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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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