Lending Club just announced a new sign up bonus. We haven’t seen one in a long time, so I was excited when I saw the email! Lending Club is offering a $25 sign up bonus for new lenders.

Happy Free Money Friday!

How to Get Your $25 Sign up Bonus

1. Sign up as a lender for the Lending Club $25 Sign Up Bonus.
2. Make an initial investment of $5,000 within 90 days of signing up.
3. Get your bonus within 120 days deposited to your account.

Lending Club Terms and Conditions

• Existing accounts are not eligible for this offer.
• One bonus per account.
• Bonuses can be used solely for investing through the Lending Club platform and will not be available for withdrawal or transfer from the account to which they are credited.
• A bonus will be awarded as an account credit within 120 days of the opening of each eligible account.
• Bonuses may be subject to U.S. withholding taxes and any taxes related to the bonus are your responsibility.
• “Invest” means that the funds are used to purchase Notes through the Lending Club platform. Funds invested through the Folio Investing Note Trading Platform4 will not be considered in determining eligibility for this offer.

More on Lending Club

• How Do You Handle Lending Club Taxes?
• Readers Share Lending Club Returns
• Prosper Versus Lending Club
• Lending Club Review
• How to Earn High Returns with Lending Club
• How is your Lending Club Account Doing?
• A Closer Look at a Lending Club Default
• Are You Still Using Lending Club?

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It’s been awhile since we’ve done a Lending Club update. If you’re not familiar, Lending Club is a peer-to-peer lending service. Regular people like you and me can use the site to borrow and lend money without using a bank. To run the service, Lending Club charges each party a small fee. But in general, borrowers pay lower interest rates and lenders earn higher interest rates than they would using traditional borrowing and/or investment channels.

My Lending Club Experience

I was a fairly early investor in Lending Club – I made my first loan in 2008. Then the site closed to complete SEC registration. When it reopened, I stayed on the sidelines for a bit. But in early 2009 I couldn’t help myself and became a regular investor. I tended to invest in 1-2 notes a paycheck, for a total of about $1000 a year. I also reinvested all payments I received from the site. At one point, my selective lending criteria was earning me about 10% a year on a total investment of about $3,500.

When I first started investing, I invested in mostly A and B loans. But I found that the interest rates were so low that even one default really drove down my total return. LazyMan discovered the same thing – and just like him, I decided to up my risk in the hopes of increasing my return. It worked for a while – but over time, a larger number of loans defaulted, and my return went back to hovering somewhere around 4-6%.

Around that time, I decided that I wanted to aggressively attack the remains of my student loan debt. Because the interest rate on that loan was above 6%, using funds to invest in new Lending Club loans was not really the best use of my cash. So I stopped adding new money, and began to withdraw much of what I earned. In the meantime, more of my loans went bad.

My Account Today

My current account summary

My Lending Club account currently shows a Net Annualized Return of 3.64% – not bad considering the number of defaults I’ve had, but not great. I receive about $80/month income off of my $3500 investment – but that amount is decreasing as some loans reach maturity. All told, a full 10% of my loans have been charged off, and several more look to be headed that way. What’s frustrating is that there doesn’t seem to be a rhyme or reason to the charge-offs – they come from borrowers with different credit scores, incomes and types/amounts of loans. Because of this, my defaults aren’t a good indicator of what to stay away from in the future.

My Future with Lending Club

I’ve made only a few loans in 2012. I currently withdraw most of the money I receive in payments every couple of days, using it to pay down the (nearly non-existent!) remains of my student loan and save for my next big expense. If I ever happen to log in and have over $25 sitting in my account, I do use it to buy a new loan. I’m not adding any new money to my account right now, but I still haven’t quite been able to give up investing altogether!

I’m anticipating that the next year of my life will be among the most expensive I’ve had. Steady cashflow is vital, which doesn’t leave a lot of room for “fun” investments like Lending Club. But when the dust settles and I find myself with a little extra cash on hand, I do plan to dive back in. While Peer-to-Peer lending may not be quite as trendy as it was a couple of years ago, I do believe it’s here to stay. As Lending Club continues to fine-tune its lending process, returns should only improve. I currently have 138 notes, so even one default significantly impacts my returns (my mom has a similar number of loans, just 4 fewer defaults, and over twice my return). Lending Club consistently touts the returns of investors with over 800 notes – and even those with 400 notes are doing pretty well. Of course, high (or any) returns will never be guaranteed, which is why I’d never put in money I actually need, or expect to earn anything but the most basic of returns.

How about you – are you still using Lending Club? If so, share your experience in the comments!

More on Lending Club

• How Do You Handle Lending Club Taxes?
• Readers Share Lending Club Returns
• Prosper Versus Lending Club
• Lending Club Review
• How to Earn High Returns with Lending Club

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Jill and I were discussing Lending Club tax reporting last weekend, and we thought it would be a helpful discussion for everyone, since many of you have taken advantage of Lending Club sign up bonuses.

Is Lending Club taxable? How do you report interest earned on Lending Club loans on your taxes? What do you do if you don’t get a Lending Club tax statement?

Let’s take a closer look at all of the Lending Club taxation topics.

Is Lending Club taxable?

Yes. How’s that for a direct answer? Just like income you receive from a savings account or other investment, your net earnings from Lending Club loans are taxable. So do yourself a favor and report it.

To get started, you’ll need three sets of statements for your Lending Club tax reporting: your year end statements, your monthly statements and your tax statements. You can find all three in your Lending Club account under the statements tab.

How do you report interest earned on Lending Club loans on your taxes?

Lending Club will produce various 1099s for you based on your investments. The most common is the 1099-OID (which stands for original issue discount). Here’s how to report it:

1. 1099-OID: If Lending Club sent you a 1099-OID, you’ll report it on Schedule B, Line 1. The 1099-OID for newer Lending Club loans replaces the 1099-INT they sent for loans a few years ago. More specific instructions for how to report OID tax forms are in publication 1212 on page 6, under how to report.
2. Reconcile your 1099-OID with your year end statement.
3. If there are differences (which I’m going to bet there will be), add any net earnings not reported on the 1099-OID to your taxes (see below for how to calculate the amount).

What do you do if you don’t get a Lending Club tax statement?

Chances are, if you are investing only $25 in each loan, you’re not going to get a 1099-OID.

Lending Club will only produce a 1099 for you when an individual loan has interest above $10. So, even if you have dozens of loans that together were greater than $10, you’re still not going to get a tax statement.

So that means many of you who are diversifying across lots of loans, as the social lending model is built on, are going to be in this situation.

Here’s how to handle it, since the Lending Club earnings are still taxable, even if you don’t get a tax statement.

1. Review the earnings summary on your year end statement.
2. Calculate your taxable earnings. Taxable earnings = loan interest + late fees – servicing fees.
3. The loan interest and late fees are displayed on your year end statement.
4. Unfortunately the servicing fees aren’t, so you have to look back through your account to add those up. They are displayed on your detailed monthly statements. Hopefully, Lending Club will fix that in the future, because I have to be honest, that’s a pain point.

If you are adding your self calculated net earnings to the amount on your 1099-OID, be sure you don’t double count any of your loans by mistake.

Lending Club Charge Offs

Another tricky Lending Club tax topic? The charge off.

I had a charge off awhile back which was even stickier when it comes to taxes. Based on all of the regulations I’ve read, there could be a few different ways to report your charge off.

By the way, because I know some of you are going to ask…. I handled the charge off by reporting it as a personal bad debt and showing the net loss as a capital loss on Schedule D.

Lending Club Taxes

When it comes to taxes, Lending Club investments do take a bit of work; it’s something we need to add to our Lending Club Review.

But obviously, if you scored a Lending Club sign up bonus, free money is worth a little extra paperwork.

Hopefully the instructions above will help make it a little easier! I realize it’s a lot to take in, and I wish there was a more straightforward way to explain Lending Club taxes.

Be honest. Does this make the Lending Club tax situation more clear? Or are you even more confused than before?

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Our social lending arbitrage expert, Derek, is back! After one of my Lending Club loans defaulted, I really wanted to know how Derek’s loans were doing! We’ll check in with him and see how his strategy is working…

Social Lending Arbitrage

Its been six months since I first introduced my Social Lending Arbitrage method to the mydollarplan community, and Madison has asked me to provide an update on where I stand with my method.

To summarize the idea, this method basically plays an arbitrage game similar to the no-interest credit card arbitrage popular on the site but with a slightly different twist in that I’m borrowing money at a lower interest rate and lending it out at a higher interest rate — and pocketing the difference.

Social Lending Arbitrage Numbers

I borrowed $10k from lenders at the Lending Club website at an interest rate of 7.78% and turned around and invested that capital (minus some service fees taken out by Lending Club as a part of the loan) to other borrowers with a higher risk profile than myself. It is a method wherein I profit off of varying appetites of risk. I have a higher risk appetite with this money than other lenders and as such, I make a return off borrowed money (Note that I have enough cash held in reserve from other sources that I am able to cover my loan should the social arbitrage world end tomorrow, so my sense of risk is appropriately higher than someone who does not have that).

Metrics as follows:

• Amount Borrowed: $10,000
• Interest Rate: 7.78% (Or $1,245 over 3 years)
• Total Fees: 1.25% (note that this has since gone up to 2.25%) (Or $125)
• Total Cost of Capital (3 yrs): $1,370 (13.70%)

Loans:

• Amount Loaned: $9,875 ($10,000 minus $125)
• Loans filled ($25 per loan): 395
• Est. Default Rate: 2.5% ($247 in total)
• Net Invested: $9,628
• Average Annualized Return: 14.69%
• Service Charge: 1%
• Net Return: 13.69%

Total Return of Invested Capital (3 yrs): $2,166 (22.5%)

Arbitrage Gain (3 yrs): $797

Social Lending Details

I personally choose all 395 loans, which I feel was incredibly time-consuming, but also ended up being to my benefit, as the default rate is lower than normal (outlined in more detail below). I have not decided whether I would go that route should I do this again in the future, since it was more time-consuming than I was ok with.

The beauty of this system is that I have isolated all transactions related to this set up to one bank account which is fully automated — I don’t touch it month over month. My only real work after initial set up was to determine whether my default rate is staying below my forecasted rate of 2.5% (which I update quarterly).

I am 1 year into this plan and thus far, of the 395 loans I have funded, I have had 2 default (one with 3 payments made in total, the other with 6), which translates into a 1.50% default rate (assuming I will have another 2 default per year through the remaining 2 years). This equates into more of a return than I had originally forecasted. Happy day!

While it is next to impossible to determine which loans could potentially default in the future, I was highly surprised that of the sheer number of loans I have funded, 10 have had any late payments, and of those, only 2 have defaulted. My thought behind this is that barring unforeseen financial hardships that could occur to my borrowers, I would expect those that have been paying so far to continue to do so through the end of the loan term.

Selling Riskier Loans

I have kept a close eye on the credit scores on all my loans with a lower than B rating (the riskier loans in my portfolio) to see if they are getting “riskier” than they were when I originally funded the loan. Should any fall substantially far below their original rating (something at this point I consider subjective from both a rating perspective as well as my own viewpoint), I plan on selling the debt to someone with a higher risk appetite than myself.

How to do so? Luckily for me (and others), Lending Club and Prosper have provided their members the ability to sell the debt they own to other members on a trading website Folio Investing. This adds a degree of flexibility to lenders in case they want to pull out on one or many loans. It effectively provides me the ability to increase my liquidity should I need it (although there is the potential I would lose my return or even my principal should I have to firesale the debt). In my mind, the more options I have for worst-case scenarios, the better I can exit this position and minimize my losses should the worst happen.

Social Lending Projections

Using the updated default rate, my new forecast calls for me to earn approximately $835 over 3 years. This assumes I do not reinvest the return I make on new loans (which at this point I am not doing), so theoretically this return could be higher than that should I choose to do that (which I am considering, but have not had the time to properly research new loans). The idea that by reinvesting, I compound my return makes this plan all the more enticing! Not only am I receiving free money, I begin to see an even greater return as the free-money snowball gets larger over time.

I must reiterate that this investing method is definitely not for everyone. Every investment has a level of risk and while I feel this is easy enough for myself to earn a small return, others may not like the inherent risks of investing in a new vehicle such as social lending is. This is a relatively new type of investment and while the intent behind the system is very noble, some may consider the relative ease of borrowers’ ability to game the system to be riskier than worthwhile. Others may consider the return in actual dollars to be too small for some people to consider – this may be more work than worthwhile. Again, its a personal decision.

For myself, free money is free money, and is completely passive income, which in my mind makes the process worthwhile. What kind of free money returns do you have?

Lending Club is giving a sign up bonus to try out social lending for free. If you haven’t taken advantage of it yet, you can try it out at: Lending Club $25 Sign Up Bonus.

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Lending Club has a new bonus that’s a fantastic follow up to the great discussion earlier this week on social lending arbitrage. It is this week’s Free Money Friday offer!

Lending Club rolled out a new website, and sent an email to current investors detailing the bonus offer.

How to Get Your $150 Bonus

1. Be an existing Lending Club investor and apply for a new loan.
2. List the loan by February 28, 2010 and make sure the loan is fully funded prior to midnight PT on March 15, 2010.
3. Bonus will be given after first loan payment is received.

Lending Club Offer Details

I sent an email to Lending Club to get some more information on this bonus program. They confirmed the following details:

• This offer is exclusively for existing Lending Club Investors who wish to take a loan.
• There is no minimum on the loan amount.

There was a link in my email that looked like it was tied to my personal information, so you’ll want to check your email for your own link to make sure you get credit for the bonus. The email was titled “Celebrate our new look with a $150 bonus” if you are looking for it.

Even though the link was personalized, the email did contain the following note:

• If the link above is unavailable, please copy & paste this URL into your browser: https://www.lendingclub.com/borrower/applyForALoan.action

Free Money Math

After I botched the math on the last Lending Club bonus offer, I’m certain the math works out better on this one… even with the service fee! A lower loan amount and the larger bonus will definitely lend itself to some free money.

So if I take a out a $1,000 loan, I pay $22.50 for the 2.25% servicing fee, less than $10 in interest for the first month (assuming great credit which starts at 7.89%), and get a $150 bonus. I net over $100. Right, readers?

This was just the offer I was waiting for to give the social lending arbitrage a try! Now I just need to make sure to apply and get the loan listed before the end of the weekend!

If you aren’t a Lending Club investor yet, you might want to sign up for an account (and get a free $25 Sign Up Bonus) so you’ll be eligible the next time one of these offers shows up.

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Social lending arbitrage. It’s the newest finance game in town. A reader, Derek, shares the details of how to pull off this fascinating arbitrage strategy. A special thanks to Derek for sharing his story with all of us!

Social Lending Arbitrage Explained

Let me tell you about my arbitrage strategy that I’ve used successfully for almost a year on both Prosper and Lending Club.

In this instance, I borrowed $10,000 using Lending Club at a relatively cheap rate of 7.78%. I say relatively cheap in that A) it was being offered to me, and B) the price tag in the form of interest was small given the fact that it was actually being offered. This is by no means free money, so your returns will be lower than if it were a no interest credit card offer, however I’ve noticed those credit card offers have disappeared with the credit crunch we’ve been seeing over the last two years, and bank lending has similarly been affected as well.

That being said, my risk appetite is somewhat greater than the average person’s, and my investments tend to reflect that. I took the $10,000 I borrowed from Lending Club, and put it right back into Lending Club (with a balance also going to Prosper as well), looking for somewhat riskier borrowers than myself. I applied $25 per lending note and spread the total notes by risk class (A, B, C, ratings, etc), taking into account current default rates by risk class to get an estimated return. Looking at all the notes I invested in, I know about 2.5% will default based on current data. But the fact that I diversified my investment into as many notes as possible will (hopefully) minimize my default rate.

A Closer Look at the Numbers

Taking all that into account, my return on investment is close to 15%, with a 2.5% default rate means my net return is close to 12.5%. I pay 7.78% on that capital, and pocket the difference (4.72%), or about $500 over three years.

Yes, this is a lot of work for $500, but not only does it add up quickly, its something that can be built off itself very quickly — the compounding returns only make my returns bigger over time. In my mind, I’m also helping people fulfill their needs by supplying them capital to accomplish their goals. If I can make money and their needs are satisfied, then everybody wins.

I do understand this game isn’t for everyone – I have enough cash in the bank to cover my debt if all my notes default (which has next to no chance of ever happening). But it is free money, and its a very fun 10-minute a week hobby.

More about Derek

I think its good to frame what I do with how I go about doing it. I’m a financial analyst at a growing company (a rarity these days) and because I look at capital flows professionally, over the last few years, I’ve picked up on a few tricks used by companies to grab a decent return on their capital, as well as increasing their capital on-hand for capital buildouts and revenue streams. That being said, I’ve modeled some of those strategies (albeit on a much smaller scale) in my personal life as well. Some with great results, others not so great.

One of those strategies is finding good returns on capital, and having capital offers come your way at a relatively cheap price.

Action Plan

Of course, Derek had me at hello on this one! I’m considering a small scale social lending arbitrage experiment at Lending Club for some reader enjoyment. However, it might have to wait until our credit card arbitrage strategy is exhausted. Either way, stay tuned for more details on social lending arbitrage!

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Lending Club has a new bonus offer. They sent an email a couple weeks ago highlighting the new Lending Club bonus offer. The $100 is this week’s Free Money Friday offer!

How to Get Your $100 Sign Up Bonus

1. Open a new Lending Club borrower account (separate from your investor account).
2. Apply for a loan of at least $12,000.
3. Bonus will be deposited into your account within 30 days after loan is fully funded and issued.

Lending Club Terms and Conditions

• Loans start at 7.89%.
• No pre payment penalty. You can pay off the loan at anytime without penalty.
• As a Lending Club investor you will need to create a new account, using an alternative email address, to apply for a low, fixed rate loan.
• Offer available only to borrower members who apply for a loan after Monday January 11,2010.
• Offer may not be combined with any other offer.

But don’t let the loan part scare you! With a creative twist, I think even those of us who don’t know what we would do with a loan can participate in the fun. Keep reading…

Update: A reader, Derek, caught this one for me. When they sent out the email with “no hidden fees” listed, my mind completely skipped over the service fee. Lending Club has upped the service fee to a minimum of 2.25%. Thanks Derek!

What it means: If you are in the market for a loan, the $100 is still there for the taking. For the rest of us, it’s not such a great deal. I’m going to remove the rest of the article, so that people won’t be confused.

It’s too bad. When they offered the $150 deal on a $1000 loan at Christmas time, it really was a great one!

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Almost two years ago I opened a P2P lending account with Prosper. I invested in about 20 loans before they shut down for SEC registration. I switched to more stringent lending criteria after having a few loans default early on, but still had many defaults.

Those defaults made me a little turned off by the idea of P2P lending, but then Lending Club offered $50 to sign up and I couldn’t resist! So about a year ago I joined Lending Club and invested in my first two loans. After a few months I was happy with the results and began transferring some of my own money to Lending Club. After several months, I’m averaging about 10.1% on roughly 30 loans – slightly above the average. Here is quick rundown of my Lending Club strategy.

My Lending Club Strategy

Each time I get paid (twice per month), I transfer $25 to Lending Club. That’s enough to fund one loan, and also a small enough amount of money that I don’t mind losing it if the borrower defaults. I also reinvest any payments I receive – I usually receive $25 in payments about every 5 weeks. When choosing my loans, I avoid using the automatic investment option (called Lending Match). Instead, I use the “Filter Notes” option to filter out notes based on these criteria:

• Amount: I found with Prosper that the single biggest predictor of default was the loan amount. Lending Club allows borrowers to request up to $25,000 – but that amount can mean a monthly payment of up to $800 depending on the interest rate. Most people simply don’t have that kind of money to throw at a loan payment – if they did, they probably wouldn’t need the loan! I filter for loans under $10,000, and usually end up selecting loans of less than $6,000 if available.
• Interest Rate: Lending Club assigns interest rates based on credit history. I look for A, B, and C borrowers, which correspond to interest rates of 7.94-13.57%. D-G borrowers have higher rates of return but also have higher default risks, so I avoid them. Even C borrowers have to be stellar everywhere else for me to consider them. I usually stick in the B range to get the best risk/reward tradeoff.
• Delinquencies: I look for borrowers with 0 delinquencies on their record. This substantially decreases the number of loans available for me to choose from, but I also believe it substantially decreases the default risk for the loan I ultimately choose.
• DTI Ratio: I look for a Debt-to-Income ratio less than 20%, so that I feel absolutely confident in the borrower’s ability to service the loan payments. Technically, borrowers should be able to afford the loan payments as long as their DTI is below 36%, but I’d rather be safe!
• Funding amount: Finally, I look for loans that are at least 50% funded. I do this for two reasons: so that I know other people thought this was a good investment and so that the loan is made and begins earning interest as quickly as possible.

Browsing Loan Detail

Once the filter has returned a group of loan listings, I take some time to browse each one individually, looking for the following:

• Type of loan: I usually look for debt consolidation loans or other personal loans – I never invest in loans for small businesses. While I would love to help business owners, I just can’t take the risk without seeing some sort of business plan. In addition, the current economy is not good for new businesses – lots of my original Prosper defaults were business loans. Medical loans also scare me, though I will invest in them periodically if the interest rate is right.
• Loan description: If there’s no description, I’m not investing. Period. If you want my money, you need to tell me why – in complete sentences with proper grammar and spelling. I think people who really are serious about the loan will take the time to do it right.
• Questions and Answers: If people have asked questions, I make sure the borrower actually answers them. Getting defensive is a bad sign – it means they’re hiding something. An answer such as “thanks for your concern, I’m trying to do better” is a non-answer. As with the description, I’m looking for proper spelling and grammar.

Choosing My Loan

Once I’ve narrowed down the originally filtered loans even further, I sort by interest rate. I then look for the highest possible interest rate for the lowest amount requested. So if there are two $3,000 loans, and one pays 9% and one pays 8%, I choose the one paying 9%. If there are two loans paying the same interest rate, I choose the one requesting the lower amount. Finally, I add it to my order and submit the order – I’ve just invested $25 more dollars!

Make It Work For You

If you’re interested in investing with Lending Club, make sure to check out this sign-up bonus. Then use “Browse Notes” and “Filter Notes” to select your lending criteria. Once the filter has returned a certain number of results, browse through the listings to check for loan descriptions, questions/answers, and anything else that interests you.

When tax time rolls around, check out our guide to Lending Club taxes to help you handle your taxes on your investments.

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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.

Borrower Comparison

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.

Lender Comparison

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.

My Experience

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.

Sign Up Bonuses

If you’re interested in P2P investing, check out these sign-up bonuses from Prosper and Lending Club. And if you are already an investor, let us know how you’re doing!

Be sure to check out tomorrow’s article, when I tell you how to achieve high returns on Lending Club!

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Social lending, also called Person-to-Person and Peer-to-Peer (P2P) lending, started a few years ago as a way for people to borrow and lend money without going through traditional banks. The two biggest players in the industry are Prosper and Lending Club.

Prosper came first, but entered a long dark period to allow for registration with the SEC. It’s back now, and open for business to borrowers and lenders in certain states.

How Prosper Works

Borrowers apply for loans through Prosper, stating a total amount and a desired interest rate. Prosper approves the loans and lists each as an individual “note.” All loans are for a period of 36 months, with no prepayment penalty.

Borrowers can fund the note in increments of $25, and “bid” on the interest rate they are willing to pay – the lowest interest rates win. So if borrower requests a loan at 10%, investors can decide that loan is a good investment and instead be willing to loan at 8.5% just to get in on that loan. If a note is not fully funded in the requested amount, the borrower does not receive any funds. Completed loans are disbursed to the borrower, who then makes monthly payments to Prosper. Lenders can also trade existing loans through Folio Investing.

Lender Details

• Eligibility: Lender accounts are only available to residents of the following states: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Minnesota, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming. Lenders in the following states may be subject to suitability requirements: California, Idaho, New Hampshire, Oregon and Virginia.
• Minimum Investment: $25
• Fees: Loan servicing fee is 1% annually on the balance of each loan. Collection fees for late loans are 17% of collected amount. These fees are taken from payments before payments are disbursed to you.
• Risk: Prosper investments are not secured. If a borrower defaults on a loan, you will lose the amount invested in that loan.
• Returns: Prosper boasts annual returns that average 7-13%, depending on the credit risk of the borrowers you invest in. Higher interest rates equate with more default risk – if the borrowers come through on payments, you’ll be rewarded, but if they default you’ll lose the full investment in that loan.
• Liquidity: You receive a payment each time a borrower makes a payment to Prosper. The only way to get your outstanding investment back is to sell existing loans through the trading platform, possibly requiring you to provide a small discount.
• Diversification: You can invest in as many notes as you want, up to $5,000,000 total. Since each loan requires minimum funding of only $25, you can spread even a small amount of money through multiple lenders, thus decreasing your exposure to individual defaults.
• Interaction: You can ask questions of individual lenders and see responses to all questions.

Borrower Details

• Requirements: Resident of any US state except Iowa, Maine, or North Dakota, with a minimum FICO score of 640, with bank account and a Drivers License Number
• Loan Amounts: $1,000-$25,000
• Interest Rates: Start at 7.5% with a cap of 36%. You can request a certain interest rate and lenders will “bid” on your listing, possibly lowering your rate. Lower interest rates are usually awarded to those with a good credit history and sufficient income to make loan payments.
• Fees: 3% closing fee with a minimum of $50 for most loans. The highest rated borrowers pay a .5% closing fee. All borrowers are subject to a $15 failed payment fee and the greater of $15 or 5% of the outstanding balance for late payments.

Prosper Overall

Like other social lending sites, Prosper is a great option for borrowers looking to get financing from non-traditional sources. Lenders can often earn higher rates than savings accounts and spread their investment risk by investing in multiple notes. The trading platform means that you can get at least some of your money back if you have a quick need for cash. I made about 15 loans through Prosper before it entered its dark period, but haven’t made any since.

Prosper Sign Up Bonus

If you’re interested in checking it out, don’t forget about the $50 sign up bonus going on now!

Stop back tomorrow for a comparison of Prosper and Lending Club!

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