Major
Finance
Advisor
Michael Ice
Advisor Department
Finance and Insurance
Date
5-2016
Keywords
Finance; Peer-to-Peer; Investing; Loans; Debt Consolidation; Interest
Abstract
The year was 2006, the housing market was booming, and it seemed as though any borrower was able to get a loan. The housing bubble finally burst in 2007-2008 leading to the worst financial crisis since the 1930’s Great Depression. This crisis threatened the collapse of many large financial institutions and was prevented only because of the American Recovery and Reinvestment Act of 2009. A bailout of $831 billion between 2009 through 2019 led to capital regulations of big banks. These requirements are put in place to ensure these institutions do not take on excess leverage and become insolvent. By establishing these regulations, financial institutions are forced to hold enough capital to ensure continuation of a safe and efficient market and withstand any foreseeable problems. However, these capital requirements make it harder for the average American to receive a loan from the banks, and near impossible for low FICO score individuals to receive a loan.
This has forced many borrowers to turn elsewhere to find a loan. Lending Club is a relatively new form of investing and borrowing founded in 2006. It takes the age- old concept of lending money to a friend and combines it with the advancements in technology to create a new form of borrowing called peer-to-peer lending. Soaring in popularity for its ease of use and ability to receive loans, Lending Club has claimed 15.98B in loans through December 31st 2015. In August of 2014 they launched their IPO on the NYSE and saw the stock rise 56% by the next day. This valued the company at 8.5B. Although a relatively young industry, peer-to-peer lending has been picking up steam and generating extreme interest across the country.
Lending Club offers two forms of business, the lending and the borrowing side. My project, Forget the Bank: The Future is Peer-to-Peer Lending, focused on the lending aspect of Lending Club and began with a personal seed investment of $500. This allowed me to invest in 20 “partial” $25 notes of larger borrowing requests. Although I am not able to meet the borrower face to face, Lending Club offers key statistic’s that allow me to generate an investment profile of the borrower. These statistics include monthly income, FICO Credit score, job title, debt to income ratio, and delinquencies in the last 3 years. Using these statistics I was able to generate an idea of to whom I would be lending money. Lending Club then ranks the loans according to possible risk on a scale from A-G. From there, I can build a portfolio based on the amount of risk and ideal return I want to garner. My goal was to take a personal investment of $500 and achieve a 12% interest rate throughout the 3 months of my Honors study. During this time I researched the industry of peer-to-peer lending, generated an investment profile, and dug deep into the backbone of Lending Clubs business model.