Thursday, February 15, 2007 - Read the new American gamble

After reading about, I am very intrigued by their concept. Their business concept is to match up borrowers and lenders, and make a small fee when they get together, a total of about 2%. To make up for this fee, the average loan gets about 7.5% APR, which is just about 2% over what banks are willing to pay you for your money.

However, consider that a CD or savings account at a bank are essentially riskless, whereas this site has no real guarantees. They have available loan data to download. I obtained it and ran a quick analysis of the loans. I discovered quickly that there is no correlation between credit rating, loan interest rate, borrowed amount to the likelihood of getting your money back.

After considering it further, I realized that although there are no direct correlations, a 3% default rate still meant that 97% of all loans were being paid back at a pretty nice return. Given a good diversification of loans, this could actually be a worthwhile investment, although the money you put in will have to money you are willing to part with for 3 years.

1 comment:

MoneyMan said...

Are you sure you have an MBA? There most certainly is a correlation between credit rating and likelihood of defaulting on a loan. This is the reason why lenders rely so heavily on credit scores to set interest rates and grant credit.

Also, the high interest rates being paid on loans aren't set that way "to make up for the 2% fee." They are set that way because they are considered risky debt.