Investors looking to take advantage of the great returns offered by peer-to-peer lending have two choices: Lending Club or Prosper. Both offer excellent potential returns for investors, but they do operate slightly differently.
Prosper (see my Prosper review) was the first P2P lending company, and launched in February 2006. This was during the debt bubble of the 2000’s, and they quickly gained a large number of investors and borrowers.
Lending Club launched eighteen months later in mid 2007 — on Facebook originally. Today both remain the only two real choices for peer-to-peer investors.
In my opinion, one of the more important metrics is the investing returns of each. Does Lending Club or Prosper give you better returns?
For Prosper they changed their risk model and underwriting in July 2009. They became much more like Lending Club. Without question, previous performance with Prosper was poor and would have been a terrible choice to invest with.
Statistics are courtesy of LendStats.com. Data is accurate as of September 2015. This chart is collectively all outstanding loans at each lender, and breaks-down performance for each year.
The results from are somewhat surprising to me. Prosper edged out Lending Club for approximately four years. While that’s not the complete picture of returns, it’s interesting that Prosper shows you would more than likely get better returns.
The first thing for p2p investors to consider is whether or not P2P lending is available in their state. Even though both Lending Club and Prosper are regulated by the Securities and Exchange Commission (SEC), it is still up to the individual states whether or not to allow these companies to solicit for investors in their state.
Lending Club is available to new investors in the following states: You can invest if you are you a resident of: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kentucky, Louisiana, Maine, Minnesota, Missouri, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, North Dakota, South Dakota, Texas (New), Utah, Virginia, Vermont, Washington, Wisconsin, West Virginia, and Wyoming. (Kentucky has additional requirements for new investors).
However, there is an additional list of states available for investors via the Lending Club trading platform FolioFN. This is where investors trade in existing loans and this has a much broader acceptance with the states. The additional states available here are: Alabama, Alaska, Arizona, Arkansas, Indiana, Iowa, Massachusetts, Michigan, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, Tennessee, and Texas.
Prosper has a slightly different list of states available for new investors:
Alaska, California*, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho*, Illinois, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire*, New York, Oregon*, Rhode Island, South Carolina, South Dakota, Utah, Virginia*, Washington*, Wisconsin and Wyoming (there are additional requirements for those states marked with an asterisk). Prosper does not allow any additional states on their trading platform.
Interest Rates Comparison
The interest rates charged to borrowers change regularly, but as of this writing, Lending Club interest rates range from 6.03% up to 24.11%.
It is a somewhat complex formula that takes into account various factors that appear on a borrower’s credit report such as FICO score, number of recent credit inquiries, length of credit history, total number of open credit accounts and revolving credit to name a few. Most borrowers will also end up paying a higher interest rate the higher the loan amount and for 60 month loan terms versus 36 months.
Prosper has slightly higher rates and also allows borrowers with lower credit scores on to their platform. Their interest rates range from a low 5.65% up to 31.99%. Prosper offers 12-month loan terms which carry the lowest rates, and they also allow borrowers with a slightly lower credit score than Lending Club and these people typically pay the highest rates.
There is no public information as to how Prosper calculates their interest rates, but we do know that they take into account credit data such as number of inquiries, available credit, credit card utilization, and recent delinquencies.
The Investment Platform
Prosper and Lending Club both allow investors to invest in a minimum of $25 per note, but Prosper does give a little more flexibility here. With Lending Club you must invest in multiples of $25 whereas Prosper allows any amount of at least $25. The minimum needed to open an account is just $25 with either company.
Both companies will help take the legwork out of investing for you. At any one time there are hundreds of loans available for investors on either platform. But investors wanting just a broad cross section of loans can invest their available cash in just a few clicks.
Lending Club always provides three options when you invest in this semi-automated way: High, Medium and Low risk loans. Enter the amount you want to invest (or just let them invest your available cash) and just a couple of clicks later you are done.
Prosper has a Quick Invest feature that allows investors to put new money to work very quickly. With Quick Invest you can choose the loan grade or other filtering criteria, and you can invest any amount greater than $25 in just four clicks.
For those investors who like p2p lending but don’t want to manage their investments at all there are “managed account” options at both companies. Lending Club PRIME has a minimum investment of $5,000 and is subject to a one-time 0.8% fee.
PRIME accounts are fully hands-off — the investor provides some initial direction (as in what interest rates to invest in) and then the Lending Club takes care of the rest. Prosper has something similar called their “concierge service” that starts at $25,000, but has no fee attached to it.
If you like looking at individual loans then both companies allow fully manual investing. You can filter the loans on the platform according to interest rate, loan term, loan purpose as well as a whole range of date pulled from borrower’s credit reports.
Lending Club allows the added benefit of being able to download the spreadsheet of all available loans on the platform, and then you can do analysis on these loans in Excel. Prosper doesn’t allow a download, but it does have superior filtering capability on their platform.
One little trick for Prosper investors: if you use Google Chrome you can get a plugin called Prosperity that will display the credit data for each loan on the page (as long as you are logged in to your Prosper account). I use this feature all the time and have found it to be very helpful.
Credit Worthy Borrowers and Default Rates
Both companies have strict underwriting standards and a borrower must have decent credit before obtaining a loan from either company. Lending Club uses Transunion to pull credit data, and they allow borrowers with a minimum credit score of 660. Prosper uses the Experian Scorex credit score and allows borrowers with a minimum credit score of 640 (this minimum score is reduced to 600 for borrowers taking out a second loan).
Defaults are a big concern for every p2p investor. When comparing the defaults from all loans that originated in 2010, we can see that Lending Club has a slightly lower default rate (as of this writing) of 3.2% versus at Prosper 5.7% (data from Lendstats.com).
This doesn’t mean that returns are lower at Prosper than Lending Club; it just means that Prosper has on average higher risk (and higher return) loans. This is demonstrated by the average interest rate for 2010 loans. It was 12.2% at Lending Club versus 19.2% at Prosper.
Which Company is Right For You?
I originally just started with Lending Club and was hesitant to invest with Prosper based upon previous performance. As I discuss in my Prosper review, they’ve made dramatic changes in their underwriting process. From the statistics Prosper offers similar, if not slightly better, performance and risk profile to Lending Club.
I now have accounts at both companies, and I continue to add new money to my investments there. I encourage every peer-to-peer investor to research each company, take a look at their platforms and get a feel for which one you prefer.
New investors should also take a look at the prospectuses of both Lending Club and Prosper, you should always know the risks involved. Also the entire loan history for both companies is available for download online.
My opinion is that new investors have two great choices. If you can’t decide between the two companies, then do what I did; open up accounts at both companies.