Investing with LendingClub vs. Prosper: Pros vs. Cons
- January 14, 2017
- Posted by: Jeff Gitlen
- Category: Personal Loans
Have you been considering investing in peer-to-peer (P2P) lending but are unsure how to get started? When it comes to the world of P2P lending, there are only two solid choices available so far: LendingClub and Prosper. These two platforms share more similarities than they have differences, but they do have some slightly different features. This article will briefly discuss P2P lending in general then go through the main features of both platforms, including the things they have in common and what stands out about each.
How P2P Lending Really Works
P2P lending is generally unsecured consumer credit lending. Through P2P website platforms, individuals such as you and I can lend money to other individuals the same way that banks and credit card companies have been making personal loans and issuing credit cards for years.
When you open a P2P account, you can control how much you micromanage your investment, how much you invest, and for how long. Typically, a certain amount is deposited with the platform and it then diversifies your investment by spreading the money among dozens or hundreds of individual consumer loans, with input from you as to how thinly your money is spread among borrowers.
Those consumers make their monthly payments, which include interest, and the interest is profit to investors. Over time, that interest builds up and compounds through reinvestment.
LendingClub vs. Prosper - How They Stack Up
Types of Loans
Consumer, Auto Refi, Business
$1,000 - $500,000
$2,000 - $35,000
$25 + $25 increments
$25 and up
4.95% - 7.10%
4.15% - 11.72%
No: AK, OH, PA, NM, NC
No: AL, AR, AZ, IA, KS, KY, MA, MD, NC, ND, NE, NJ, NM, OH, PA, TN, TX
on LendingClub's secure website
on Prosper's secure website
Prosper is the company that came first, launching in early 2006 and becoming popular very quickly with both investors and borrowers. LendingClub wasn’t far behind, and it originally launched on Facebook in mid-2007. Today, LendingClub has the lion’s share of the market, but Prosper is still, well, prospering. Although other P2P lending platforms have tried to enter the market, no one else comes close to the success of these two industry forerunners.
Which Website is More User-Friendly?
Although opinions may vary by user, the consensus is generally that LendingClub has the upper hand when it comes to the investor interface. The account homepage is just a little bit cleaner, just a bit easier to use and view at a glance. Neither platform is difficult to use, but LendingClub has the upper hand in this category.
Comparing Interest Rates
Interest rates can vary at any time, and these could be outdated even by the publishing of this article. But generally speaking, Prosper interest rates are higher than LendingClub’s. And this is because Prosper offers higher-risk loans than LendingClub does, and they correspond with the higher rates.
Interest rates for LendingClub start at 5.32 percent and go up to 28.99 percent, while Prosper runs a range of 5.99 percent to a high of 36 percent. LendingClub releases more data on how it calculates a borrower’s interest rate than Prosper does, but both platforms are going to weigh the typical credit factors such as FICO score, number of inquiries, credit history, credit utilization, and so forth. Prosper also factors in a borrower’s repayment history with past Prosper loans when deciding how to score the borrower’s loan in terms of risk.
Customization of Investing Style
The two platforms differ in how much flexibility they give an investor. For example, LendingClub only allows you to invest in multiples of $25, while Prosper allows different amounts as long as you invest a minimum of $25. Prosper offers more interesting filters for their Quick Invest feature, while LendingClub’s version simply allows investors to click on low-, medium-, or high-risk options. Of course, both platforms allow investors to become much more active in the selection and management of their loans if they so choose. Either platform allows investors to search by type of loan as well as other factors.
Types of Loans
When it comes to types of unsecured personal loans, LendingClub offers more variety than Prosper does. While Prosper only offers consumer credit loans up to $35,000, LendingClub offers loans in the consumer, auto, and business category up to $40,000, $50,000, and $500,000, respectively. If you’re looking for more variety in terms of risky borrowers (with possibly higher returns), you’ll want to go with Prosper. But if you’re looking for variety in terms of types of loans, then you’ll lean toward LendingClub.
What are the Risks of P2P?
Either platform exposes an investor to risks common to P2P lending, and some common to any type of investment. The most obvious risk of either platform is borrower default. This risk can be minimized by investing small amounts among numerous loans, so that if one or two borrowers default the risk is spread around. A good strategy to minimize risk is to invest small amounts in many loans. There’s also the risk that either platform’s associated companies could go bankrupt. Both platforms appear to be doing well, however. Additionally, both utilize typical corporate entity structures to maintain and protect investment proceeds.
Regarding risky loans, there are some important differences between Prosper and LendingClub. Prosper does not allow late loans (loans entering default or that have already defaulted) to be listed for trade, while LendingClub does. To someone who is highly risk-adverse, this could be a factor leaning weight to going with LendingClub. In addition, Prosper lends to more risky borrowers – the minimum credit score with Prosper is a 640, compared to a 660 with LendingClub. But for the adventurous investor, the higher the risk the larger the gain.
An Important Note About State Availability
The laws governing LendingClub and Prosper are promulgated by the Securities and Exchange Commission, and thus are the same laws, but different states interpret them differently and the platforms operate differently on the backend. For this reason, the first thing you should check if you’re trying to decide between the two is whether your state only allows one or the other to solicit where you live. Prosper is not available to new investors residing in Iowa, Maine, North Dakota, Pennsylvania, and Vermont. LendingClub is unavailable to new investors in Alaska, Maryland, New Mexico, North Carolina, North Dakota, Ohio, and Pennsylvania. However, some of those states will allow their residents to trade in existing loans with LendingClub, and state laws change, so find out the current regulation where you live.
LendingClub and Prosper function in a surprisingly similar manner, but more adventurous investors are advised to give Prosper a try. Prosper’s policy of lending to consumers with lower scores means it can charge more in interest. For those looking for safer and more reliable investment opportunities, either platform will serve you well but LendingClub’s is more user-friendly. However, with just a $25 minimum investment at each platform, the average investor can try both out for size and see which one they personally like better.