Lending Club vs. Prosper, is the Pepsi Vs. Coke of the peer-to-peer lending world. They are the two biggest peer-to-peer lending companies operating in the United States today. With hundreds of millions of dollars in loans facilitated by the companies over the past 5 years, more individual borrowers and investors are taking interest in the companies and are attempting to decide which company would be best for their needs. Although there are many similarities between Lending Club and Prosper, there are many differences between the companies as well that could sway a borrower or investor to do business with one company or the other.
Lending Club and Prosper both offer fixed interest rate loans to qualified borrowers that are funded by individual investors looking to earn a return on their investment. The interest rates that are offered to borrowers for these loans are generally below the interest rate they could expect to receive to obtain the same amount of money from a credit card company or traditional banking institution. Both companies have automatic repayment systems that deduct the monthly payments for the loan directly from the borrower’s bank account to be deposited into the accounts of the lenders that funded the loan.
The model of each company’s lending program is slightly different. For example, the loans funded through Prosper were originally funded using an auction like style where lenders bid on the right to fund a particular loan by supplying the interest rate that they were willing to accept in return for their funding. Today, Prosper has modeled the way the company sets interest rates after the technique developed by Lending Club, in which the interest rate for a loan request is automatically set using a formula that takes the borrower’s personal information and credit score into consideration. Lenders review the loan listings and choose which loans to fund based on the information provided with no negotiations allowed.
Lending Club focuses on top tier borrowers, automatically rejecting any applicant that has a credit score below 660, has any recent delinquencies or bankruptcies on their credit report, or has a debt to income ratio that is too high. Prosper is a little more liberal with its acceptance policy, allowing less credit worthy borrowers to post loan requests on their website while charging them a higher interest rate than borrowers with better credit profiles. Individuals with excellent credit may get a better interest rate with Lending Club while individuals with average credit will have a better chance of acceptance with Prosper.
Prosper and Lending Club both have a secondary market for the loans originated by the company, allowing lenders to sell their underperforming loans to other lenders before they reach maturity. By providing this additional service that allows investors to take advantage of under-priced loan notes and shorter maturity dates, Lending Club has increased interest from investors and increased its volume of business over the past few years.