Lending Club Vs Prosper – Which Company Provides Better Peer-to-Peer Loan Investment Opportunities?

After the dust has settled from the SEC coming down on peer-to-peer lending companies in the United States, Prosper.com and Lending Club have come out as the two dominant forces in the peer-to-peer lending industry in the United States. These companies provide investors with an alternative investment to stocks, bonds and real estate that most investors previously did not have access to—consumer loans.

Becoming a lender through Prosper or Lending Club probably shouldn’t be your primary investment strategy, but it might be a good way to invest 5-10% of your assets as a way to hedge against other classes of investments. This leaves the question of which company should you use to invest in peer-to-peer loans.

When shopping for mutual funds or a stock broker, you’re primarily concerned about the expense costs. With peer-to-peer lending company, the expenses are about the same between both companies, but there are other major factors that you should take into consideration.

As an investor, you want to put your money into the marketplace that will have the most profitable loans. You’ll want to know which company has lower default rates, which company does a better job of screening their borrowers, which company does a better job of collections, and which company charges its customers higher interest rates.

Both companies have had higher than expected delinquency rates. Many of the loans that Prosper.com originated in its first couple of years of operations have gone delinquent. Lending Club seems to have done a bit better job about screening its borrowers (they have a higher interest rate requirement), but you can expect default rates of about 9-10% of your loans when investing.

When a loan does go delinquent, Lending Club does a much better job of collections than Prosper. They have a system based on emails, telephone calls and skip tracing to remind the customer of their obligations to repay their debt. Prosper.com has been criticized by its investors in not doing nearly enough (or anything for that matter) to collect from its delinquent borrowers.

The interest rates that you’ll get from borrowers on both companies will vary. Lending Club charges fixed interest rates based on the borrower’s credit score, whereas Prosper.com investors bid at interest rates they are willing to lend money at. Depending on the situation, either company could yield better interest rates for investors.