LendingClub or Prosper: Which Is A Better P2P Platform?

LendingClub or Prosper? These are two main P2P platforms today. Both started around 2007, and both are based in my home town of San Francisco. I've met with senior management of both companies as well.

Below is a quick snapshot of what the two platforms have to offer.

LendingClub or Prosper

As you can see, the platforms are quite similar. However, unbeknownst to some, LendingClub as a company is doing much better than Prosper, and is therefore, a safer place to investment in loans.

On December 10, 2014, LendingClub raised almost $900 million in the largest U.S. tech IPO of 2014. It is a publicly listed company on the New York Stock Exchange. As a result, it is highly regulated by the Securities & Exchange Commission (SEC) and is required to report quarterly earnings to investors.

Prosper, on the other hand, is still a private company. It missed its window to go public in 2015 as institutional investors suddenly pulled out of P2P lending temporarily. This showed the heavy reliance Prosper had on institutional investors, which ultimately slowed down growth and hurt its valuation. Prosper has never quite recovered since, and it will likely never go IPO.

LendingClub Or Prosper? The Difference For Borrowers

The significant difference between Prosper and Lending Club is borrower qualifications. Lending Club requires a higher credit score, lower debt-to-income ratio, and longer credit history. In contrast, Prosper has developed a proprietary scoring formula called the Prosper Score. Together with a borrower’s FICO score, Prosper assigns each borrower this rating. Then they use the rating to set interest rates.

If you are a borrower and need to consolidate your debt into a lower interest payment, P2P borrowing is a good solution. Credit card interest rates are absurdly high, and are a form of highway robbery in my opinion.

LendingClub Or Prosper? The Difference For Investors

Both platforms are quite similar. They both approve a minority of borrowers onto their platform. This minority is then graded based on creditworthiness. The lower the grade, the higher the interest they must pay to borrow, and the higher the return an investor gets.

However, there is also a correlation with a lower grade and a higher default rate, hence the importance of investing in many loans across grades for diversification.

Both platforms offer manual choosing of investments and automatic investments based on a criteria you provide them.

Here is an example of LendingClub's rates based on grades.

LendingClub Rates By Rating

Here is an example of Prosper's rates based on grade.

Prosper lending rates

As you can see, the rates are all quite similar.

A P2P Investment Strategy To Consider

I recommend focusing on higher quality borrowers in the A and B grade. Although you will receive a lower interest payment, the likelihood of getting paid back increases tremendously.

Focus on high quality borrowers who are looking to refinance their credit card debt. Credit card debt often runs in the 15% – 30% range, which is why to such borrowers, paying 6% – 10% is a good deal.

If possible, look for borrowers with a FICO score of at least 680, a debt-to-income ratio of at least 30%, no delinquency history, and positive reviews.

Despite focusing on high quality borrowers, I've still had delinquencies or defaults over the past five years of investing. As a result, it's important to diversify your loans into at LEAST 10 investments. I've spoken to the team, and they recommend an even greater amount. They said with a 100 investment portfolio, you would have still made money during the financial crisis vs. -50% in the S&P 500.

LendingClub Returns And Diversification

Go With LendingClub

Whenever you invest in an alternative investment, it's important to evaluate not only the investment, but the platform. Platform risk is much higher with Prosper than it is with LendingClub due to it being public. With a private company, you don't have to disclose your performance. A private company could be here today, gone tomorrow. At least with a public company, you can tell from a far how the company is doing until it runs out of gas.

Lending Club has facilitated more than $35 billion in loans since it was founded in 2007. They've had some ups and downs, but have survived through the downturn and have continued to grow their lending platform.

You can open these types of accounts with Lending Club: Individual, Joint, Traditional IRA, Roth IRA, Simple IRA, Rollover IRA, Trust, Corporate and Custodial.

The best way to open up a Lending Club account is through an IRA due to tax deferment. The income you generate from Lending Club is taxed as ordinary income. However, if you can't open an account via an IRA, most investors open up an after-tax individual investment account.

It's worth signing up with Lending Club and checking out the platform for free on your own. They've been around since 2007, and I foresee them continuing to grow over time.

Alternative To P2P Investing

Just remember to invest with money they you are OK losing. I keep alternative investments to no more than 10% of my investments. Alternatively, I would consider investing in real estate crowdfunding with Fundrise and CrowdStreet. There is huge growth in the heartland of America real estate due to demographic shifts and technology.

I've personally invested $810,000 in real estate crowdfunding to diversify and earn income 100% passively.

CrowdStreet Past Deals

About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.

FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million organic pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.