Lending Club Vs. Prosper: Here’s the Difference Between the P2P Lenders

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Maybe you’re looking for a lucrative place to invest your money.

Or maybe you’re looking for a loan to help you pay down high-interest credit cards, start your own business, or dig a swimming pool in your backyard.

Either way, it’s high time for you to check out the world of peer-to-peer lending, a financial phenomenon that’s been spreading like wildfire.

Peer-to-peer lending platforms like Lending Club and Prosper allow people to apply for credit from the general public.

Borrowers can access small or large amounts of money ($1,000 to $40,000) from groups of people who each invest a little bit — as little as $25 — into their loan. (This is also known as “social lending.”)

These rapidly growing companies offer investors another way to diversify their portfolios and earn monthly interest, while helping borrowers get better interest rates than they’d get from a traditional financial institution.

Lending Club and Prosper pretty much dominate this market. As of this writing in mid-2017, the companies have loaned out $26 billion and $9 billion, respectively.

Here’s our rundown of how each company works for borrowers and for investors.

How Peer-to-Peer Lending Works

Before we delve into the details, let’s talk a bit more about social lending.

By directly connecting individual lenders and borrowers through online marketplaces, peer-to-peer lending (P2P) effectively cuts out the middleman of the traditional lending process. Of course, the “traditional” way is for financial institutions take a hefty cut as they manage the transfer of money from lenders to borrowers.

The P2P process is more streamlined and efficient, eliminating the need to maintain hundreds of physical buildings like your local First National Federal Trust Capital CitiBank of America does. For borrowers and investors, P2P can be a win-win because it reduces costs and hassle for both parties.

Prosper and Lending Club are pioneers in this field, having been founded in 2006 and 2007, respectively.

“Think of them as eBays for money,” says Consumer Reports. “Just as eBay brings buyers and sellers together, peer-to-peer platforms bring borrowers in need of loans … together with investors who want to earn better returns than those offered by banks.”

What kind of loans do they offer? According to the Federal Reserve, more than half of all P2P loans are debt consolidation loans, followed by credit card payoffs (17%), home improvement (8%), and small business loans (3.5%).

Lending Club vs. Prosper: How These Companies are for Borrowers

If you’re looking for a P2P loan, which company should you choose?

For starters, I suggest checking your interest rate at both Lending Club and Prosper to see which offers you the lowest rate. That’s a good starting point, but you shouldn’t stop there.

No matter which way you go, know that these two websites are a lot alike in important ways.

Applying: You’ll fill out an online loan application, answering the usual questions about your age, employment, income, etc. Each will check your credit score, but this won’t affect your credit rating the way it does when you apply for a typical loan. (This credit check is a “soft inquiry.”)

The basics: Both sites offer 3- to 5-year loans, both have similar loan amounts. Lending Club has loans from $1,000 to $40,000, while Prosper has loans from $2,000 to $35,000.

Interest rates: Like any lender, your chosen P2P platform will assign you an interest rate based on your credit score, income and payment history. Lending Club’s rates range from 5.99% to 35.89%, while Prosper’s rates range from 5.99% to 36%, pretty much identical.

The process: Your loan will get posted on the company’s website. Individual investors browsing through lists of loans will be able to choose your loan for their portfolios. They’ll decide how much of it they’d like to fund, starting with as little as $25. This fraction is called a “note.”

Are P2P loans safe for borrowers? Once your loan attracts enough investors and is fully funded (this happens quickly), Lending Club or Prosper transfer the total to your bank account. As you make payments each month, that money gets funneled back into your investors’ accounts.

Fees: Both companies charge you a fee for taking out a loan. Lending Club’s fees range from 1% to 6%, while Prosper’s fees ranges from 1% to 5%. Once again, they’re pretty comparable.

For most loans, the fee will be 5% of the loan amount. Borrowers with great credit pay lower fees.

For Borrowers: How Your Choices Differ

Now that we’ve laid the groundwork, let’s help you make your decision.

The first thing you need to know: What’s your credit score? One way to get that number is to sign up with a free service like Credit Sesame.

This might make your decision for you: Lending Club’s minimum credit score for a loan is 660. However, Prosper will make loans to people with scores as low as 640.

If you’re still trying to choose between the two, get out your calculator and a scratch pad. Here’s the complicated part. It involves math.

Lending Club may have lower rates for you. A number of reviewers comparing the two websites have found that Lending Club offered them a better interest rate than Prosper.

(I’d tell you what rates I was offered, but to be honest my credit is currently too lousy to qualify for a loan from either site.)

However, your results might be different. The YMMV rule applies here: Your Mileage May Vary. Just keep in mind that a difference of only 1% or 2% could cost you a tidy sum over a 3- or 5-year loan.

Prosper may have lower fees for you. If you have really excellent, awesome credit — unlike me — Prosper might offer to charge you a fee of just 0.5% instead of its usual 1% to 5%. For a big loan, that could save you hundreds of dollars.

By the Way, What State Do You Live In?

Lending Club and Prosper each are regulated by the feds — specifically, by those super fun kids at the SEC, the Securities and Exchange Commission. But it’s still up to individual states to decide whether to let them operate in each state.

In most states, you’re good to go.

However, you can’t borrow from Lending Club if you live in Idaho, Iowa, Maine, Nebraska or North Dakota. You can’t borrow from Prosper if you live in Iowa, Maine, North Dakota or Pennsylvania.

You can’t invest in Lending Club if you live in Alaska, Maryland, New Mexico, North Carolina, North Dakota, Ohio or Pennsylvania. You can’t invest in Prosper if you live in Iowa, Maine, North Dakota, Pennsylvania or Vermont.

Man, North Dakota is tough.

For Investors: How These Two Choices are Alike

Hey, did you just hear that noise? Kind of a cranking sound?

That’s the sound of this story suddenly shifting into a higher income bracket.

Fair warning: You need a pile of money to read this part.

To qualify to invest with Lending Club, you must earn at least $70,000 in annual gross income and have a net worth of at least $70,000 (not counting your house or car). Or you must have a net worth of at least $250,000. Prosper has the exact same requirements.

Despite those requirements, Lending Club and Prosper keep attracting growing numbers of investors. That’s because they typically offer better returns than, say, investing in a CD.

Lending Club boasts historical returns of 5% to 7%. Prosper boasts average returns of 8%. Each has a detailed prospectus online, and the entire loan history for each is available for download. This independent analysis found annual returns of 4.9% to 9.9%.

Kyle Taylor, founder and CEO of The Penny Hoarder, invested in P2P lending and found it rewarding. He initially deposited $5,000 in a Roth IRA with Lending Club, and found himself “earning a crazy good 14% interest rate on my deposit.”

While Lending Club or Prosper shouldn’t be your only investment, either or both can be a solid, diversifying addition to your portfolio.

As with most investments, you should enter into the P2P lending sphere with a long-term wealth building mindset. If you employ a day-trader-type strategy — buying and selling stocks frequently — then a service like Lending Club or Prosper might not be for you.

Worried about borrowers defaulting on their loans? Each company evaluates borrowers’ credit scores and assigns them a grade. To avoid defaults, only choose the highest-graded, lowest-risk loans — as long as you understand that you’ll be earning less interest on those.

Diversify, diversify, diversify. Both companies make it easy to diversify your investments. By loaning, say, $25 to 50 different borrowers instead of funneling that same $1,250 to just one borrower, you spread out the risk of loan defaults.

Automated Investing: On either website, investors who want a piece of a wide cross-section of loans can spread around their nest egg with just a few clicks.

For Investors: How Your P2P Options Are Different

Simon Cunningham is the founder of LendingMemo, a financial advice website that focuses on the P2P lending industry. He’s been watching this industry for years.

Here’s his advice: “Let me say from the outset: Most new investors will probably want to open their first account with Lending Club. However, there are some honest reasons someone might choose Prosper instead.”

For investors, here are the biggest differences between the two companies:

Their websites. Both websites have evolved over the years, but some beginners still say they find Lending Club’s website simpler to navigate.

Lending Club has more loans. It generally has far more loans to choose from than Prosper does. At Lending Club, investors say they typically find it easier and faster to spread around their money by investing in dozens of loans at a time.

Prosper has a greater percentage of high-risk loans. Prosper has more risky, high-interest loans because it loans to borrowers with credit scores as low as 640, while Lending Club cuts it off at 660. For investors willing to assume some risk, those loans can be a lucrative investment.

Prosper offers better returns. Larry Ludwig, founder of the financial advice website Investor Junkie, analyzed both companies’ investment returns from 2009 to 2014. He found that Prosper’s annual returns ranged from 6.6% to 9.9%, while Lending Club ranged from 4.9% to 8.8%.

“Prosper edged out Lending Club for five of six years and tied with it the other year,” Ludwig says.

Minimum Investment Flexibility: Both sites will let you invest in any particular loan starting with a minimum of $25.

Here’s the difference: With Lending Club, you have to invest in multiples of $25 — like $50, $75, $100, and so on. But Prosper allows you to invest any sum of at least $25 or more. You could invest $26 or $30 or $40 in a loan if you wanted to.

Seeing For Yourself

Cunningham offers the following advice:

“Because of their easier website and longer list of available loans, most investors will probably want to open their first account with Lending Club. Elements of their site, such as their simple and powerful automated investing tool, successfully make peer-to-peer lending an easy and rewarding experience for almost anybody who wants it.”

“In contrast, Prosper will appeal to people who want precisely filtered loans … or those who want higher potential returns/risk.”

No matter which way you go, many market analysts say you’ll be in good shape.

Marc Prosser, founder of financial news website Learn Bonds, wrote this on Forbes.com: “I believe the business fundamentals of Lending Club, Prosper, and other peer-to-peer lenders are strong.”

However, Ludwig won’t make a recommendation between Lending Club or Prosper.

Instead, his advice is simple: “I encourage every peer-to-peer investor to research each company, take a look at their platforms, and get a feel for which one you prefer.”

Disclosure: This post contains affiliate links. May we all be a bit richer today.

Disclaimer: This article contains general information and explains options you may have, but it is not intended to be investment advice or a personal recommendation. We can’t personalize articles for our readers, so your situation may vary from the one discussed here. Please seek a licensed professional for tax advice, legal advice, financial planning advice or investment advice.

Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder. He’s working on improving his credit rating.