Comparing Lending Club with Prosper

The following information may help you in your peer-to-peer investing decisions.
Prosper Logo

The Comparisons

A useful comparison of Lending Club and Prosper would be to invest the same amount of money in each company and review the progress a few months later. And that is just what I did. However, an exact comparison was not possible because first Lending Club and then Prosper were in quiet periods. So while my Lending Club loans span only four months, Prosper’s cover eight months. Also my Prosper loans cannot be re-invested because of their quiet period whereas Lending Club has no such restriction. Note too that Lending Club tends to have lower interest rates thus giving a lower return.

The Numbers

Lending Club Prosper
Total investment $4,100.00 $3,000.00
Date of first loan 28 Oct 2008 09 Jun 2008
Active loans 115 34
Interest rate — lowest 8.00% 11.50%
Interest rate — highest 15.37% 30.00%
Interest rate — average 11.34% 17.46%
Net interest $158.54 $422.29
Loans paid in full 5 5
Late loans — number 0 1
Late loans — grade N/A B (1)
Late loans — value N/A $74.28
Loans in collections — number 3 6
Loans in collections — grade B (1) and C (2) AA (4); A (1); B (1)
Loans in collections — value $161.07 $576.47
Cost of auctions $60.72 N/A
Profit (interest minus losses) -$63.25 -$228.46

Table last updated: 16 July 2009
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In the table Net interest includes late fees, collections, and administration fees. I have counted Loans in collections as well as Late loans. However, there have been some small collections made and frequently loans that are late are caught up.
Lending Club

The Conclusions

Even though Prosper has the higher earnings its losses are greater. Bear in mind the loans on Prosper have been running twice as long as my Lending Club loans, hence more opportunity for loans to fall behind. My losses on Prosper have been aggravated by my having one loan of $200 in collections and the rest that are behind all at $100. The idea is to invest no more than $50 a loan. My mistake. Over time I believe my Prosper profit will go into the black but I see Lending Club giving a better return. I have thought for awhile that Lending Club does a better job of rating the risk on the loans and these results tend to confirm it. Consider that four out of five of my Prosper late loans are rated AA and the remaining loan is rated A. One would never have thought that these higher rated loans would be the first to cave.

When Prosper reopens I probably will not resume investing but will in the near future pick up the pace with Lending Club. If you are going to try peer-to-peer investing plan on losing some of your money. But with a little more care than I exhibited you should still make a better return than with a Certificate of Deposit.

Looking over these numbers what do you conclude?

Updates

7 Apr 2009 Updated the table.
23 May 2009 Since I last updated the table I have added another $1,100 to my Lending Club account. Although small, Lending Club is now reporting a loss. In a change of direction, today I put up for auction five of my $100 loans. It is time for me to move out of peer-to-peer lending and put more into my FDIC insured rewards checking accounts that return a steady 5%.
16 Jul 2009 Updated the table. Late in May I liquidated all my Lending Club holdings except for the 3 loans in collections. Over a period of three days I placed and auctioned off all the loans. I paid 1% commission on the selling price. I also discounted the price by 1/4%, 1/2%, or 1%. They were purchased very quickly because almost all the good loans are not discounted. The total cost to sell my loans of $4,048.13 was approximately $60.72. This makes early withdrawal very fast and relatively painless. I was happy with the result.
Rickety signature

Four New Features from Lending Club

Lending Club
The Lending Club blog announced four new features today:

  • Notes Already Invested in
  • Charged off loans and notes
  • Give your friends $50
  • Reinvesting Monthly Payments

These are all very useful features. I checked them out in my Lending Club account. But first, to give you some idea of the possibilities of peer to peer lending here are a few details of my rickety lending. Currently I have 44 notes in Lending Club that have a weighted average interest rate of 11.45%. None of my notes have ever been late. Based on outstanding principal the composition by rating are A 6%, B 55%, and C 39%. It seems to me that this is a very good interest rate when compared to Certificates of Deposit.

Notes Already Invested In

The “Notes Already Invested in” feature was one that I had requested in October. The part that is most useful to me is the ability to exclude notes already invested in when browsing and searching. I just have to select the check box at the top of the search page.

Charged off Loans and Notes

As far as “Charged off loans and notes” are concerned, I don’t have any of my notes that are past due so there is nothing for me to see — yet. Here is what Rob has to say:

We have added a “charged off” status to your account, so that you can now differentiate defaults from charge-offs. While “default” occurs automatically when a loan is 120 days past due, a loan or note only gets charged off when Lending Club considers it unrecoverable after a review of the collections activities (which can happen before or after 120 days). These charge-offs will appear in your end of year statement so that you can report them as losses for tax purposes.

Give Your Friends $50

The “give your friends $50” feature appeared at first to me to be a gift certificate I would have to buy. But no, it is a promotion and a very good one. Lending Club explains their generosity:

Well, we spend around $50 attracting a new customer anyway so instead of making an ad agency richer, we thought it would make more sense to let you invite your friends and deposit $50 in their account, make them $50 richer and make you look good in the process!

I have already sent invites to several friends and family who will appreciate $50 to play with. The slick interface allowed me to choose from my email contacts and edit the email invitation if I wanted.

Reinvesting Monthly Payments

“Reinvesting Monthly Payments” offers the ability to schedule a search that runs automatically when your cash balance equals or exceeds a given amount. This feature currently uses LendingMatch; Lending Club will be adding the ability to use the more granular credit criteria soon. I am using this feature by setting the minimum amount of $25 and the lowest target average interest rate. As soon as my cash balance reaches $25 I should be notified by Lending Club of the order that is waiting. I’m not interested in the order — I pick my own notes — I just want to be notified that I have enough to invest in another loan. We will see if it works the way I have set it up.

Update

22 Feb 2009 A Lending Club Investment Analysis (PDF) was conducted by Javelin Strategy & Research (January 2009). Accounting for loans paid off early, late payments, defaults, and a Lending Club 1% service charge, the overall investment return still averaged 9.05%, with a median return of 10.48%, based on a Weighted Average Return on Invested Capital.
Rickety signature

Trading Loans on Lending Club

Map of Lending Club fully funded loans in Utah.

Getting Ready To Trade Notes

I previously wrote about my experience with Lending Club. None of my loans have turned rickety and I have even signed up for FOLIOfn’s Note Trading Platform. Here is what Lending Club has to say about trading:

If you are a Lending Club lender and wish to sell some of your Notes, or buy Notes currently held by other lenders, you can now use the Note Trading Platform operated by FOLIOfn, member FINRA/SIPC. You will need to open an account with FOLIOfn, but you can use the funds available in your Lending Club account to buy Notes through the Trading Platform, and receive the proceeds of any sale of Notes (minus a 1% trading fee) directly into your Lending Club account. Only Notes that were issued after October 12, 2008 can be traded on the Trading Platform.

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My Experience with Lending Club

Lending Club

Getting Started

Ten days ago I funded my Lending Club account with a few spare dollars. On Monday the transfered money was available for use. Lending Club connects those seeking a loan with lenders. Risk of default from rickety borrowers can be spread out by investing only $25 per loan. Unlike Prosper, the interest rate is determined by Lending Club and remains fixed during the funding process. Lending Club sets the interest using a base rate and adds to it an adjustment for risk and volatility.

A few months ago I opened a Prosper account but the company is currently in a quiet period. Hence I moved my Prosper earnings over to Lending Club. I was able to invest in several notes without any difficulty. The software did present two procedures that were a little awkward at first but I readily adjusted. I will detail them below. Also remember that I am showing you how easy the process is but I am not telling you which loans to choose.

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