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

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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Taking Stock of my Personal Finances

Market Losses

Several bloggers have been posting about the effects of the recent rickety stock market on their finances and giving advice. I am appreciative of this, it helps to see how others are faring — I might learn something. So it is time for me to do the same and perhaps you may pick up something of use. Today for the first time in months I checked the status of my retirement account. For the last three years I have been invested in the 2020 Lifecycle Fund (L Fund) which, according to the Thrift Savings Plan (TSP) website, works like this:

The L Funds provide you with a convenient way to diversify your account among the G, F, C, S, and I Funds, using professionally determined investment mixes that are tailored to different time horizons. Your “time horizon” is the date (after you leave Federal service) that you think you will need the money in your TSP account. Because it is important for each L Fund to maintain its target investment mix, the TSP will automatically rebalance each L Fund daily. Then, each quarter, the investments in each L Fund will shift to a slightly more conservative mix. In addition, experts will review the investment mixes periodically to be sure they are still appropriate.

So the L Funds include a mix of all available funds:

  • Government Securities Investment (G) Fund.
  • Fixed Income Index Investment (F) Fund.
  • Common Stock Index Investment (C) Fund.
  • Small Capitalization Stock Index Investment (S) Fund.
  • International Stock Index Investment (I) Fund.

As you can see I am well diversified. In the recent stock market declines the G and F funds held steady while the C, S, and I funds took a pounding. For the quarter ending 30th September I had a loss of $16,663.71 which also includes money contributed. Not bad. But from 1st October to 9th October I had an additional decline of $31,665.27. So even a diversified account is getting hammered. When the roof falls in it takes about everything with it. However, it is not all bad news. For 2006 the L 2020 earned 13.72% and in 2007 6.87%. As of yesterday those earnings approximately equal the losses.

Other Funds

I recently reported on Prosper where I now have 34 loans earning an average of 17.5%. While the stock market is causing grief throughout the land with seven days of triple digit declines, my Prosper loans serenely cruise along with not one point of return disturbed. Of course I plan for defaults but I haven’t had any yet.

Where to put one’s petty cash? I have mine earning 6.01% in rewards checking accounts at Coulee Bank and 5.01% in Lee County Bank and Trust (the rate was reduced from 6.01% today). I’ve not understood why more people don’t take advantage of a FDIC insured rewards checking account that pays this high of an interest rate. Of course I also have a local bank and credit union.

My Plans

My plans now are to the leave my L Funds as they are and continue to contribute the maximum amount. As soon as the stock market settles down there will be a flood of money coming back into stocks. Then we will see a number of triple digit increases.

I plan to wait a few weeks and watch how Loanio progresses and either invest some money there or in Prosper. I will look around for another bank to replace Lee County Bank and Trust. I think the minimum rate for a rewards checking account should be 6%, considering the monthly requirements that are demanded.

As far as spending is concerned I will continue as normal. What is normal? For me it is conservative but not spartan. That’s about it — business as usual. And if you’ll excuse me for tonight, I have a retirement fund I want to check again.

Update

1 Mar 2009 I did indeed leave the L funds as they are and continued to contribute the maximum amount. Recently I put new contributions into the G fund. Loanio and Prosper went into “quiet periods” so I put money into Lending Club instead. Lee County Bank dropped their rate to 3% so I joined my local Deseret First Credit Union to earn 5%. I continue to spend as normal, which wouldn’t even bring a mouse out of recession.

Rickety signature.