Lending Club vs. Prosper Experiment: Which Has The Highest Returns?

I’ve decided to invest $10,000 in Prosper and Lending Club to compare their performance as an investment. Putting $5,000 in each will allow me to invest in 200 loans at $25 a piece, so that each loan will only be 0.5% of each respective portfolio. The money has already been deposited:

Prosper Screenshot:

Lending Club Screenshot:

Prosper advertises returns of seasoned returns of 10.08%. Lending Club advertises rates of 5.81% to 9.43% depending on credit grade, but always with prime borrowers. I want to compare both absolute performance and the investing experience (ease of use, customer service, liquidity, etc.). However, I’m not sure exactly how I should run the experiment…

Background

I’ve been following person-to-person (P2P) lending on a casual basis since the beginning. The short history is that Prosper started out in 2006, and the initial results weren’t so great. The average investor with loans originating in 2006-2007 had a negative return due to inadequately low interest rates (set by investors themselves), loose credit requirements, and vague collection techniques. LendingClub entered shortly thereafter and set their own rates, with better results. Both LendingClub and Prosper relaunched after registering with the SEC, and their overall returns have been much more promising. Prosper is now very different than when it started (no more eBay-style bidding), and LendingClub has also improved in many respects.

I feel that both are more mature companies now with more experience in setting proper interest rates, tighter lending requirements, better credit-screening and fraud-prevention techniques. I’ve lent nearly $4,000 since 2007 and returned about 5% annualized with a focus on the highest-quality loans. Can I do better today? This is an experiment, but I fully expect to get my $10,000 back plus 3-8% interest at the end. Here’s what I have so far:

  • Setting a target of 8% return. If I’m going to compare returns, I have to set similar risk levels for the portfolios. I figured it’d be best to just go for a target return. Each site provides an estimated return based on the interest rate and expected delinquency rate. I might as well test out how well their models work. I just picked 8% because it was in the middle, though 10% is also a nice round number.
  • Automatic investment. I’ve done the manual loan-picking thing, and am now over the initial fun factor. 400 loans would take forever. I’m going to use the automatic investment service provided by both websites to try and achieve the target return. I can also record how long it takes to choose and fund all the loans.
  • Basic screening? I could leave it at that, or I can add additional constraints like rejecting all loans over $20k, or only lending to people who rent instead of having a mortgage, etc. I do think some basic screens can improve returns. I don’t know if both sites offer the exact same screens, however.
  • Three-year loans only? Having all 3-year loans would give this experiment a natural ending point.
  • Reinvest the interest? Should I lend out all the money, and just sit back and collect interest, or should I continue to reinvest the interest in new loans? The fact that you can now sell loans before maturity on a secondary market would still allow me to liquidate everything at some point.

Am I missing anything? Tell me what you think in the comments.

Comments

  1. I would personally say don’t reinvest the interest after the loans. This way you can get a direct rate of return (invest the payments in a separate account if you want.) It will be easier to do the math on what it would be to reinvest the interest in new loans this way. Also, if/when you do this can you keep us updated on your returns, I did Prosper back near when it opened (granted a small amount) but with awful returns (ironically the lower rated loans where the ones that paid in full while the “A” loans were the ones that defaulted.) When they pick the loans through autoinvesting if you can see how viable they would be if you selected them yourself (obviously not indepth since you will be having hundreds, but from a cursory view.) Also, when you set your autoinvestment if you can share your filter criteria that you decide on. Lastly, if you have a referral code that gives a new account bonus for LendingClub can you post it (I’ve been debating about trying theirs since it seems like they have their process more in order than what I remember from Prosper.)

  2. As the loans get paid and you start collecting interest as well as principle, won’t your numbers be skewed to the low side since you’ll have more and more money sitting on the sidelines? Thats assuming you select 3 yr loans then do nothing for 3 years but watch you interest rate number.

  3. Dan, you can use my link

    http://bit.ly/Lls6kU

    you get $100 if you invest $2,500 or more.

  4. Sounds like an interesting experiment. I think you have set some good parameters, and I agree that whatever choices you make of what to do with the money you should consider how best to easily record your results.

    In my state I can’t make loans, and I’m not interested in the secondary market. However I am planning to start investing via Kiva. Despite the expected slight negative returns, the ability to invest by funding with a credit card for a period as short as 5 months opens up new opportunities.

  5. I would think you’d need to re-invest at least your principal or you’ll receive less and less each month in interest and it will skew your results. As long as you do the same at both sites, it doesn’t matter as far as the experiment is concerned, but you’ll have a lot on the sideline at the end if you’re not keeping that money invested.

  6. When you do the auto-invest make sure that you actually get only one share in any one loan or you won’t be as diversified as you thought.

  7. In addition to deciding what to do with the interest payments, don’t you also have to make a decision about pre-payments?

  8. I am still only comfortable with manual loan screening. I have set up auto transfer and every Friday I spend about 5-10 minutes to check on the status of current loans and to lend new ones.

    I am uncomfortable to lend to someone who has 20k revolving credit balance and wants a loan for vacation. But is s/he is applying for debt restructuring, I would consider that.

    I have also realized there is no way to enforce the money is used for what they say it is for.

    When the economy is fine (relatively) all looks fine. But if not-so-nice things hit the fan, default rates might increase from single digit percentages to 20%-30%.

    One thing always on my mind is what happens if these two companies go belly-up. Lendingclub is still not making profits. They are getting funds from VCs but that’s not sustainable in the long run. LC claims they have a backup institute that will service the loans if LC has to close shop.

    btw my rate of return for last 2 years is 11% (as claimed by Lendingclub) with no defaults so far (knock on wood).

    @Dan: I am sure Jonathan has an invite, but if not I can send one that gives you $100 for investing $2500 in loans within first 45 days of account opening.

  9. This is just too scary to me. I can’t imagine loaning money to someone you don’t know. It’s hard enough loaning to family. I think I’ll just stay out of the lending business.

  10. I actually, had 2 notes from 36 defaulted on Prosper (one in 2007 & one in 2010)
    Still about 7% interest there

    And 3 notes defaulted on Lending Club (out of 125 – most issued since beginning of 2011) Still about 8% interest there.

    The defaulted notes on Lending Club: A3; A4 & A5
    On Prosper defaulted notes were A & E (Just a few of my notes are sub-prime)
    So with default rate so far of about several percent at Prosper & Lending Club it’s not bad. But it’s not risk free either.

    Still I feel much more comfortable lending to people than to companies for some reason. Especially when I diversify by lending just $25 to many hundreds of people.

    I really wish to bite the bullet and go with Lending Club IRA that has 10K minimum to avoid $100 per year fee after the second year. So does the Prosper IRA, but I am not sure how much fee they charge for not meeting the requirement. Eventually I may go with both of them, but 20K in these is beyond my comfort level. I wish they decrease their IRA requirements.

    In any case, I am withdrawing all my money as notes are paid, and once I fully receive my funds back in 2014 – I will go with the company that offers biggest bonus for opening IRA, so I have a cushion for losses. Or if a company lowers the threshold for no-fee IRA to let’s say $2500, I would go with them even before my other funds are paid back.

  11. Here’s my invite link, same deal you must invest $2,500 upfront and you get $100. I wouldn’t just invest $2,500 for the $100 unless I was comfortable with the risks, however, it took me a couple years to get to $2,500 in total loans. I’ve had plenty of A and AA loans default. I’m doing my experiment partially so you don’t have to. :)

    https://www.lendingclub.com/landing/invest.action?reg_referrer=mymoneyblog&progId=2004

    The liquidity in the secondary market is also pretty nice on LendingClubs loans at least, I’ll post about that later.

  12. Why not just invest in Vanguard high yield (junk) bond fund? The returns are about the same and i would trust Vanguard to do the research for me.

  13. Vanguard’s High Yield fund has an SEC yield of 5.80% (also closed to new investors) not including any defaults. Also, it will be rolling loans over to maintain maturity, still not sure if I want that. It would be interesting to compare performance, though.

  14. I would have to imagine one could find a handful of common stocks paying 3-4% yield when purchased at a reasonable price that could yield more in return then doing this.

    I love how people think the stock market is “risky”, “scary”, etc, etc but are willing to loan money to other people who really are in essensce a black box of risk with nothing more then a promise and credit scoore. That in my mind is much more scary then fluctuations in market value of a stock.

    I did lend money once through prosper with $25 I recieved free for signing up a long time back. None of my own money was invested. I was paid back $14 of the money…the other money……gone, the borrower died and I was SOL.:)

    Not for me with a projected 7-10% yeild.

  15. Well if lending to people would have been so risky, why banks do it? Not only that, but credit card companies let you have money for up to 18 months at zero interest, in hopes you’ll pay interest after that. Fact is with bankruptcy laws made more stringent, it’s much harder to default for a person than a company.

    With all these commotions in the economy, my stock ending loosing all the gains it got since the financial crisis. Whereas, even through the worst financial crisis since the Great Depression, I haven’t experienced any massive defaults or such.

    A Canadian 2003 documentary “The Corporation” a while ago diagnoses a corporation, which is legally a “person” as having psychopathy: “The film is in vignettes examining and criticizing corporate business practices. It attempts to compare the way corporations are systematically compelled to behave with the DSM-IV’s symptoms of psychopathy, i.e. callous disregard for the feelings of other people, the incapacity to maintain human relationships, reckless disregard for the safety of others, deceitfulness (continual lying to deceive for profit), the incapacity to experience guilt, and the failure to conform to social norms and respect the law.”

    In contrast very few of people on peer-to-peer lending network are psychopaths (less than 3% of people are). So I would rather invest into conscientious people, than psychopathic corporations.

  16. Income Taxes?

    I have never seen a good guide on income tax due to social loans. It looks like it would be a mess the more loans you do. Or does Prosper/LC make it easier now? I tried them both a few years ago and then when tax time came, I promised never again, due to the massive headache it created.

  17. Michael,

    That’s why peer-to-peer lending is great for tax-sheltered accounts such as IRA – it helps avoid income tax headache.

  18. Residents of Oklahoma cannot sign up for Prosper or Lending Club!!! Just spent several frustrating minutes trying to sign up only to find out we can not.

  19. Residents of Oklahoma cannot sign up for Prosper or Lending Club. I found this out after several frustrating minutes trying to sign up and updating my PayPal account.

    What other states don’t allow this???

  20. I got the $25 credit to join Lending Club and made a loan. The loan has since been charged off and I now have less than $23. I do not think that I would invest that much.

  21. Lending Club state eligibility rules, which do change from time to time. Most people can at least invest on the secondary market exchange:


    To invest in Lending Club Prime Consumer Notes, you must reside in one of the following 28 states and meet that state’s financial suitability conditions: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kentucky, Louisiana, Maine, Minnesota, Missouri, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.

    If your state is not listed above, you may be able to trade notes via FOLIOfn’s Note trading platform. At this moment, applicants from District of Columbia, Kansas, Maryland, Ohio, Oregon, and Vermont are not eligible to become trading members with FOLIOfn.

  22. I must not clearly understand the goal of this ‘experiment’. As you stated both Prosper.com and LendingClub.com advertise average annual ROI of around 8% (or higher). If you are to invest your $10K with no filtering, then sure you should expect around 8%+ return. And if you don’t re-invest the interest income, then what is your goal with your funds? Do you have a purchase you need to make in 3 years with the $12,500 you will have at that point? Or do you need the income stream it will provide of roughly $100/mth. If not, then certainly reinvest. Is the goal to simply prove or disprove Prosper and LC’s advertised ROI?

    On my blog at http://www.ProsperToRetire.com my goal to retire early with P2P lending. My returns thus far are around 20%+. My ‘experiment’ per-se is to beat (not meet) the average P2P returns and definitely to beat stock/bond/mutual fund returns by a long shot.

  23. Hi Jonathan,

    I donno if you’ve checked out my performance with Lending Club over the years. I’ve been doing it now 3 years, over $9k invested, and earning 8.75% ROI (That’s NOT NAR!) I list my filters and how I pick notes in my review.

    http://investorjunkie.com/4/lending-club-review/

    At least with Lending Club, although it sounds counterintuitive you should invest in the higher risk loans. I think LC targets that audience more and gives them a slightly lower rate to the the risk to default. I’ve had better results with my B,C,D notes.

    Some comments:

    - I don’t recommend the automated method. Pick each note manually. LC notes are not a quick in quick out. If a note is coming close to default it’s very hard to sell on the secondary market. Make sure you pick good notes to begin with.

    - Because your accounts are $5k each I assume they are IRA based accounts? Even though I don’t do this with my P2P investments, most should be doing P2P investing this way. P2P isn’t very tax efficient and best to put it into a tax differed account.

    Jonathan or others you may want to check out Peter Renton’s “P2P Lending Wealth System” course. Hokey name, but he gives some great tips on how to improve your performance with either P2P investment site. I reviewed it and even I learned some tips from the course. The amount for the course is well worth the money.

    I plan on reviewing Prosper next and add $10k to that account, just like my Lending Club investments.

  24. @Serge

    You asked if lending to people was so risky then why do banks do it. Is this a serious question? Personal loans are the highest risk loans a bank makes, ie the extremely high rates.

    Are you aware of personal loan/personal business default rates vs mortgage default rates.

    Let me ask you this…is maybe the reason these individuals are borrowing money online from strangers because the great majority were turned down in a face to face transaction at a brick and mortar bank?

    Your personalization of a corporation is cute but only highlights your misunderstanding of the banking industry and loaning money.

    In regard to your stock losing all of its gains either your stock/mutual fund picking is very average or you buy at overvalued levels. Something to think about.

    One of the best investors of all time Benjamin Graham suggested obtaining a margin of safety when investing, what is the margin here? A credit score?

  25. @Matt

    I am aware that banks charge high rates, especially on the credit cards, even to the low risk borrowers at the time of ultra-low interest rates. But that may not be as much the evidence for the risk of lending, as for the bank’s greed. Especially when they grant a very long period of zero percent interest rate. (i.e. If a borrower was such a safe bet to receive 0% APR (or 2-3 % with many balance transfers) for as many as 18 months or more, how come he suddenly becomes such a high risk to justify a double digit interest rate spike when the promo expires? (sometimes as high as 20% or more)

    And while many credit unions (and small banks) play it fairly, big banks usually peg a much higher interest on their credit card, than the the borrower merits. Hence, many of them would turn to Prosper or Lending Club to consolidate their credit cards with a usurious interest rates.

    Some borrowers will turn to start a business of course, and starting a business is very risky indeed. However, they are on the hook for repayment regardless if their business fail, since they assume the personal debt. (I don’t think Prosper & LC allow lending to Limited Liability corporations and such)

    Some will borrow to pay for their medical bills, and even if they get crushed by the medical debt and can never repay it, I would regard those loses as a form of charity. (Since I normally rarely give anything to charity (except for my time))

    Finally, I have a high trust in the FICO score. The people I known with high FICO score (myself included) are almost without exceptions very consciousnesses people who mange their finances responsibly.

    Then, the people I known with low FICO score proved to be more careless people, especially with their money. My former tenant, while an otherwise a nice guy with a high paying job, was so irresponsible with his money, that he end up giving me most of his wages (per lease agreement) so he can keep up with the rent & save for the future. When he left I gave him back more money that he ever thought he could save. And of course his FICO was on the rock bottom.

    So I would take FICO over anything S&P and other rating agencies have to offer (their incompetence & corruption has been clearly shown during the previous financial crisis), and I regard my peer-to-peer loans equivalent to bonds with a low-to-moderate risk earning a relatively stable high yield.

  26. How are you going to compare the services unless they have the same exact risk metrics in their loans?

  27. Evan,

    You should be able to filter on the similar info between both. What matters is picking out similar borrowers.

    See my review of Prosper on Wednesday for more details. LendStats.com also shows similar returns and default rates for the two companies.

  28. borrow money says:

    I’m curious if someone compared investing with the lending club and prosper to a vanguard blanket fund over the course of ten years or something, what the result would be.

  29. @borrow money: Well nor Prosper or Lending Club have been around for 10 years yet. Give another 3-4 years to get that stat. Also to really do an accurate comparison would be a high yield index.

  30. DON’T DO IT!

    I lost a ton of money on Prosper…in the early years, circa 2008. It must have been a magnet for every sleezebag and con-artist in cyber space.

    I think their screening process of borrowers was non-existent.

  31. It’s nice to see a comparison between Prosper and Lending Club, since I do not invest with Prosper. But does it matter which provides better results? I think it is all about selecting the notes and be available of taking a higher risk and thus boost your return yield, right?

  32. People who complain about 2007-2008 on Prosper, lost money. I also had 4 defaults in one year. Since 2008, things improved dramatically.
    I now have about 150 loans on Prosper and 148 LC and I have to say that LC is consistently better in terms of returns and fewer defaults for similar loans.

    I would love to see a site dedicated to people posting their filter criteria for selecting loans and where we can shift the conversation from bashing Prosper and LC to how we can maximize our returns by learning from each other.

  33. Can anybody help me on my school project? I am trying to gather information about the pain points of investors in LendingClub. If you are an investor in LendingClub and can spare 10 minutes it will be very helpful to me.. This is a survey through SurveyMonkey. Thanks much for your help!

    http://www.surveymonkey.com/s/HS6B52K

  34. As someone who has used Lending Club for a long time, I’d have to say I find the company a little shaky. I once watched one of their investing webinars when they were starting up, and the leaders of the company made some pretty rough comments when they thought the mic was off afterwards. Nothing corrupt or illegal, just vulgar and unprofessional — which I think represents what’s going on behind the scenes quite well. Their policies are also very anti-investor — they almost always waive late fees (which are supposed to go to lenders), and collections are a joke. They allow people to request $35,000 without requiring so much as a reason why – most of their loans now have blank descriptions (avoid the auto-investing feature!). My dealings with their investor customer service have been poor, too — often taking several days to get a response and you never can get a name of who’s helping you. Often you’ll just get a “thank you for your patience” along with a canned response anyway – again, they just don’t seem to respect the investor. Also, their 1% fee is a misnomer – they round and never make up for it, so you’ll actually end up paying around 1.5 to 2% in fees.

  35. I am personally very confident in lending club after using it for 2 years. Mind you the economy has been on an upswing the past two years- so I still take that into account but the return I have been getting consistently is better than any of my other investments.

    I actually have to majority of my savings in Lending Club at this point.

    I have over 900 notes and have gotten between 18-21% in interest the last 2 years. I invest solely in E,F & G loans.

    Do I have defaults? Sure, I have about 25 of them. 25 more are late and 10 are in grace period. I am still making an amazing returns and love the liquidity. Very easy to sell these puppies for cash within 2 days!

    I hope everyone jumps on the bandwagon with these! To all of those who are afraid to take a chance- think of it this way- any investment you have will likely go to shit if the economy fails (sans gold obviously). So keep diversified to protect yourself and don’t shy away from strong returns! Getting good money now will protect you from getting hurt if you lose some down the road.

    We should be making money, not only banks who have a crap ton of it and get bailed out with OUR tax money because of their bad decisions.

Speak Your Mind

*