Lending Club and Prosper: Comparing Two Peer to Peer Lending Models
Lending Club and Prosper Marketplace are the two established companies in the United States which offer peer to peer lending marketplaces in which people can make loans to one another. Although they have similar business plans, the two companies loan marketplaces function quite different.
Prosper Marketplace makes use of a reverse Dutch auction, in which a borrower places a loan listing, then investors can commit to fund a part of the borrower’s loan at a specific interest rate. At the end of a two week period, the investors that offer the best rates to the borrower will be able to provide the loan to the borrower.
The reverse Dutch auction model benefits borrowers in that they can often get lower interest rates, but in Prosper’s infancy, lenders were so eager to place loans that they would make loan bids that were so low that they lost money in their investments after fees and defaults. Prosper has since cleaned up its act to an extent and has placed limits to prevent lenders from bidding extremely low interest rates on loans. The other downfall for investors in the reverse Dutch auction model is that a lender could have his or her money tied up for two weeks while the loan is listed, and then find that he or she does not even get to make the loan, resulting in a lot of time where money is sitting useless.
Lending Club’s process is a bit simpler. Lending Club sets the rates at which borrowers can take out loans at based on certain origination criteria such as the borrower’s employment history and credit score. After the borrower agrees to take out a loan at a specific interest rate, a loan listing will be created and then investors can opt to fund part of that loan. Once an investor commits to funding part of the loan, there’s no question as to whether or not he or she will actually be an investor in that loan because there’s no reverse Dutch auction happening.
Once a borrower’s loan is fully funded on Lending Club, then it will be taken off the marketplace and the borrower will receive his or her funds.
Prosper Marketplace gives its lenders a bit more control into what interest rates that they fund loans at, but it also results in more time where lender’s money is sitting vacant. Lending Club has the benefit for investors that you know exactly what rate you are going to fund a loan at and reduces the amount of time that your money sits vacant. For borrowers, Lending Club gives you a fixed interest rate up-front, but if you can get a lot of interest from investors on your loan listing, Prosper may result in a lower rate.