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Monday
Oct142013

Lending Club vs. Prosper: Why Prosper Wins (For Now!)

Let me be clear up front:  I like both Lending Club and Prosper.  I think that they are both excellent ways of potentially getting a much better return on investment than many other investing alternatives.  In just a short amount of time, both services have generated over $1,500 in purely passive income for my family.  I'm happy that I have money in both places. 

That said, I've decided to continue to transfer $500 monthly from my banking account to Prosper for futher investment, but I've decided to suspend the similar transfer to Lending Club.  Here are three reasons why.

1.  Prosper's Quick Invest allows me to set detailed investing criteria and then Prosper finds loans that meet those criteria and then automatically invests into notes on my behalf.  Afterward, I get a note telling me about my investment.  This is so easy, yet so investor-controllable, that this sort of functionality is a no-brainer.  Lending Club doesn't have it (yet.  When I wrote Lending Club with my critique of their service, they informed me that they are working on this functionality for release "in the coming months.")  Currently, Lending Club will send you an email when it finds loans that match your criteria, but you still have to log in, see if the note is still available, and then purchase the note yourself.  

My Prosper Auto-Invest Criteria

2.  New notes at Lending Club post four times daily:  6 AM, 10 AM, 2 PM, and 6 PM (PST).  You had better be there when they post, or the good ones (read:  higher risk, higher return loans) will be gone within minutes.  When I log in even 30-45 minutes after those times, I'm usually confronted with a wall of "A" and "B" grade loans after I apply my loan criteria and the "C" or riskier loans are already bought up.  This might be fine for you if you want those lower risk loans or if you can perch near your computer each day and swoop in at the appropriate times, but for me, this simply isn't practical.  In my email exchange with Lending Club about this, they cited increased investor demand and overall positive press coverage for the decreased loan availability.  No doubt this is good for the overall sustainability of the company, but it isn't good for me when I have to find over $500 worth of new notes each month in $25 increments.

3.  Finally, and you must understand that this might be attributable purely to statistical noise over the course of my experiment, it appears that I'm getting far fewer defaults on Prosper Loans than I am with Lending Club, despite using nearly-identical criteria when selecting notes from each.  As you can see below, at the beginning of October, I had 17 late or defaulted notes at Lending Club versus 3 late at Prosper.  Some of this is attributable to the fact that I have twice as many notes at Lending Club as I do at Prosper, but figuring this in, the ratio would be something like 17 to 6, which is still a clear difference.  

If there is a silver lining to the defaults, it is that I'm recording each one on a spreadsheet alongside all of the note's data in an effort to determine what markers might exist for defaulted notes.  If I develop clear patterns, I will put up my analysis in a future post.  In the interim, I've already begun to add a "0 delinquencies last two years" filter on all of my new notes based upon some of my early data.  That said, each filter of course yields fewer note choices, which is more of a problem for Lending Club each day.

I will be more positive on Lending Club once their automated investment tool goes live and loan supply there catches up with loan demand.  Clearly they've been victims of their own success, but until then, I'm more pleased with the offering at Prosper.

I will continue to periodically update my results with both Lending Club and Prosper at this dedicated page here at LTNE.

Interested in investing in either Prosper or Lending Club?  Using our affiliate links costs you nothing and kicks a small amount of cash to LTNE, which we really do appreciate.  Check out Prosper here and Lending Club here.  

Not yet ready to invest?  Bookmark this page and come back when you are!  Thanks!

I expect this post might generate some discussion and possibly disagreement.  What are your thoughts?  Let me know in the comments below.

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