About 2006, Peer to Peer (P2P) lending emerged as a new way for people to lend money to each other without going through banks or other traditional avenues. Since then, the two largest players in the P2P market have been Prosper (our review) and Lending Club (our review).
Both sites allow borrowers to make loan requests for various purposes up to $25,000. Interested lenders can get together and fund as little as $25 per loan. The P2P site then gathers all the money, disburses it to the borrower, collects payments, and disburses them to the lenders – all for a small fee, of course!
Prosper was initially the more popular of the two websites, and grew even more when Lending Club suspended operations to register with the SEC. Then Lending Club reopened while Prosper went through a similar dark period, driving many eager investors to check out Lending Club. Both sites are reopened now, although only to investors from certain states. From buzz I’ve seen around the blogosphere, Lending Club appears to be a little more popular right now. However, Lending Club has made about $70,000,000 in total loans as compared to Prosper’s $185,000,000.
Now that both sites are reopened (although only to people in certain states – check the terms for details!), we thought it was a good time to compare the two and try to determine which is a better deal for those of you interested in P2P. I have to give both sites credit for posting a LOT of performance data – you can view some here for Lending Club and here for Prosper.
All loans at both sites are for a maximum of $25,000 and last for a term of 36 months.
- Where Prosper wins: Prosper offers the chance for borrowers to set an interest rate. If your rate is considered high for your deemed risk (based on credit score and history), lenders can bid down your rate, resulting in less interest paid over time. Prosper loans are available to those with a credit score of 640, compared with 660 for Lending Club . Prosper’s origination fees are fixed at 3% for most borrowers, compared to a sliding scale of 1.25 -4% for Lending Club borrowers, depending on credit history.
- Where Lending Club wins: Lending Club’s rates are fixed, but generally lower than Prosper’s rates – starting at 7.05% for borrowers with the best credit history and maxing out at 21.21% compared to 7.5% – 35% at Prosper.
Bottom Line: Borrowers with lower credit ratings will probably have a hard time getting their loans funded at either site. But if you do get your loan funded, your loan will cost less over time if you get it through Lending Club. However, if your credit score is between 640 and 660, Prosper is your only option.
Both sites allow you to invest amounts greater than $25 in individual loans and sell existing loans on a trading platform, and charge a 1% service fee on the outstanding balance of each loan.
- Interest Rates & Defaults: Prosper’s higher rates mean the chance of higher returns for you…but its higher default rates mean that those returns don’t always materialize. In the past, this was likely due to the fact that Prosper lenders often bid down loans so low that the risk-adjust rate of return was negative. Prosper has now instituted minimum interest rates to try to prevent this from happening, but hasn’t been reopened long enough to see results. In the meantime, 22.03% of Prosper’s loans have been charged off compared to a default rate of just 3% for Lending Club.
- Returns: Lending Club loans currently have an annual return of 9.67%, compared to 9.52% for Prosper. Of course returns vary widely across levels of risk, loan amounts, and loan purposes.
- Ease of investment: Lending Club has fixed rates, so what you see is what you get – as long as a loan is not fully funded, you can get in at the stated rate. Prosper allows for “bidding” of rates, meaning you may want to invest in a loan but get shoved out if your required rate is higher than the loan ultimately closes at.
- Investment amounts: Prosper lets you invest any amount over $25 – so if you receive a payment of $1.21, you can transfer over $25 and bid $26.21 on your next loan, earning interest on that payment. Lending Club only allows increments of $25, and does not pay interest on any amount remaining in your account.
- Withdrawals: Lending Club allows you to withdraw any amount that is not invested in a loan at any time. Prosper normally requires you to have a minimum of $25 before withdrawing, but lets you make a smaller withdrawal once per month. If you always reinvest your payments, this doesn’t matter, but if you want to move money around, this might be a big deal to you.
- Collections: Prosper admits to only collecting .48% of late loan payments (yes, that .48%, as in less than half of 1%!). Lending Club does not reveal its collection rate, but of course has a smaller hill to climb since default rates are so much lower! Anecdotally, I’ve never had any of my late Prosper loans successfully collected on, but I had one late Lending Club loan that entered collections and then was returned to “current” status two weeks later.
Bottom line: Lending Club appears to win on most counts. The biggest pro for Prosper is the fact that you can invest “odd” amounts rather than just $25 increments. I didn’t mention it above, but Prosper also has a slightly better interface in terms of borrower listings – borrower can include pictures and often provide more of a “story” as to why they are asking for their loans. Lending Club presents more hard numbers, and less personalization, although lenders do have room to describe their listing. Both provide a Q&A that can be viewed by all registered members.
I have lending accounts with both Prosper and Lending Club. I joined Prosper first, and joined Lending Club during Prosper’s dark period. I haven’t gone back to Prosper because my performance at Lending Club has been far superior – I’m currently earning 9.9% on 30 notes, with only one late. At Prosper, 9 of 24 notes have been charged off - while Prosper does not show my earnings as a percentage,we can assume it’s negative at this point. I do think that Prosper is making an attempt to be stricter on lending criteria since the early days, so I have faith that it could bounce back. But in the meantime, I think I’ll stick with Lending Club.
P2P lending is an investment, and as such, it comes with some risk. At the same time, if you’re smart about borrowing, you can see excellent results.
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Be sure to check out tomorrow’s article, when I tell you how to achieve high returns on Lending Club!
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