Prosper.com and Lending Club.com are by far the two largest peer-to-peer lending websites in the United States. Many investors have used these services to diversify their investment portfolios. During the financial crisis, while stock and bond prices plummeted, many peer-to-peer lenders continued to make a positive rate of return because their returns were solely based on people repaying their loan.
If you’re an investor and are thinking about registering with Prosper.com or Lending Club.com, is there one site that will generate a better rate of return than the other? Both Prosper and Lending Club publish detailed statistics about the rates of returns that they receive. Lending Club prominently promotes that their investors have averaged 9.64% since the company started originating loans in June 2007. The rate that Lending Club promotes was independently determined by Javelin Research and reflects what lenders are actually earning after fees, late pays and defaults.
Prosper.com promoted that its investors were earning 7.06% back on their return on the front page of their website until about a week ago. Now Prosper.com is reporting that their investors are earning an average of 7% to 13% dependent upon the types of loans that its investors take out. Unfortunately for Prosper Lenders, that rate is much closer to 7%. According to Prosper’s own data, lenders loaning only to borrowers with the best credit ratings earned only 7.19%. Lenders lending to investors that were high-risk or had no credit actually lost 6% to 7% on their investment. Investors with A through E credit ratings earn an average of 4.5% to 7% back on their money.
What’s the reason for this disparity? Lending Club has much more stringent credit requirements for its borrowers. Lending Club has also has much more developed collections practices, which are very similar to what a credit card company might use, in order to minimize late fees and defaults. This has shown up in their default rates as well. 20% of Prosper’s loans have ended up being charged off, where Lending Club’s charge-off rate is just 2-3%.
Lending Club and Prosper also base their interest rates off different metrics. With Prosper, Lenders bid down the interest rate of the loan until the borrower gets the cheapest rate possible, but with Lending Club, borrowers are assigned interest rates based on their credit score. With Prosper, there’s the Prosper, there’s the possibility that enthusiastic investors that have not thoroughly researched the credit risk could be bidding at too low of interest rates, greatly reducing their rate of return. With Lending Club, borrowers pay more standardized rates which will ensure that investors get reasonable rates of return.
