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Lending Club vs. Prosper – The Top 2 Social Lenders

October 4, 2011 | Investing | Loans | 3 Comments

The two biggest players in Social Lending (also known as Peer-to-Peer Lending) are Lending Club and Prosper.  If you are seeking to invest in Social Lending, you may wonder what the differences are with both companies.

But first if you are not familiar with Social Lending, Social Lending are online communities connecting people so they can loan and borrow money from each other thus eliminating the middle man, the bank. Because the bank is eliminated, lenders and borrowers can lend and borrow money at better interest rates for both parties with extremely low fees. 

Major Differences Between Lending Club and Prosper

Both Lending Club and Prosper are now very similar.  In the past Prosper used an eBay auction style where the interest rates are set by lenders via a bidding process. Lending Club sets the interest rate based on a formula and lenders and borrowers have to accept the rate. There is no bidding.

Prosper decided to change their business model and now operate just like Lending Club.  Now Prosper sets the interest rate and loan grade based on a formula which takes into account  Prosper Rating, Expected Loss Rate, Loan Term, Economic Environment and Competitive Environment.

Lending Club sets interest rates for the borrower and lender based on the borrower’s credit score and other financial parameters. A loan grade is then established which takes into consideration Assumed Default Rate, Lending Club Base Rate, and Adjustment for Risk and Volatility.

Investing at Lending Club

Since Lending Club started in mid 2007, the net average annualized return for investors has been over 9.5%. That is a fantastic rate of return! Lending Club average borrower has a FICO score of 713. The required minimum FICO score is 660. Individuals and organizations can be lenders. Lenders invest in loans called “notes”. (Note: Currently Lending Club is offering a 2% Cash Bonus on your initial investments.)

Requirements to becoming a Lending Club Investor:

  1. Must be U.S. residents of states where Lending Club does business which includes California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kentucky, Louisiana, Maine, Minnesota, Missouri, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming, and is not available or sold to residents of any other state, the District of Columbia, any other territory or possession of the United States, or any foreign country.).

  2. Must have a bank account to transfer money to bid on loans.

  3. Must be at least 18 years old with a valid Social Security Number.

  4. A minimum of $25 is required to open an account.

  5. Individual lenders who are residents of states other than California or Kentucky must have an annual gross income of at least $70,000 and a net worth (exclusive of home, home furnishings and automobile) of at least $70,000; or have a net worth of at least $250,000 (determined with the same exclusions).

  6. California residents must (a) have an annual gross income of at least $85,000 and a net worth of at least $85,000 (exclusive of home, home furnishings and automobile); (b) have a net worth of at least $200,000 (determined with the same exclusions); or agree not to invest any more than $2,500 in Notes if you do not meet either of the tests set forth in (a) or (b).

  7. If you reside in Kentucky, you must qualify as an “Accredited Investor”. See website for further details.

  8. Lastly, regardless of your state of residence, individuals may not purchase Notes in an amount in excess of 10% of their net worth, determined exclusive of the value of an individuals home, home furnishings and automobile.

Borrowing at Lending Club

Lending Club is very selective with accepting borrowers. Borrowers at Lending Club get loans for a variety of reasons (paying off credit card debt, purchasing a car, consolidation of debt, education, home improvement projects, wedding, small business, elective surgery, balance transfers, etc..)

All Lending Club loans are:

  • Unsecured 3-year (36 months) or 5-year (60 months) fully amortized personal loans.

  • Have a fixed interest rate for the life of the loan and is typically lower than rates offered by credit cards and banks.

  • Monthly payments are fixed, and can be automatically deducted from the borrower’s bank account.

  • Borrowers can pay the loan in full early with no penalty.

  • No hidden fees

To qualify borrowers need a FICO score of at least 660 with a debt-to-income ratio (excluding mortgage) below 25%. Additionally, credit history must prove that you are a responsible borrower:

  • At least 1 year of credit history, showing no current delinquencies, recent bankruptcies (7 years), open tax liens, charge-offs or non-medical collections account in the past 12 months,

  • No more than 10 inquiries on your credit report in the last 6 months,

  • A revolving credit utilization of less than 100%, and

  • More than 3 accounts in your credit report, of which more than 2 are currently open.

  • Must be US citizens or permanent residents and at least 18 years old.

  • Have a valid bank account and social security numbers

Loans are issued by WebBank, an FDIC insured Utah chartered industrial bank located in Salt Lake City, Utah.

Investing at Prosper

Prosper Investors invest their money directly to people. Prosper charges a 1% annual loan servicing fee which is already taken into account in the rate investors bid on. Investors have access to each borrower’s credit history and why they want the loan. Prosper rates borrowers which help investors make informed decisions. Additionally, Prosper offers investors portfolio pans to help with automating the bidding process. (Note: Currently Prosper is offering a 2% Cash Bonus on your initial investments.)

Requirements to becoming a Prosper Investor:

  • Must be U.S. residents of states where Prosper is currently available (California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Minnesota, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming.)

  • Must have a bank account to transfer money to bid on loans

  • A minimum of $25 is required to open an account

All Prosper loans are:

  • Unsecured 1-year, 3-year and 5-year fully amortized personal loans.

  • Have a fixed interest rate for the life of the loan and won’t change for any reason, even in the event of late payment.

  • Monthly payments are fixed, and can be automatically deducted from the borrower’s bank account.

  • For finalized loans there’s a one-time closing fee.

  • Borrowers can pay the loan in full early with no penalty.

 There are three ways to invest:

  • Search for individual loans and manually invest by clicking “Invest Now” from any loan
  • Use Quick Invest
  • Invest in Notes on Prosper’s trading platform

 

Quick Invest allows you to efficiently invest in a group of loans. You specify the Prosper Rating and any other selection criteria and Quick Invest will find loans that meet your criteria, so you maintain control of your investments. A diversified loan portfolio may enable you to spread your risk among many borrowers, so consider investing in small amounts across many loans.

Borrowing at Prosper

If you are looking for a personal loan, Prosper can get you a loan via person-to-person lending, eliminating the bank. If you are looking to buy a car, consolidate debt, pay for education, have a wedding, remodel your kitchen, etc., Prosper is a place to get a fixed rate loan with a very competitive interest rate.

All Prosper loans are:

  • Unsecured 3-year fully amortized personal loans.
  • Have a fixed interest rate for the life of the loan and won’t change for any reason, even in the event of late payment.
  • Monthly payments are fixed, and can be automatically deducted from the borrower’s bank account.
  • For finalized loans there’s a one-time closing fee.
  • Borrowers can pay the loan in full early with no penalty.


Risks for Investors

Unlike a bank, when you invest in loans, your money is not FDIC insured. Only when your money is in cash in your account is it FDIC insured by both Lending Club and Prosper. Keep in mind this is investing and not a savings account. There are risks involved. The main risk is for lenders having borrowers who default on their loan.

For more information visit Lending Club and Prosper. Currently Lending Club is offering a 2% Cash Bonus and Prosper is also offering a 2% Cash Bonus on your initial investments.

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3 Comments to “Lending Club vs. Prosper – The Top 2 Social Lenders”

  1. Robert
    8:17 am on October 5th, 2011

    I liked Lending Club model better than Prosper. But now Prosper is just like Lending Club which is great!

  2. Mitch
    11:02 am on January 8th, 2012

    Thanks for the post. I’ve been looking for some information comparing Lending Club and Prosper. I’m leaning towards signing up with Lending Club.

  3. stacey
    11:10 am on March 4th, 2012

    Spot on with this write-up, I absolutely believe that this web site needs a great deal more attention. I’ll probably be returning to read more, thanks for the information!

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