Online loans defy fears of mass defaults
Marketplace loans – unsecured personal loans issued online on platforms such as Lending Club, Sofi, Best Egg and Upstart – have defied skeptics amid the Covid-19 pandemic, with defaults rising only moderately even as unemployment has increased.
According to a recent report by data provider dv01, bad loans in the market – those that have fallen behind on payments or accepted forbearance – account for 9.7% of the total, up from around 6% before. the onset of the crisis. That’s down from a peak of 16% in April, and the rate of depreciation continued to decline through the first weeks of August. About two-thirds of impaired loans are forborne.
That compares to total credit card loans forbearance or overdue at more than 5% in June and mortgages at more than 7%, according to credit reporting agency TransUnion. But proportionally, market loan write-down rates have risen less than those for cards and mortgages, both of which were well below 2% before the pandemic began.
The performance of loan-backed securities in the market “has defied expectations, to be honest,” says Jennifer Thomas, an analyst at asset manager Loomis Sayles.
“Securitizations are ongoing and secondary trading has been quite active.” She noted that on new securities, pricing is just a few basis points from 2019. of equivalent duration, and the lowest-rated tranche priced at 270 basis points above Treasuries.
dv01 data is based on 1.7 million loans with a cumulative value of over $19 billion, representing the vast majority of the market’s loan universe.
“We were struck by the improvements [in impairment rates] recently among all parts of the market universe – high income, low income, high FICO [credit] score, low FICO,” said Vadim Verkhoglyad, principal analyst at dv01. “What this tells us is that they really appreciate their online loans, even if they are not from a bank.”
Credit agency Experian recently released a credit hierarchy report that found that among unsecured debt, consumers prioritized personal loans, ahead of student loans and credit card loans. Personal loans typically charge double-digit interest rates, higher than student loans, but lower than the high teenage rate charged by the typical credit card.
Scott Sanborn, CEO of Lending Club, told the FT that the majority of the company’s borrowers were repeat customers, so they wanted to be sure they maintained a good relationship with the lender. He said “everyone was skeptical [of marketplace loans]. You can do all the patterns you want, but at some point people want to see what your loans are doing in a recession.
Renaud Laplanche, chief executive of the lender and issuer of Upgrade cards, told the FT that “delinquency rates are down across the board”. He added that “about 10% of our clients signed up for a hardship program in March or April and 85% of them. . . are already out of this program.
Lenders of all types face the prospect of a dragging pandemic and expiring government benefits. The stock market appears skeptical that market loan default rates can be kept low. Lending Club shares, although rising in recent months, are still less than half the level they were before the crisis began.