In our quest to find the best peer to peer lending platforms for investors we compare Lending Club and Prosper Marketplace to find out which one is better? Both Lending Club and Prosper are the largest platforms in the industry but which serves the investor better?
In October 2020, Lending Club ceased all new loan accounts as it is transitioning into an online bank, LendingClub Bank, after the acquisition of Radius Bank. As of December 31, 2020, Lending Club no longer operates as a peer-to-peer lender.
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How Peer to Peer Lending Works
Credit is very essential whether you want to buy a car or a smartphone. To get this credit, the first place we think about is in the banks. In the banks, we deposit funds and then the banks lend the same funds to other people and companies. When we need our funds back, we just go to the ATM and make a withdrawal. Peer-to-peer lending platforms work in a similar way but the investors are in control. Investors deposit funds and lend them to pre-screened applicants. When they pay back the funds, we get the interest and the p2p lending companies take their cut. As with all other investments, investing in this asset class is risky, especially when the borrowers fail to pay.
What is Lending Club?
Lending Club is the biggest P2P lending company that was started in 2006. The company became public in 2014 and is currently valued at more than $1.2 billion. At its peak, the company had a valuation of more than $15.6 billion. Today, the company has more than 3 million customers and more than $45 billion invested. The company lends to individuals and companies. In 2018, the company had more than $600 million in revenue.
What is Prosper?
Prosper Marketplace is a company similar to Lending Club that was started in 2005. Since then, the company has given out loans worth more than $12 billion to moee than 920k people. This makes it the second biggest peer to peer lending company after Lending Club. Following a scandal that emerged at Lending Club, Prosper has seen its valuation drop to below $600 million.
Lending Club vs Prosper: Who Can Invest?
Lending Club and Prosper are highly regulated companies. These regulations help to minimize fraud and protect the investors. The two companies have a similar criteria on who can invest in them. People from all states except North Dakota, Alaska, Maryland, New Mexico, North Carolina, Ohio, and Pennsylvania can invest in Lending Club. However, the investors must have an annual gross income of at least $70k and a networth of at least $70k. Alternatively, they must have a net worth of at least $250k. Those who reside in California must either have a gross income of at least 85k or a net worth of $200k and must not invest more than $2,500.
For Prosper, investors in Alaska, Idaho, Missouri, Nevada, New Hampshire, Oregon, Viginia and Washington must have an annual gross income of at least $80k and a net worth of at least $80k. Alternatively, they must have a net worth of at least $280k. For California residents, the minimum gross income is $85k and have a net worth of the same amount. Alternatively, they must have a net worth of at least $200k. For those in Maine, Missouri, and Oregon, their investments must not invest more than 10% of their net worth.
Lending Club vs Prosper Marketplace Returns
Lending Club boasts of historical returns of between 4% and 8% every year while Prosper Marketplace boasts of returns of between 3.5% and 7.5% each year. However, these numbers don’t give a clear picture of how much money you can make. The chart below shows the historical returns of Prosper Marketplace across the three credit ratings.
Other Differences Between Lending Club and Prosper
The following is a summary of how the two companies are different:
- With Lending Club, you can only invest in multiples of 25. This means that you are limited to $25, $25, $50, and $100, and so on. With Prosper, you can invest any sum of money from $25. This means you can invest $25, $27, and $42, and so on.
- On returns, analysts believe that Prosper beats Lending Club. In an analysis of loans made between 2009 and 2014, the company’s annualized returns ranged between 6.6% and 9.9% while those of Lending Club ranged between 4.9% and 8.8%.
- As a bigger company, Lending Club has more loans than Prosper. This is obvious because the company has more than 3 million customers compared to Prosper’s under 1 million.
- Finally, while both companies are relatively safe, Prosper loans are riskier because the cut-off credit score of their customers is 640 compared to Lending Club’s 660.
Going Forward
As you try to find other places to invest your money, it makes sense to invest in the peer-to-peer marketplace companies like Lending Club and Prosper. However, since these companies are relatively new, you should only invest a part of your money in them. For higher yields, we recommend investing in stocks or index funds, In addition, you need to realize that these companies are still making losses. Lending Club has never made a profit and in 2018, the company made a loss of $128 million. Therefore, you need to assess your risks carefully.
