING

Peer-to-peer lending platforms will likely also tell you if an individual is a homeowner, which may go far in establishing their reliability, as well as their income, debt-to-income ratio, in what industry they're employed, how long they've been employed, and their current income.

The work history is useful inasmuch as it reveals some information about the reliability of the person and/or the potential reliability of their income. However, if someone has been gainfully employed at a good wage for 10 years, but their industry is, say, a construction contractor or automotive worker, there may be a risk of future income issues. This is, of course, all subject to a person's geographical location, the strength of their particular business, and a host of other factors.

Ideally, the debt-to-income ratio will fall somewhere around 30% or less, and many banks will reject applicants that have a higher ratio than that. However, in peer-to-peer lending, a potential borrower has the ability to explain that they're about to get a raise, that their spouse also contributes to paying the bills, that some of that may refer to a credit line for which the borrower is an authorized user but not primary payer, that the loan will be going to pay off higher-interest bills so the debt-to-income will remain the same, or other such explanations that may influence a lender's decision.

THE PERSONAL TOUCH

One of the most important things a peer-to-peer borrower gets that traditional borrowers don't is the opportunity to explain him/herself. Every peer-to-peer listing includes a personal profile of the person requesting financing, as well as a description which tells what the money will be used for, the borrower's monthly bill amounts, their explanation of how they will fit this payment into their budget, and explanations of past delinquencies.

Armed with all of this information, and knowing the desired target ranges for all of those cryptic numbers with the listing, the peer-to-peer lender can now make an educated decision on whether or not to invest in this particular listing. Make notes of what pieces of information are ideal and which are less-than-ideal, consider the personal explanation, and you're ready to make your evaluation. All borrowers come with some risks, but by understanding what you're getting into you can minimize those risks and maximize your returns. Expect to see limited credit records or a number of negative pieces of information for higher percentage rates, and save your lower-percentage bids for those borrowers that meet the ideal requirements in every way.

Comments

    0 of 8192 characters used
    Post Comment

    • profile image

      Bob R. 7 years ago

      P2P Lending is here to stay. The problem is evaluating credit-worthiness of borrower and likelihood to repay. I like the P2P model at www.money360.com because the loans are backed by real estate....providing security to the loans made.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: "https://hubpages.com/privacy-policy#gdpr"

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)