December 27, 2007 Comments

LendingClub vs. Prosper

Recently, I had come across an article about zopa.com and it really peaked my interest on peer-to-peer lending. In researching more about Zopa, I also came across two other major peer-to-peer lenders: Prosper and LendingClub. I researched both Prosper and LendingClub a bit and decided I liked LendingClub better, so I signed up for an account with them.

I had problems validating my identity with LendingClub, which was extremely inconvenient. It prevented me from investing in any loans, which defeated the purpose of signing up. I then began researching Prosper a bit more and signed up for an account with them as well. I had absolutely no problems signing up with Prosper and validating my identity. Within a few days of signing up, my account was funded and I was ready to begin bidding on loans.

As I was doing my research on both sites, I came to realize that although LendingClub touts very good loan statistics with regards to defaults and late payments, Prosper has been around much longer. I think LendingClub’s loan statistics are somewhat misleading, as they really haven’t been around long enough for a lot of loans to default. I read a post on TechCrunch about LendingClub going nationwide and provided some of my analysis in a comment on the article:

I would take LendingClub’s stats with a grain of salt. The oldest loans were originated at the end of May, so there hasn’t been a lot of time for defaults to take place. Also, given the rising popularity of the service, the majority of those loans will have been in force much less than 7 months. I pulled the csv down from Lendingclub, and the average loan age is only 75.85 days (only 2 1/2 months).To provide a more fair comparison, I looked at some of the Prosper.com data on lendingstats.com. 2,869 grade AA-C loans were originated on Prosper.com between July 14 – December 13. I chose grades AA-C because Lendingclub only allows those with a 640 credit rating or higher to participate. Using Prosper.com’s AA-C grades approximates this restriction. The average age of these loans is 75.7 days. I selected the dates to provide approximately the same age as the lendingclub.com loans.

Of the 2,869 Prosper.com loans, 0.87% were late, 0.82% were 1 month late, and 0.09% were 2 months late (total of 1.78% late). None of them were any later than 2 months and none of them have defaulted. Even if I went back to May 24 on Prosper.com, only 3.61% of the loans are late and still no defaults. During this time frame, 3,796 loans were originated with an average age of 100.9 days.

I think after the loans on lendingclub.com have aged more, the statistics will likely be very similar to those of Prosper A-CC grade loans. I was all ready to open up a lendingclub.com account, but then came to the realization that the service hasn’t existed long enough to provide an accurate statistics. Also, in the process of creating my account they were unable to verify my identity. They were never able to resolve the issue and I would have had to manually verify my identity. With all the problems I had in in opening the account, I decided to take a look at Prosper and decided it was better to go with them anyway since they were more established and could provide better statistics.

Basically, I found that loans on Prosper that were similar to those on LendingClub showed a late rate of about 1.78%. Currently, LendingClub shows a late rate of 0.44%. According to my analysis, the late rate on LendingClub is only about 1.34% better than that of Prosper.

I can certainly appreciate the additional measures that LendingClub takes to help investors reduce the risk of losing money from late payments and defaults (640+ FICO score and ACH repayment of loans). Afterall, that was what drew me to sign up with them first (I may have stuck with them if I hadn’t had problems with validating my identity). However, I would prefer until they have been around long enough for some of the loans to default in order to get a better overall picture. For now I will stick to investing on Prosper.

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    • Good luck,

      you will notice that
      - very few of the loans at Prosper that are one month late do recover
      - many loans at Prosper do not default initially since Prosper defines default as debt sale and keeps loans in 4+ month late
      - overall defaults for old loans average around 20% at Prosper
    • I have lent some money using prosper, and I am about to try out lending club in the next couple of days, as soon as my money goes through.

      To me the stats are irrelevant. I don't think people are less likely to default because it is one site rather than another, in the end the default rate are going to depend more on credit and economy than anything else. IMHO.

      You can see how lending club goes on my blog in a couple of weeks. If you are interested, they are offering a referral deal like prosper's $25 after you fund your first loan.

      http://www.lendingclub.com/refer.action?referre...
    • WealthBoy
      Jason, I agree. It doesn't matter where the borrowed funds are coming from, in the end an individual is going to either pay or default. Aggregately, the default rates will be higher for loans with higher-risk borrowers.
    • I had no issues verifying my identity on Lending Club. I am surprised to hear that the process could go bad because it was rather simple.

      "I would take LendingClub’s stats with a grain of salt."

      I think that both Prosper and Lending Club websites are understating the risk.

      "Prosper’s default rate hovers at about 2.7 percent, Larsen said, but that figure is expected to rise as more loans mature." Source: http://www.msnbc.msn.com/id/21993720/ A huge understatement.
    • I can't think of a good reason to use one over the other. I'm currently using Prosper and my default rate is lower than the average. I think it depends on the types of people to loan to.
    • Willy
      This is really old. Prosper defaults are horrendous. No prospective borrowers are denied and the bidding process tends to push interest rates too low. Prosper is not granting loans now (early 2009) while awaiting SEC review. They really need to revise the model before starting up again.
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