Lending Club vs Prosper: The Ultimate Showdown

Lending-Club-vs-Prosper

Last year was a big one for us in the lending community. On the one hand, we watched as Lending Club, the industry leader, crossed $1 billion in issued loans (and has now crossed $2 billion). This was wonderful news for those of us who are eager to see peer to peer lending go mainstream. But to our chagrin, there were also no additional platforms launched. While the cost of launching a platform is high (around $10 million), we had hoped that additional companies would follow Lending Club and Prosper’s lead into this new lucrative class of investment. Yet, none came.

Lending Club vs Prosper for Borrowers

Note: this post is for investors. Borrowers may want read Lending Club vs Prosper for Borrowers.

As we wait for additional platforms, there are still only two options to choose from in the United States: Lending Club and Prosper. Each platform has its own strong and weak points, so lenders would be wise to understand both. We previously examined each platform in great detail, like in our Lending Club review, but it would be good to examine them both side by side.

This is what we will do today. Read on as we put these two platforms head to head for a steel-cage bare-knuckle no-holds-barred showdown of lending disintermediation.

Lending Club vs Prosper: Trust-factor

Probably the first thing we can examine between these two companies is how well they have done in the past, and how well they are doing today. This picture can give us a clue of how they will perform in the future.

Lending Club Issued Loans Oct 2013

As you can see above, Lending Club has had a very positive past. They were the second company to launch and have experienced positive lender returns every single year, even during earlier shakier seasons like 2007. Since their relaunch in 2009, they have been growing by leaps and bounds. In November of 2012 they crossed $1 billion in issued loans, and have already crossed $2 billion in issued loans since then, just eight months later. Amazing.

Prosper has not had equally blistering success, but has still managed to do very well. While they were the first company to launch, they ran into problems early on and have yet to totally shake loose from their previous mistakes. That said, they have experienced tremendous growth as well. The majority of Prosper’s months had them achieving record highs in issued loans.

Prosper Issued Loans 10-2013

As you can see in the graphic above, things took a turn for the worst in late-2012 when Prosper experienced its largest drop in issued loans ever. The company quickly convened and retooled the platform going into 2013, appointing a new CEO and pumping in another $20 million in funding. By mid-2013 they seem to not only be surviving but thriving, hitting company-record highs each month. You can read my interview with President Aaron Vermut here.

These days, while Prosper is experiencing much welcomed growth, they still are on somewhat shaky ground in the eyes of the lending community.

Winner: Lending Club

Lending Club vs Prosper: Website

If you are just getting started with peer to peer lending, probably the first thing you will encounter is the website of the platforms. In this way, Prosper and Lending Club can each be a very different experience for you. Prosper does a really great job at making their website easy to understand. Their overall platform is presented in a readable and efficient format. The typography and colors organize the site well, making lending an easier process.

Prosper 2013Q1

(click to zoom)

What this means for you, the prospective lender, is that Prosper’s website is actually helpful when trying to lend money to borrowers around the country. Peer to peer lending terminology like ‘debt-to-income ratio’ is slightly underlined whenever it is presented, meaning it has hover-over definition boxes that pop up if you are struggling to understand what they mean.

This is really important for peer to peer lending in general. In my opinion, the reason peer to peer lending has yet to catch on within the mainstream public is because people struggle to understand how it works. In this way, Prosper’s website is a breath of fresh air.

Lending Club, on the other hand, has needed for years to give its website an overhaul. As mentioned in the previous section, Lending Club has often forgotten about retail investors and focused instead on its larger institutional partners. What this has meant for lenders like you and me is a website that is somewhat less innovative and helpful overall.

Lending Club Taxable 2013 Q1

(click to zoom)

Terminology like ‘debt-to-income ratio’ is not defined on the Lending Club site, so beginner lenders often have a tough time in trying to understand what things mean. Furthermore, their area for filtering available loans is clunky at best; everything is squished into a side bar when it should have its own filtering page.

Overall, Lending Club’s site works fine once a lender gets the hang of it, but Prosper’s site is much better, especially for beginners.

Winner: Prosper

Lending Club vs Prosper: Function

We have covered how each platform looks and operates, but how well do Lending Club and Prosper actually work? In many ways, their experience is quite similar, but there are major differences we can highlight.

For instance, Lending Club struggles in filtering its platform for available loans, while Prosper’s filters can be finely tuned. This is apparent when looking at something like ‘Earliest Credit Line’, which is the number of years a borrower has had credit history. Borrowers with longer credit histories are generally going to be more trustworthy than those with shorter histories, since a borrower with a long trouble-free history is obviously less likely to become troublesome in the future.

LC earliest credit line filter (2)Lending Club has only four options when filtering their loan pool using ‘Earliest Credit Line’: Any, 1 year or more, 5 years or more, and 10 years or more. A borrower who has four years of credit history is often more trustworthy than someone with only one year of history, yet Lending Club does not make this distinction. Prosper, in comparison, allows full fine-tuning of its filters. You would just punch in the number 4 and be done.

Prosper Earliest Credit Line Filter

Prosper also gets praise for its Automated Quick Invest, a feature which allows you to peer to peer lend passively! You just set up the finely tuned filters to auto-invest for you and let the website work its magic. Lending Club has no passive feature, and this means you have to log in every week to reinvest your available funds. This can be quite frustrating for some, since Lending Club’s loans are often quickly funded. As a result, lenders at Lending Club have to be more active to excel on their site.

Regarding their similarities, both Lending Club and Prosper do a good job at the basic lending functions. You can invest and receive payments on each platform with ease. However, while Lending Club does have its occasional innovative feature (like its portfolios section), Prosper overall is a more functional website.

Winner: Prosper

Lending Club vs Prosper: Loan Quality

While we have covered the platform’s history, website, and function, we need to finish with looking at the quality of their available loans. While both platforms do a decent job at funding available loans and receiving payments, they have somewhat different quality within their available loans.

On top of other factors, Lending Club requires a minimum credit score of 660 to be approved for a loan. This stricter application process has meant that 90% of their loans are not approved, and that the quality of Lending Club’s available loans are better. Prosper, perhaps because of their underdog status, allows slightly riskier borrowers onto their platform, like those with a credit score as low as 640.

This means that some lenders like myself experience a higher number of defaults on Prosper, meaning we have more people borrow money from us who then fail to repay their loan. To offset this, Prosper offers riskier loan grades than Lending Club, and this greater risk means these loans carry much higher interest rates. The riskiest loans on Prosper can give you interest higher than 30%, which is five percentage points higher than the best ones on Lending Club.

That said, I have found the higher risk is not worth the higher number of defaults. While some lenders might disagree with me, I feel Lending Club’s stricter application process means it has better quality borrowers overall, and thus gives us lenders a more consistent and positive experience.

Winner: Lending Club

Verdict: What do you need?

Both Lending Club and Prosper are good platforms, but they do have significant differences when compared side by side. Ask yourself:

  • Do you place great importance in a company’s history? Go with Lending Club, since they have experienced more consistent growth over the years than Prosper.
  • Do you need help understanding the peer to peer process? You may want to open an account first with Prosper, since their site is far more user friendly.
  • Are you trying to deeply filter each platform for very specific high-performing loans? You may tilt towards Prosper. Their filtering is much better than Lending Club’s filtering, and you may be able to earn a higher return.
  • Do you want peer to peer lending to be a more passive hands-off experience? You will want to open an account with Prosper, since their Automated Quick Invest feature is amazing at finding solid loans for us without much involvement.
  • Are you looking for lower risk or a higher return? If you are trying to lower your number of defaulting borrowers, you may want to go with Lending Club since their loans are generally higher quality. However, there are far better interest rates within the riskier borrowers on Prosper, so if maximum risk/return is your desire, they might be the better option for you.

In summary, both platforms are great options, and lenders like myself have accounts with both (see my portfolio). This allows me to not only receive the benefits of each one, but it also reduces my risk, since owning notes across two different platforms acts as a way to further diversify my lending portfolio. As a reminder, there are actually more important things to do in peer to peer lending than choosing between these platforms, like fully diversifying your account. But if you are trying to decide between them, this article should help you choose one that is more tailored for your specific needs.

Open an account with Lending Club or Prosper.

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Comments

  1. Mollie Lyddane says

    I’m a newcomer to the P2P lending world and needed a Lending Club vs. Prosper article in order to help make my first move! Helpful comparison, thanks!

  2. says

    Simon, well done as usual.

    I just added some funds to my LC account but I tend to prefer the Prosper platform too. I definitely think that for beginners that Prosper’s site and functionality are easier to use and understand. keep up the good work.

  3. Steve says

    Great article. However, my question is from the other end of it. Meaning, which is a better company to go with as a BORROWER?
    Any input would be appreciated.

  4. Monica says

    Hi, Simon. I’m curious about your statement “…there are still only two options to choose from in the United States: Lending Club and Prosper.” Why isn’t Peerform an option. Is it because their availability is limited (last I looked, it was 13 states)? Or is there some other reason? Just curious…I’m getting ready to jump in and make my first loans, and while I was focusing on Lending Club and Prosper anyway, I always thought there was a third option (I’m in California). Thanks.

  5. Phil Smeby says

    This was a really helpful article as I am new to this whole thing, and I am looking to get involved as an investor. I am curious as to why you would consider Lending Club beating out Prosper in loan quality. Does Prosper not inform you of their credit scores? Are the loans at Lending Club for someone with a 700+ credit score defaulted on less then those of similar risk at Prosper? If you are basing loan quality only on the fact that Prosper allows loans created for lower credit scores, then I would think that Prosper would be the winner as it gives more investing options.

    I am thinking about starting with Prosper, so I want to know if I am loaning money to similar borrowers in both Lending Club and Prosper, both have similar credit scores and both are asking for the same amount of money, can I expect similar results from both Lending Club and Prosper? Also how do these two compare in the event of a default? Thanks.

  6. John Howard says

    What is the maximum amount a single borrower can obtain on each of the websites for the purchase of a business? Other peer to peer websites?

  7. Him says

    I am a newcomer at lending club, what do you think are the best filters that can be used. You are explaining everything in detail and is a very helpful article.

    • says

      Hi Him. Honestly, there really isn’t one “best” filter. It all depends on how much risk you’re willing to take, and how much time you have. If you have very little time, you’ll probably only want to focus on B-C grade notes with a simple filter (IE: zero inquiries or income $5000+/month). If you have more time, you can make your filters more complex (since you’ll have freedom to search for harder-to-find notes more often).

  8. says

    Just wondering if you would still stand by your vote for Prosper having the better website. I’m a fairly long term investor in Prosper, and am really disappointed that they no longer are providing information on what borrowed money would be used for. I only invest in business loans, and evaluated the quality of the idea and proposal, along with the credit history of the borrower. I went in today to relend money that has grown in my account, and there is no information available any longer on what the money would be used for. I find this a serious omission, as investors are now forced to treat prospective borrowers as merely a sum of their numbers. Seems to me, we’re moving in the wrong direction on this.

  9. Lauren says

    As a retail lender, I have to wonder why neither company requires potential borrowers to answer detailed questions about their income and expenses. I have been an investor with Prosper for about 8 months now, but I am struggling to find worth while investments, as borrowers are not required, and hence most don’t, put any information about their ability to repay their loans. I find it frustrating that so many are eager to take my money, yet won’t spend 5-10 minutes providing details about why they want the money and if they can afford to pay it back.

    • says

      Hi Lauren,
      The answer is complicated, but it has to do with supply and demand. There are far more investors than borrowers right now. Prosper and Lending Club used to require all sorts of detailed information that they don’t anymore, because asking borrowers to provide additional answers resulted in many of them no longer wanting to apply. This does not mean the loans are less quality – far from it. The default rate for Lending Club has dipped below 3% in the past twelve months. So, statistically, the loans are actually getting better even though borrowers are being asked to provide less and less info. In short, if you’re looking to get a “feel” for each borrower’s request, history, employment, etc then you’re going to be frustrated to where this industry is headed. P2P lending has become a numbers game, and the quicker we can adjust to this reality, the more we will enjoy it and profit from it. Simon

      • Tom Eggert says

        Simon
        I appreciate your answer, but it is really unsatisfying. What Kiva first demonstrated, and what others have demonstrated since, is that as borrowers, we want to understand our loan recipients. If in fact, Prosper and Lending Club move away from providing this information, I will move toward Kickstarter, Vittana, Kiva Zip, or a host of other options. I’m not investing in a bank, I’m investing in people. If they choose not to share information about themselves because they just don’t have to, I’ll find another option. What a loss for the industry!

          • Lauren says

            Simon I appreciate your answer, but I disagree that either site provides “socially-responsible investment opportunities”. Your first answer contradicts that statement. If individuals want my money, than they should be “socially responsible”, and prove to me that they can afford to pay me back. I have to agree with Tom here. If someone needs my money bad enough to ask for a loan, than they better prove that they have the means of paying it back. And if they don’t want to spend 5-15 minutes explaining how they are able to afford this loan, then let some other sucker/loser invest. Because that is completely irresponsible of the lender/investor. And I must say if you’re ignorant enough to blindly invest your money without knowing anything about a person’s ability to repay, then you deserve it if the borrower defaults.

          • says

            Hi Lauren, I do believe these investments are socially responsible (outlined here). Secondly, I would argue that their credit history goes much farther to “prove” that they are responsible than the tedious task of examining each person’s story. Statistics, as I’ve said before, are amazing in their ability to help us efficiently evaluate people. To be frank, I’ve yet to see anybody have better returns than me (see here) who picks their borrowers through reading each one’s story.

          • Lauren says

            I guess we will have to agree to disagree, Simon. As I said, my money will go elsewhere. I am sure Prosper and LendingClub won’t/don’t care. That’s their prerogative to run their company the way they see fit. But its my prerogative to take my business elsewhere. By the way, I have done quite well for myself with returns of 12.5%. You believe in statistics. I believe in the individual. Would you ask Mark Cuban of Shark Tank to invest in a business or individual based on their credit score? He would laugh at you!

          • says

            No worries. Thanks for stopping by. As for Mark, I would like him to use his approach on 800 people at once – the number I’ve loaned to. One on one, I bet he’s good. But en masse, he would have to defer to a more numeric approach.

        • Lauren says

          Tom, my sentiments exactly. Thank you for providing other sites for me to check out. I have money to reinvest/invest, but it won’t be with either of these companies.

          • Lewis says

            I have to agree completely with Tom Eggert & Lauren. I too have been investing w/ Prosper for over 3 years and am very disappointed w/ their decision to drop the loan field description. No bank would loan me any money w/o asking why I wanted/needed the money–answering “other” or “large purchases” (actual descriptions @ Prosper) wouldn’t cut it.
            I too have decided to look elsewhere to invest MY money.

          • says

            Sorry to hear that Lewis. Prosper continues to provide good rates to borrowers and good returns to investors like myself each quarter, despite the lack of loan descriptions.

  10. Anonymous says

    You should put a Bitcoin “donate” button or list a receive address. I would have flipped you some coin for your informative comparison, thank you.

  11. Nate says

    Lending Club does have a passive investing service called PRIME. Usually the minimum investment to be eligible for PRIME is $25k, but right now they have opened it to those with at least $10k for a limited time. It has made it much easier and efficient for me since I enrolled.

    • says

      Thanks Nate, this is true. However, PRIME is not really the same kind of investing. They automatically choose the notes for you using wide selections, whereas Prosper’s auto-investing tool goes for notes that you specify, and you can make your specifications as broad or narrow as you wish.

  12. Eileen says

    I am interested in being a lender but I just can’t understand why one have to have MINIMUM of $70k yearly income + an additional $70k in assest (NOT including, house, car, furniture). This is ridiculous, no other investment company has these requirement. As I read , the minimum to invest is $25, so what’s behind this ridiculous requirement? Also, why would they pull the credit report for being an investor? Thanks.
    I accidentally posted this on the borrowers’ page, not realizing there was one for investors

    • says

      Peer to peer lending is only not starting to gain trust in the eyes of the general public, particularly to unaccredited investors. As a result, Lending Club and Prosper have done their best to keep their population of investors at least somewhat above the ability to be ruined by peer to peer lending, in case the whole thing would blow up.

      That said, peer to peer lending is more trusted these months than ever before, so I would not be surprised if they loosen the requirements you’re referencing.

  13. mark menzie says

    I just joined Prosper and am going through account verification. How long does account verification take and also how long do funds transfers take?

    A word of caution is in order, loan statistics have been improving in an improving economy. When we have another recession we should expect loan quality to deteriorate.

  14. John says

    Simon,

    Thank you. I have a question concerning default of the platforms themselves. In the beginning, I shied away from Prosper as the notes were general obligations of the company (which was loosing millions at the time). A few years ago, they restructured the notes into a trust so lenders would not have to stand in line with general creditors if Prosper went under (my interpretation).

    I am just starting to look at Lending Club and will read the prospectus, but are they legally organized like Prosper or are lenders general creditors of Lending Club if they bankrupt? Thanks.

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