Posts filed under “Credit”

Peer-to-Peer Lending Is Poised to Grow

Peer-to-Peer Lending Is Poised to Grow
Yuliya Demyanyk and Daniel Kolliner

 

 

Peer-to-peer lending—a type of lending which matches individual borrowers with investors—is a recent innovation. But because it fills at least two gaps left by traditional lending sources, the peer-to-peer-lending market is likely to continue growing for some time.

Emerging first in the United Kingdom in 2005 and arriving in the United States a year later, the peer-to-peer market has been growing rapidly since its inception, while traditional consumer bank loans and credit-card lending have been declining. Since the second quarter of 2007, the total amount of money lent through bank-originated consumer-finance loans has been declining on average 2 percent per quarter and the total amount lent through bank-originated credit cards has been declining on average 0.7 percent per quarter. Meanwhile peer-to-peer lending has been growing rapidly at an average pace of 84 percent a quarter.

Peer-to-peer’s rapid growth may be attributable to two of the benefits it provides. First, it can improve access to credit for individuals who have short credit histories. Second, it allows consumers to consolidate credit card debt and lower their interest rate more than they could by going through traditional lenders.

Peer-to-peer lenders use income, the type of employment, and even SAT scores in addition to credit scores and histories to assess the creditworthiness of borrowers. As a result, peer-to-peer lending could improve access to credit for consumers who, for example, are denied a loan by a bank because their credit histories are short, even if their credit scores are sufficiently high. A significant number of people fall into this category. According to data from Equifax, one of the three largest US credit bureaus, 39.8 percent of people with credit histories shorter than three years have credit scores higher than the subprime threshold, in other words, generally good enough to obtain a loan (Equifax, Federal Reserve Bank of New York’s Consumer Credit Panel).

Most peer-to-peer loans are used to consolidate high-interest-rate credit card debt. Data provided by Lending Club, a company that arranges peer-to-peer loans, shows that 83.3 percent of peer-to-peer loans are personal one-time loans, most of which are put to use for this purpose. This may be explained by the fact that interest rates on peer-to-peer loans have been lower than those on credit cards since 2010:Q1.

Not every peer-to-peer borrower manages to obtain a better interest rate than a credit card rate. Peer-to-peer loans are categorized by grades A to D, reflecting the probability of default. On average, around 50 percent of loans are awarded a grade of “A” or “B.” These consumers are considered the least risky borrowers, while borrowers with grades “C” or “D” tend to be riskier. Borrowers with loans graded “A” or “B” have consistently been getting better rates through peer-to-peer lending compared to credit cards. For borrowers with good scores, interest rates have a strong negative correlation with the credit card interest rates, meaning that when banks increase their interest rates, peer-to-peer lenders decrease theirs.

In comparison to bank-originated consumer-finance loans, peer-to-peer loans performed either similarly or slightly better. On average, between 2010:Q2 and 2014:Q1, 3.2 percent of peer-to-peer loans were past due compared to 3.7 percent of standard consumer finance loans. Over this period, peer-to-peer loans had a lower share of poorly performing loans in 10 of 16 quarters.

The peer-to-peer market is currently hundreds of times smaller than the consumer finance and credit card markets. However, the data suggest that the peer-to-peer lending market will continue to grow. One reason is that the supply of funds from investors for such lending has been increasing. Though peer-to-peer lending started as individual investors lending to individual borrowers, institutional investors, such as community banks, have become involved over time. Another reason that peer-to-peer lending is poised to grow further is that demand for such loans has been increasing. Individuals who either cannot get loans from traditional banks or who wish to consolidate their credit card balances at lower interest rates find peer-to-peer lending an attractive alternative.

Source: Federal Reserve Bank of Cleveland

Category: Credit, Think Tank

Category: Credit, Fixed Income/Interest Rates, Think Tank

Banks, Shadow Banking, and Fragility

Category: Credit, Federal Reserve, Think Tank

Student Loans Are Going to Crush the Economy! (No, they are not)

  Student loans are the next great subprime crisis! At least that’s what the usual purveyors of doom and gloom say (see this, this and this). The numbers are big, the default rates are high and soon enough this is going to tip the economy into the next crisis or recession. Not so fast, writes…Read More

Category: Credit, Really, really bad calls

Gates, Fees, and Preemptive Runs

Gates, Fees, and Preemptive Runs Marco Cipriani, Antoine Martin, Patrick McCabe, and Bruno M. Parigi Liberty Street Economics, August 18, 2014       In the academic literature on banks, “suspension of convertibility”—that is, preventing the exchange of deposits at par for cash—has traditionally been seen as a potential means of preventing economically damaging bank…Read More

Category: Credit, Think Tank

One Cheer for Fair Isaac

Sometimes we don’t know exactly how broken things are until after they get fixed. Case in point: Fair Isaac Corp., the company that created the model used to calculate the scores underlying millions of consumer loan and credit decisions. The New York Times described Fair Isaac’s formula as “one of the most widely used and…Read More

Category: Credit, Economy, Really, really bad calls

Tapering Is Now Tightening

Tapering Is Now Tightening David R. Kotok July 19, 2014     For a long time, as we saw it, tapering and the threat of tapering (as in last year’s taper tantrum) did not constitute tightening. Today we explore why we believe the situation has now changed. In order to understand why tapering was not…Read More

Category: Bailouts, Credit, Federal Reserve, Fixed Income/Interest Rates, Think Tank

Bank Counterparties and Collateral Usage

Bank Counterparties and Collateral Usage Hamed Faquiryan and Marius Rodriguez The 2007–09 financial crisis drew attention to the nature and consequences of connections among financial firms. New reporting standards set in the wake of the crisis have shed more light on these ties in current financial markets. New data are available on the magnitude of…Read More

Category: Credit, Think Tank

Are the Rating Agencies About to Get Their Comeuppance?

This week in encouraging news, we learn that the Securities and Exchange Commission may finally be pursuing one of the prime enablers of the financial crisis — the ratings companies. Previously, it was reported that disclosure violations were on the SEC’s radar, but truth be told, those are minor offenses. The SEC’s Office of Credit…Read More

Category: Analysts, Bailout Nation, Credit, Really, really bad calls, Regulation

Banks Are Where The Liquidity Is

Category: Credit, Federal Reserve, Think Tank