With the exponential growth of peer to peer lending over the past two years, platforms like Lending Club have shown increasing flexibility in the kind of borrower they accept on their sites. Growing investor demand has pushed the platforms – particularly Lending Club – into accepting higher-risk (though still above average) borrowers to meet investor’s thirst for new peer to peer loans.
Lending Club sets fairly strict approval criteria for their borrowers, which must have at least a 660 FICO score. But over the past two years, approval rates on Lending Club have risen dramatically. In September 2012, the approval rate on Lending Club stood at 16% versus 9.5 % in 2010 – a 70% increase. That means people still wading in debt have a better chance to get a loan and consolidate.
The loosening borrower restrictions represent an opportunity for borrowers that are still trying to crawl themselves out of debt. Lending Club’s average borrower debt to income ratio– which excludes a borrower’s mortgage – rose from 12.95% in September 2010 to 17.3% in September 2012. That’s an increase of 34% in just two years. This bucks the country’s overall deleveraging trend since the recession, and shows clearly how Lending Club is taking in a broader type of applicant.
The growing investor pool appears to be a major driver. Institutions seeking higher returns on fixed-income assets have entered the market more aggressively in the past two years. Lending Club now has more than $100 million in institutional money in peer to peer loans. . As a result, average interest rates have climbed as well, though not as quickly – rising 17% over the past two years.
The increased borrower approval may reflect Lending Club’s acknowledgement that, as with credit card companies, the industry and the economy has reached more solid footing, creating the possibility for peer to peer loans to become more widely available to the average consumer.