The following information may help you in your peer-to-peer investing decisions.
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.
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.
“Note too that Lending Club tends to have lower interest rates thus giving a lower return.”
As you explain later in your article, a higher interest rate does not mean a higher return. The two defaults with Prosper mean your higher interest rate is a lower return.
I expected to see higher default rates with Prosper but was surprised that your defaults are AA loans. Most of my Prosper loans are AA’s. Luckily none have defaulted so far.
Lending Club only accepts prime borrowers so the risk is lower.
In the end, I think your comparison is valuable but it is difficult to take your results and extrapolate them to the general population. One nice addition to your comparison would be to add the average loan age and loan grade.
Tom,
Most of the loans I took out when I first signed up. So most Lending Club loans are four months old and most Prosper loans are eight months. Here is the breakdown by dollar amounts:
Prosper: AA 17% A 23% B 50% C 0% D 5% E 5%.
Lending Club: A 5% B 53% C 41% D 1%.
You are right, the return should be calculated after defaults are subtracted. I have read your blog several times, it is very good.