Upcoming Loanio Launch Puts Focus on P2P Credit Quality

News that Loanio, yet another peer-to-peer lending venture, will be launching in “just a couple of weeks” got me thinking about credit quality at these nascent loan-makers. Just how good are these online P2P loans after all?

The scant evidence I have come across leads me to believe that the answer is not very good at all. Certainly, P2P loan performance would not imply that a “we’re all in this together” economic joie de vivre exists between online lender and borrower.

The one place you can see P2P loan performance is on Prosper.com, arguably the largest peer lending site. Since it started in November 2005, around $171 million of loans have been originated through Prosper.com. Fully $17.7 million of loans, or 10.38%, have charged off. That’s not bad in and of itself, considering that Prosper loans have been made across the entire credit spectrum.

But when you delve deeper into the numbers, some trouble spots emerge. For example, the net charge-off rate on A loans is 4.86%, and 7.84% on B loans. That’s high. People with no credit at all have been able to get loans via Prosper in the past. The charge-off rate: +50%.

Further, 3.26% of AA loans are not current — again, a relatively high number. To be fair, however, just 9.94% of D Prosper loans are not performing.

Loanio, for its part, claimed in its announcement today that it will “provide access to a significantly underserved borrower market, and consequently increase the average number of loan originations.” The site will offer a co-signer feature, offer an ID and financial document verification service, and allow borrowers to take a loan even when less than 100% of their requested loan is successfully bid upon. Will these measures result in better loan performance, and therefore better returns to lenders? I don’t have the answer to that question — yet.