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:
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…
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.