Consumers Pile on $15 Billion More Debt in March 2008!

Americans are piling on the debt at an alarming pace while one of our most valuable assets (our homes) is plummeting in value. A recent article from Bloomberg points out that consumer debt levels increased by a whopping $15.3 billion in March 2008, which was substantially more than economists had projected. According to the article:

"Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession."

This is scary for those of you (like P2P-Loans.com) that are invested in Prosper loans. As banks turn away more people, they are likely to pursue alternative financing on sites like Prosper, LendingClub, etc..

America's debt problem has only gotten worse over the years and the current credit crisis may end up being a healthy event in that it will constrict American's ability to keep borrowing (at least for a short time). But, with the weak economy and fewer sources of capital, Prosper lenders beware...

Here's an interesting site that provides a lot of interesting debt-related information. Enjoy! http://mwhodges.home.att.net/nat-debt/debt-nat-a.htm

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P2P-Loans.com recently came accross the following listing on Prosper from a fellow blogger (Deepmarket.com) who is seeking a Prosper personal loan to consolidate some debt and begin the process of improving his finances. You can review his loan request for yourself on Prosper, but here is my quick and dirty analysis of this request:

1) The borrower has shown a strong desire to reduce his debt load, which was accumulated durning an entrepreneurial jaunt, and has returned to the "rat race" at a $100k+ salary. His company is a very strong one that focuses on government contract work (we all know that economic slowdowns don't hurt the government, so this job should be pretty safe). The borrower also provides some personal information about himself on his blog, which is comforting to a lender.

2) The borrower sought out the help of a Prosper expert, RateLadder, who is his group leader. RateLadder has been around Prosper for many moons and brings a lot of expertise to the table. While RateLadder doesn't personally know this borrower, his bid and endorsement does improve this listing on the margin.

3) Coverage - this borrower has just enough income to cover his monthly expenses with his salaried position. He also earns some extra cash through his blog (anywhere from $60 per month to $900 per month according to his listing). This income should be available to support any unexpected expenses as well as provide capital to repay revolving debt more quickly. Based on my math, this borrower should be able to cover the new Prosper payment with his salary alone and the blog income will provide a small cushion.

4) $25,000 request - this is a large loan amount to repay fully in a short 3 years (the term of a Prosper personal loan). With an interest rate of 25.45%, that equates to a $1,000 per month payment, which is large. Any bump in the road means that this borrower may choose not to repay this loan (in my experience, borrowers do not make partial payments, but rather stop paying entirely). Lenders can take some comfort in the fact that this borrower has a "public" personality via his blog, thus the public shaming he'd take by being late could be a nice incentive for him to make this loan his #1 priority.

So, what's the sum total of my analysis? The borrower is clearly an intelligent person with a great job in a high-demand area (e.g. if he does lose his job, his skills are in high demand). While the leverage is high, the risk of default of mitigated by the high interest rate being offered (25%+ at the start, but this could get bid down through the course of the auction). As part of a diversified Prosper portfolio, P2P-Loans.com does believe this is a loan worth bidding on and I will support it with a small bid once funds clear my Prosper account. If you are new to Prosper, you can get $25 of free cash for joining Prosper and winning a $50 bid on this loan. That makes it a no-brainer in my opinion.

As you may not know, Fair Isaac (what's so fair about them, I don't know) recently updated its FICO score formula and it is being rolled out by the three primary credit agencies. While there are many views on whether these changes are good or bad, the one certainty about all of this is that your credit score is probably going to change. Here's our quick and dirty on how this might affect you:

If your credit is currently being bolstered because you are an authorized user on your parents credit card account, you are probably going to get HAMMERED! One of the largest (and most negative) changes to the formula is the removal of the benefit you get from being on someone elses account as an authorized user. Some credit analysts belive as many of 25% of all Americans with credit could be negatively affected by this one change (that's about 40 million people whose credit score could fall). The good news is that it may take a number of months before all the credit card companies, banks, etc. begin to use this new score (so, get some new credit while you can - P2P-Loans.com has some great credit card offers if you are interested). Getting credit now (while you can still piggyback with daddy's good credit) will allow you to start building your own on-time credit file.

However, there are some positive changes to the scoring methodology as well. For example, the system treats a single large slip up (even as much as 90 days) as an “isolated delinquency” to individuals with a 10-year credit history. Routine late payments of less than 90 days will still damage your report but at least now a legitimate mistake won’t haunt you so severely.

Also under the new system, multiple credit inquiries in a short period of time won’t be so damaging to your credit score, as now they will be weighted less heavily in calculating the overall number.

Finally, the new system rewards borrowers who demonstrate the ability to stay on top of both revolving debt (credit cards, home equity lines of credit) and installment loans (Prosper Loans, student, auto or boat loans, mortgages). Even if you show a wide range of loans but a solid history of paying them on time, expect your score to jump up as well. Go figure, if you pay on time, you have a good score!

Just as a helpful refresher, here is what we do know about the FICO system (even though the exact numbers are closely guarded by Fair Isaac) and what the rough weighting is for certain types of credit data used:

- 35% — punctuality of payment in the past (only includes payments later than 30 days past due)
- 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
- 15% — length of credit history
- 10% — types of credit used (installment, revolving, consumer finance)
- 10% — recent search for credit and/or amount of credit obtained recently

By now, you've certainly read about the credit crunch that has engulfed the world. Banks are running low on cash to lend and in some cases (such as Citigroup) our largest banks are dancing dangerously close to the fire having to rely on sovereign investment funds (can you say Saudi Arabia) to bail them out. But, with consumer and small business loans scarce, credit card companies reducing or canceling credit lines and banks refusing to write new home equity loans, what's a small business to do?

A recent Wall Street Journal article (see below) talks about how small business owners are turning to P2P Lending sites (such as Prosper, LendingClub, Virgin Money and Zopa to name a few) for capital. But, for lenders on Prosper, are we the suckers or the savvy investors by making these loans? The banks are likely turning away some pretty good credits and borrowers on P2P sites tend to pay a higher interest rate relative to a more traditional small business bank loan that might be backed by assets in the business or a personal guarantee by the business owner. At the same time, delinquency rates are very high at Prosper (upwards of 20%+ of funded loans in some months - visit LendingStats or Eric's Credit Community for details).

I published a blog posting on January 22, 2008, which summarizes my personal experience as a Prosper lender. My firm hope is that Prosper and the other P2P Lending sites will continue to be a good place to invest; however, the jury is still out on this one. P2P-Loans' future is counting on it!

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Where Either a Borrower Or a Lender Can Be Small-Business Owners Turn To Online Networks for Funds As Banks Tighten Credit
By JANE J. KIM

When Jeff Walsh wanted to refinance the small-business loan on his coin laundry, he didn't want to take a chance that his bank would reject his application. "I just bought a house in 2007 and was a little nervous about what the bank would say about my debt-to-income ratio."

Instead, the 31-year-old from Schaumburg, Ill., recently borrowed $22,500 on Prosper.com, an online lending network that matches individual borrowers and lenders. The interest rate on Mr. Walsh's loan: 10.25% -- several percentage points below what he says he would have had to pay at a bank.

HIGH FINANCE FOR THE MASSES

Read a Q&A with the founder of Prosper.com. As the credit crisis spurs traditional lenders to tighten credit standards and raise fees, more small-business owners and entrepreneurs are turning to so-called person-to-person lending networks -- with names like Prosper, LendingClub.com and Zopa.com -- to help keep their businesses going. The unsecured loans are tiny, usually no more than $25,000. But borrowers say they are able to get loans more quickly and with less paperwork than at a bank. And people with good credit are able to lock in lower rates -- often 8% to 12% -- than they would otherwise have to pay on credit cards or unsecured bank loans.

INDEPENDENT STREET BLOG

Have you used peer-to-peer lending? Read the latest post, and share your thoughts. Person-to-person lending is a small but fast-growing corner of the Web economy. New sites are jumping in, including Virgin Money USA, majority-owned by Sir Richard Branson's Virgin Group PLC. Roughly $100 million in new P-to-P loans was issued in the U.S. last year, a number that is expected to jump tenfold by 2010, according to Online Banking Report. Recently, some larger financial institutions have begun to take notice of P-to-P lending...

(article continued at WSJ.com)