The Growth of P2P Lending Whole Funded Loans

By Mark Shore

This article examines how fractional and wholly funded lending of Peer-to-Peer (P2P) loans evolved over time. When P2P lending platforms first emerged, P2P loans were 100% fractional loans. In the fall of 2012, Lending Club began to offer whole funded loans, followed in the spring of 2013 by Prosper. As noted in my article “P2P Lending for Institutional Investors and Wealth Managers: An Overview” the demand from investors for exposure to P2P lending is growing. One aspect of this growth is more recently has been large growth in wholly funded P2P loans.

What are whole and fractional P2P loans?
A fractional funded P2P loan is defined as multiple investors lending to one borrower to reach the designated loan amount. Once enough investors participate to reach the total amount of the loan, the borrower receives the loan. For example: a borrower on a P2P lending platform seeking a $10,000 loan will receive lending from various investors aggregating to $10,000. A whole funded loan occurs when one investor funds the whole (100%) amount of the loan.

Analyzing whole and fractional P2P loans

For this article, fractional and whole P2P loans were analyzed from two perspectives:

1. Number of P2P loans as a percentage of fractional and whole
2. Dollar amount of P2P loans as a percentage of fractional and whole

Prosper, one of the largest P2P lending platforms in America, parses their loans into three components: fractional, whole and whole index. The three components equate to 100% funding of all the loans on their platform. The whole index is a random exposure of loans for investors seeking a passive method of wholly funding of loans. Whereas active investors would investigate the loans on the platform and make their own decision as to which loans they would like to wholly fund. One could make the analogy of the whole index is similar to an equity investor allocating to an index or a mutual fund versus choosing the individual companies to invest in.

Chart 1: Number of Loans as a Percentage of Fractional and Whole P2P Loans on the Prosper Platform

Chart 1, is the number of loans as percentage of fractional or whole P2P loans on the Prosper platform. The data shows the transition from fractional P2P loans to wholly funded P2P loans. “Fractional” represents only the fractional P2P loans on the platform. “Whole + Whole Index” is a summation of both whole and the whole index. “Whole Index Only” represents only the whole index

A few points are noted in the chart’s data:

1. Until April 2013, Prosper’s P2P loans were 100% fractional.
2. During the summer of 2013 whole loans became more popular than fractional. But it wasn’t until December 2013 when the whole index became 45% of the type of loans P2P investors demanded.
3. Since December 2013, the whole type loans have continued to increase in popularity.

As of August 2014, the summation of whole loans combined equaled 90% of all P2P loans on the Prosper platform.

Chart 2: Dollar amount of Loans as a Percentage of Fractional and Whole P2P Loans on the Prosper Platform

Chart 2 is the dollar amount of loans as a percentage of fractional or whole P2P loans on the Prosper platform. The same as in Chart 1, “Fractional” are only fractional loans. “Whole Index” are all of the whole loans utilized by passive investors. “Whole + Whole Index” is the summation of all of the whole loans on their platform.

The analysis finds the following results:

1. Regardless if analyzing by the number of P2P loans or the dollar amount of the P2P loans, the percentage of fractional P2P loans is trending lower.
2. The percentages of fractional and whole P2P loans are about the same when comparing it as the number of loans or the dollar amount of the loans.
3. By dollar amounts of P2P loans the current percentage to fractional loans is less than 10%. The distribution to whole loans is 91%. The whole index accounts for 66% of the whole loans.

It is easier for P2P lending fund managers to participate in whole lending loans than for individual investors because of:

1. Their fund capacity.
2. Professional expertise of the P2P lending market.
3. Ability to assess the risk of the loan.
4. Technology to bring these skills and resources together in a smooth and timely manner.

“Our automated algorithm instantly analyzes the latest P2P lending opportunities as they hit the platform. Based on various factors including amount, credit score, loan length, interest rate, and more—the algorithm executes whole or fractional P2P loans in an attempt to create the best return possible while balancing risk,” says Don Davis, managing partner of Prime Meridian. “Fractional loans allow more individuals to participate in P2P lending, but the ability to identify what we believe are the best P2P loan opportunities and wholly fund them help us create returns for our P2P lending fund the Prime Meridian Income Fund.”

Keep in mind institutional investors and fund managers are investing in both fractional and whole P2P loans and their skills and resources may be beneficial in both types of funded loans. As of September 30, 2014 Prosper will allow investors greater allocation to fractional loans. Over time, this will probably increase the percentage of fractional loan funding.

In summary, the results of the analysis reveals wholly funded P2P loans have increased. It also demonstrates an increasing percentage of passive investors seeking wholly funded loans. Regardless of fractional or whole loans, the P2P lending industry is growing and maturing as it becomes more widely accepted by investors for either direct investment or via fund managers.

*Past performance is no guarantee of future results.

This material is qualified in its entirety by the information included in the confidential offering documents and supplements (collectively, the “Memorandum”) of Prime Meridian Income Fund, LP (the “Fund”) described herein. Any offer or solicitation of an investment in the Fund may be made only by delivery of the Memorandum which contains important information concerning risk factors, including a more comprehensive description of the risks and other material aspects of an investment in the Fund. The Fund is only open to investors fitting the definition of an “accredited investor” as that term is defined under Rule 501 of Regulation D of The Securities Act of 1933. The past performance is not indicative of future results. An investment in the Fund, like all investments, contains risk including the risk of total loss.