Smart Borrower Blog

Online Loan Market Shows Signs of Weakness

Nov 16th, 2016 @ 1:09 PM by Amber Nelson

Roughly $650 million in online loan securities have or are expected to reach dangerously high levels of default, according to Bloomberg. This latest news is just one of several signs that there is a growing credit weakness in the online lending market.

Bloomberg reported that Avant Inc. has already had two of its large online loan securities reach the “trigger” point of defaults that forces the lender or underwriter to start paying down the bonds early. One more is expected to reach that trigger soon. Morgan Stanley analysts have also predicted that another online loan bond, made by subprime lender CircleBank Lending Inc, is likely to breach the trigger level shortly. Altogether those four bond offerings were worth more than $500 million. Another $140 million in securitization was triggered back in September by online lender LoanDepot when default reached 4.97 percent of total loans.

Reaching default triggers can be a major financial hardship on lenders as they then have to use their cash flow to pay off bonds rather than making new loans and they often have to scale back on their market activity. Avant reduced its monthly lending target for the past summer by 50 percent and laid off many employees, while CircleBack Lending stopped making new loans completely several months ago.

Other companies are showing some signs of pressure, even if their online loan securities have not yet breached the triggers. Lending Club Corp. raised its interest rates last month and tightened its credit standards twice this year due to rising customer delinquencies.

The online loan business has grown exponentially in the past few years, especially in the unsecured personal loan arena. Non-bank startups created more than $36 billion in  loans in 2015, up from $11 billion the year before according to data from KPMG. However, online loans make up just a small segment of U.S.’s $12 trillion consumer loan industry. That means that even if the online lending market undergoes a crash, it will not bring down the market as a whole.

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to and

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