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The following is a post by MPFJ Staff Writer, Jeff. Jeff blogs about finances, health, and the environment over at Sustainable Life Blog.
Over the last few years,
LendingClub and
Prosper have gotten a lot of press. Both are “Peer to Peer” (P2P) lenders, which basically means that one person is lending money to another person. It’s like lending your coworker a dollar to go hit the vending machine in the break room, but on a much larger scale.
The Borrower
LendingClub and Prosper each have borrowers looking to borrow money for all sorts of different things: Wedding expenses, small business loans, home additions and new cars, but by far the most common reason that people turn to the sites is because they are looking to consolidate their credit card debt. For the borrower, it’s something of a no-brainer – they can pay off their credit cards that they were paying 18%+ interest to, and get a loan with an interest rate dependent on their credit profile. Some of these rates can be as low as 6-7%, and some can be as high as 12-14%. Either way, the borrower generally comes out ahead. The borrower is the first “peer” in the transaction.
The Lender/Investor
The second “peer” of course, is the lender. Savings rates are abysmal right now, with even high quality accounts paying at, near, or slightly less than 1% interest. P2P lending offers the chance at a far greater return than a traditional savings account (though with more risk). A small fee is charged by
LendingClub or
Prosper to administer the loan and facilitate payments, but the rest of the interest charged to the borrower is yours.
The lender can choose the term that they would like to invest in (typically 36 months), and the company will send the borrowers payment to you every month. You can choose to lend whatever amount that you like, though most investors lend in $25 increments so that they can further diversify their P2P portfolio.
Now that you know the basics of Peer to Peer lending, lets look at the two major players:
LendingClub
![taxable accounts prosper personal loans p2p lending p2p microloans lendingclub investing]( "LendingClub vs. Prosper Which is the Better Option for P2P Lending and Investing?")
LendingClub is based out of San Francisco, CA. Though you can use LendingClub in most states, it is not approved in all states (It’s
approved in CA, CO, CT, DE, FL, GA, HI, ID, IL, KY, LA, ME, MN, MO, MS, MT, NH, NV, NY, RI, SC, SD, UT, VA, WA, WI, WV & WY).
If you’re not reading from one of those states, you’re unable to invest in the origination of LendingClub notes, but there is a secondary market that you may purchase the loans from called foliofn. I personally have never used foliofn to trade any of my notes, but I have heard good things about the service, which is run by LendingClub.
LendingClub has a prospectus on file with the SEC, and has people reviewing each borrower individually before they disperse money to them to make sure that they aren’t just going to take out a large loan and walk off with it. Lending club also reviews each borrower’s loan and assigns a grade and a number to the loan. The grades range from A-G and are accompanied by a number. For instance, the top rated loans that will get the lowest interest rate are A1 grade, while the lowest grade loans that will get a higher interest rates are G5.
When viewing loans, you are able to see quite a bit of relevant information about the borrower: their credit score, where they live and work, estimated costs of living in their area, whether or not they have any previous bankruptcies and more. In addition to the information provided, you can ask the borrowers questions, either pre-canned questions such as “what is the purpose of this loan” or a question that you write yourself, in order to gain more information about the borrower.
In addition to this,
LendingClub also estimates your probable rate of return, adjusted for the risk of default for the loan grade that you selected. Loans graded A have a lower default rate than loans graded G, so the chances of default will be lower, but so will your interest rate. They use historical loan data for notes graded similarly to determine the possibility of default for all notes in the system.
My Personal Experience with LendingClub
I’ve been a member of
LendingClub for about a year now, and things are going well.
I initially invested $300, but about 2 months after that, I was liking what I saw and invested another $700, to bring my total investment in the service to $1,000. I am getting an 11.77% interest rate, and have not had any charge offs or late payments to date. I have had four notes get paid off early, but everything else is going well so far. It’s generated a nice little passive income stream for me, to the tune of $36.75 per month. When the payments come in, I wait until I have enough to invest in a new note and reinvest the proceeds.
My cash is spread across 50 notes, all with a 3 year term. Most of the notes that I picked initially were A and B grade, but lately I’ve been investing in a bit lower grade C & D notes to juice up the return a bit. Once I counter balance everything, I’d like to get about 25% A grade, 35% B grade, 15% C grade, and 15 % D grade and 5% E grade notes.
Prosper
![taxable accounts prosper personal loans p2p lending p2p microloans lendingclub investing]( "LendingClub vs. Prosper Which is the Better Option for P2P Lending and Investing?")
Prosper works essentially the same as LendingClub. A person posts a loan out for something that they need cash for like credit card refinancing or a wedding, and they are graded by Prosper.
Once those are graded by prosper, the investor has a chance to purchase/invest in a note that comes with an interest rate set by prosper. According to Prosper.com, they have a seasoned return rate of 9.28%, which is far better than you’ll get investing in a traditional savings account, but comes with a lot more risk as well.
Like LendingClub, prosper has a prospectus on file with the SEC. Prosper also isn’t available in all states. Prosper is available to lenders from Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, West Virginia, Wisconsin and Wyoming.
While there were major problems at Prosper when the company first started that involved the default of lots of loans, things seem to have settled down and gotten a bit more normal. It looks like there are far less defaults than there were when Prosper started.
One important thing to note about both LendingClub and Prosper. The key to both of these services is diversity. You’ll want to make sure that you diversify your funds across as many notes as possible to avoid 1 default causing a problem with your whole return. This typically takes a rather large sum of cash to properly diversify across multiple notes. However, it could be done with a sum as low as $1,000.
How about you all? Have you ever invested in P2P loans with either of these companies? If so, what type of return did you achieve? Was it worth any risk of default you were exposed to?
Share your experiences by commenting below!
LendingClub vs. Prosper – Which is the Better Option for P2P Lending and Investing? is a post from: My Personal Finance Journey
LendingClub is based out of San Francisco, CA. Though you can use LendingClub in most states, it is not approved in all states (It’s approved in CA, CO, CT, DE, FL, GA, HI, ID, IL, KY, LA, ME, MN, MO, MS, MT, NH, NV, NY, RI, SC, SD, UT, VA, WA, WI, WV & WY).
Prosper works essentially the same as LendingClub. A person posts a loan out for something that they need cash for like credit card refinancing or a wedding, and they are graded by Prosper.