Updated June 25, 2014

Best Peer-to-Peer Lending: Lending Club vs Prosper


Lending money to strangers may sound ludicrous. But that's exactly what peer-to-peer lending is all about: people who need cash link up with people willing to lend it.

Lenders don't put up money merely to help their neighbor; they are investors. Peer-to-peer investors are essentially playing the role of bankers. They risk bankrolling strangers in the hopes of getting rewarded themselves with attractive returns. Anyone who wants into the game will likely end up choosing between two companies—Prosper and Lending Club.

Identical Twins?

At a glance, Prosper and Lending Club may seem nearly identical. Both operate an online marketplace where investors can open free accounts. They both offer retirement account options. Both companies facilitate loans up to $35,000 for three- and five-year terms. Each company has a fractional loan system that allows multiple investors to fund just a small portion of a given loan. And they both allow investors to start lending with as little as $25.

Despite these similarities, the companies are different in numerous ways, and anyone who considers investing in peer-to-peer loans would be wise to understand what they are.

Availability and Restrictions

Not everyone has the option to be a peer-to-peer investor. Lending Club is only available to investors in 26 states. Prosper is open to investors in 30 states and the District of Columbia.

Even so, investment opportunities may still be subject to restrictions. Lending Club is the stricter of the two companies with requirements on its investors’ broad gross income and net worth. Lending Club also forbids any investor from lending over 10% of his net worth. Meanwhile, Prosper imposes these rules in only about one-third of the states where it's open to investors.

Winner: Prosper

Grading Risk

After deciding who is eligible to borrow, Lending Club and Prosper grade borrowers, but each company has a unique system. Lending Club's ratings span from A1 (best) through A5 to G1 through G5 (lowest). Prosper's system only has seven grades, ranging from AA (best) to HR, or high risk. These grades are much like credit scores as they determine borrowers' interest rates and tell investors how risky loans are.

Winner: No clear winner

Borrowers, Loan Quality, and Returns

Default risk is a reality of peer-to-peer lending. Not everyone you give money to will pay you back. But the risks are higher at Prosper, where borrowers can have a credit score as low as 640 and they are more likely to be approved. Lending Club has more stringent borrowing requirements, requiring a credit score of at least 660; approximately 90% of borrower applications are reportedly rejected.

Lending Club's better loan quality and lower default rate don't mean its investors come off better. Lending Club's interest rates range from 6.03% to 26.06%. Prosper's interest rates range from 6.05% to 30.09%. Since Prosper has more riskier loans, investors have more opportunities to benefit from the higher rates, making it easier to wipe out losses from defaults.

Winner: Lending Club

On the Platform

Despite the application process and grading systems, savvy investors do their own assessments of borrowers and set their own standards for lending. Both Lending Club and Prosper provide a lot of information to help investors make smart decisions. But Prosper's website generally gets the best feedback. It feels more modern and user-friendly. Inexperienced investors can get explanations of certain words by hovering the cursor over them. In addition to borrower details, loan listings provide investor data, such as lending yield and estimated loss and return. Prosper is also widely recognized as having better filters, which is important because filters allow investors to set criteria and find the types of loans they want to invest in.

Winner: Prosper

Fees

Both companies charge service fees. Lending Club takes 1% of each payment borrowers make. Prosper's service fee is 1% of the outstanding principal of a loan before applying each payment.

Prosper doesn't touch an investor's interest. And though its declining fee structure means investors pay the heftiest fees in the beginning, Lend Academy's calculations show Prosper's fees are lower than Lending Club's when borrowers repay their debt during the first half of the loan period. Since Lending Club's fee is a percentage of the payment, investors can actually lose money if borrowers quickly repay loans, say within the first month. But if investors pay on schedule until a loan matures, Lending Club's fees are lower.

Both companies also charge collection fees for chasing down delinquent payments. Lending Club clearly outlines its fees, which are a minimum of 30% of the amount collected. Prosper allows each collection agency to determine its charges.

Winner: Prosper

Automatic Investing

Both companies let investors take their hands off the wheel. With Lending Club's Automated Investing, investors can pre-set criteria and have the system automatically invest funds in matching loans. Investors must have $2,500 in their accounts to use this option.

Prosper Premier allows investors to specify their goals and strategy and leave analysts to do the work, including reinvesting available funds. This option requires investors to commit $25,000, and there's usually a one-time 0.8% administrative fee, but it's currently being waived.

Winner: Lending Club

Loans

If there's one thing that's sure to draw complaints from peer-to-peer investors, it's idle cash sitting in their accounts waiting to be invested. Loan availability is extremely important and Lending Club has far more lending opportunities. The company, which launched in mid-2007, has facilitated over $4 billion in loans. Though Prosper is the older marketplace and technically available to more borrowers, it has funded only about $1 billion in loans.

Winner: Lending Club

Institutional Crowding

As peer-to-peer lending grew, the market attracted more attention from institutional investors. Now, retail investors are concerned big money players will suck up all the loans. Prosper investors have already complained about low loan availability, and Prosper President Aaron Vermut has admitted institutional investors were dominating the platform. But he told Lend Academy that Prosper has responded by asking all institutional clients not to invest in more than 10% of each fractional loan. Retail investors don't appear to feel as threatened at Lending Club, where CEO Renaud Laplanche denies his company has this problem.

Winner: Lending Club

Making a Choice

Which marketplace should retail investors choose: Lending Club or Prosper? Many investors don't choose; they have accounts with both, at least until they determine which company best serves their individual investing needs. If you're not interested in two accounts or you're trying to select between your current accounts, consider each company's characteristics.

Who Prosper Is Best For
Prosper appears less strict on borrowers and investors and offers higher rewards for higher risk. That suggests Prosper is a good option for investors with a strong appetite for risk.

Who Lending Club Is Best For
Lending Club has strict credit requirements and high rejection rates for loan applications. The company also seems to have done a good job of managing the balance between retail and institutional investors thus far. Lending Club gives the impression of a company trying to keep the ride as smooth as possible. That type of environment is ideal for more cautious investors who accept that the trade-off for less risk (relatively) may be lower returns. Since Lending Club is more popular with borrowers, it's also a good place for investors who cringe at the thought of idle cash.

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