Examining Peer-to-Peer Lending with SAP Analytics Cloud – Info Analytic

This is the seventh in my Having Fun with SAP Analytics Cloud blog series. Join me as I get to know the solution better by using it in real-world, everyday ways.

For those not familiar with peer-to-peer lending platforms, they enable borrowers to get unsecured personal loans (up to $40k) and investors can put as little as $25 in to help partially fund these loans. Its technology operates as a credit marketplace, but with much lower costs and interest rates than traditional banks.  For investors, the interest rates are much higher than a traditional bank and they have solid predictable returns—but they carry the risk of unsecured loans.

To help investors, one of the largest peer-to-peer lending companies publicly shares all of its historical data around their loans, borrowers, payments, interest rates, defaults, and so on.¹ This is great for data savvy investors (or borrowers ) to generate their own insights. (Please note: This blog is a demonstration of SAP Analytics Cloud and is not intended as investment advice.²)

Like most things analytics, we need to start with the basics.

What Types of Loans Are Borrowers Getting?

The typical loan for this particular peer-to-peer lender is a 3-year loan between $5-15k.¹

Who’s Applying for Loans and Where Are They from?

If we look at who’s applying for these loans, we can see that they are typical middle-class workers.  On the map, we can see that the majority of these loans are from California, New York, and Texas.  With the high cost of living in New York and California, it’s easy to see why these middle-income earners might want a loan to pay off their debts.¹

What Are They Using These Loans for?

If you read the above chart from left-to-right, you can see that most loans are used to pay off debt or credit cards, the average loan amount for this is around $16k, and borrowers have an average income of $84k.¹

What Does a Typical Payback Look Like for These Borrowers?

For a typical loan, a borrower can expect an average of $473 monthly payment over the next 3-5 years to pay off their credit card and other debts. From the chart below, we can see that the monthly payments and the interest rate varies  on the loan amount.¹

What Impacts the Interest Rate?

The longer the term and the worse your credit, the higher the interest rate.  But the reason for the loan impacts it too.  If you break it down one level further, you can see that education and weddings yield the highest interest rates.¹

Where’s the Risk/Reward for Investors?

With higher interest rates than a traditional bank, it’s easy to see how a peer-to-peer lending organization might be a profitable investment.  But there’s risk.  Since these loans are all unsecured, the investor assumes the liability if a borrower defaults on their loan. Let’s take a closer look.

First, in the visual below, we can see the majority of loans are for borrowers with an average credit score (B or C) and they use this for debt consolidation. Second, if we look at this by interest rate, we can see that the worse the credit, the higher the interest rate.¹

Finally, if we look at this by defaults (people not paying back their loans), we can see that the worse the credit, the higher the default rates. But there are some outliers. Those with bad credit who use these loans for “vacation” or “renewable energy” have a 50% chance of defaulting on their loans. We can also see that people with average credit have a higher chance of defaulting on a loan when used for “education” than those who use loans for other reasons.¹

Some Questions Left Unanswered

What happens if we go into an economy downturn or recession.

• Will more borrowers default on their loans?
• Will investors be less likely to invest?
• Will interest rates change to offset these losses?

What Does This All Mean?

1. Peer-to-peer lending works.  The growth of peer-to-peer lending coupled with the competition in this space shows how peer-to-peer lending is becoming a very popular alternative to bank-funded loans.
2. Data reveals our challenges managing our financials.  This data illustrates just how hard it is for the middle class to make ends meet.  Rising costs coupled with flat salaries has led to large debt that these families need to pay off—and a good number of them default on their payments.
3.  People need analytics, not data.  While this leading peer-to-peer lending company and other banks do an excellent job providing timely and updated “raw data,“ they provide very little analytics and insight into this data, like we’re seeing above.  This type of analytics let’s us see the whole story in the data, allowing us to do our own discovery.

Got questions about the data, want to see a demo of this dashboard, or just want to know how analytics can help you? Leave a comment below and I’d be happy to respond.

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¹ All data used in this blog was publicly provided by a leading peer-to-peer lending company.

² NOTE: The information contained in this blog represents the author’s personal opinion and is for general guidance only and provided on the understanding that SAP is not herein engaged in rendering investment or legal advice.  SAP SE accepts no liability for any actions taken as response hereto.

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