Have some of the happenings from the past five years left you a little concerned about your portfolio? Are you looking for ways to diversify it and give yourself additional income options?
You’re not alone. The recession has caused many people to look in new directions to generate wealth and one area they are increasingly turning to is peer-to-peer lending.
Those hurt by the recession and then hurt again by high interest rates charged by banks on loans (when they can get them) and on their credit cards are also looking to peer-to-peer lending as a way to get stronger faster.
If you are looking to diversify your portfolio and are considering getting involved with peer-to-peer lending, the two biggest sites are Lending Club and Prosper. With a combined total of more than $2.6 billion lent, it is obvious that both lenders and borrowers are increasingly accepting the P2P industry.
So which one do you you choose? If you are looking to borrow the first thing you need to know is not everyone who signs up will Prosper and it is a whole lot easier to get into Sam’s Club than it is Lending Club.
Approximately 12.5% of applicants to Prosper get approved while the rate is less than 10% over at Lending Club. So, while defenders of traditional lending institutions often cite this newer industry’s lack of a track record due to its short lifespan, the major players are doing their due diligence during the screening process prior to placing loans on their sites.
This is reflected in loan default rates. Enhanced screening processes now weed out higher-risk applicants before they make it online. Lending Club states their default rate has been less than 3% for several years while Prosper’s loss rate is 5.8%.
There are plenty of similarities between Lending Club and Prosper. Administratively, both allow for terms of three and five years. They also offer consistent ratings systems, monthly withdrawals and a two week listing period. There are no penalties for early balance payoffs or charges for additional payments on either site.
The average FICO and ScoreX scores are close. Investors must place a minimum of $25 in each loan at either site. Both offer investors a quick invest option, where a program suggests loans for you based on your chosen criteria. Loan minimums are $1,000 or $2,000 and both companies have a maximum request of $35,000.
The interest rate range on the best APR runs from 6.03% – 8.90 % on Lending Club and 6.04% – 8.49% on Prosper.
You’re probably not reading this to find out that everyone’s the same, and they are not.
There are some differences between the average borrower on each site. With Prosper, you have informal reference checks done for you in the form of borrower endorsements and community affiliations that are a part of every profile. That information is not found on Lending Club.
Prosper lenders also see four more years of credit history on average than do the backers at Lending Club. The average Prosper borrower’s income is 16% higher than the average Lending Club borrower.
As you peruse listings at Lending Club, you see the borrower’s length of employment, which you do not see at Prosper. The average loan size at Lending Club is $13,076 and $10,268 at Prosper and the debt-to-income ratio of the average Lending Club borrower is 15.8% while at Prosper it is 18.3%.
In terms of returns, your site preference will depend on your risk tolerance and how much you diversify. The net annualized return rates start at essentially the same spot (5.49% for Lending Club, 5.50% for Prosper) but Prosper tops out at the higher end, exceeding Lending Club’s top end of 11.91% by 1.38 points for a maximum net annualized return of 13.29%.
If you prefer to spread out your loans throughout the risk spectrum, returns in the middle risk categories range between 1.09% to 2.84% higher on Lending Club.
As you navigate the Prosper and Lending Club sites you may notice some subtle differences in tone.
Both do a good job of providing basic interest rates and other information you need to participate as either a borrower or a lender. Lending Club’s site is more user-friendly, as they do a better job of explaining concepts and the process than Prosper.
Lending Club makes statistics easier to find and breaks up data with explanations, commentary and a layout that is more conducive than Prosper, which often lays out statistics and filings with little explanation.
Lending Club has facilitated $2.052 billion in loans compared to $553 million for Prosper. While the ratio is 3.7 to 1, it has been as high as 4.5 to 1 so Prosper is closing the gap.
These numbers will be significantly influenced by growth strategies in the future. For example, Lending Club is partnering with community banks on a limited basis, which will be described in a future article.
Traditional growth in combination with such novel initiatives will play a large role in determining how this competition plays out in the future.
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