Friday, November 4, 2016

Prosper versus Lending Club: My Results

Prosper and Lending Club are both "marketplace" or "peer-to-peer" lenders.  Both allow people who want to borrow money to apply online.  Both allow small investors to buy portions of many loans and both make their money on application fees and servicing fees.  As an investor it is important to look at the differences between the companies before investing your money.  In the battle of Lending Club versus Prosper, who wins?

Interest Rates

Both Prosper and Lending Club offer loans at a variety of interest rates.  Like most other loans, the less you need the money, the less interest you will pay.  The more likely a borrower is to pay back a loan, the less interest the lender will make.  


Prosper loans are rated from AA to HR, with A-E in the middle.  The current interest rate on AA loans is somewhere between 4 and 6 percent (there are sub-grades) and if you select loans manually, Prosper tells you the estimated loss on that grade of loan,such that if you had a portfolio of loans of that grade that perform as expected,  that number is what you could expect to earn.  For AA loans, that rate is about 4%.  For HR loans, the interest rate is almost 32%, and the estimated rate of return is about 12%.  Of course if there is a recession and the loans don't perform as well as expected, the HRs are more likely to take a hit than the AAs.  

Lending Club

Lending Club loans are rated from A-G, and there are four steps to each number (A1, A2...).  The current interest rates on A1 loans for 36 months is 5.32%.  The expected return to investors is 3.11%  The G3 rate right now is 30.89% and the expected return is 9.43%. 


One factor to consider in any investment is your ability to turn that investment into cash to meet immediate needs, and whether having to do so quickly can cost you money.  Since the average investor's account with either Lending Club or Prosper is made of many notes, each of which is supposed to result in a monthly payment, both Lending Club and Prosper offer investors an easy way to obtain a small part of their investment on a regular basis.  My Lending Club account is about $20,000 and it has paid me over $10,000 in principal and interest this year.  If I had been withdrawing that money, the figure would be about $600 less.  Still, if I needed a few hundred from savings periodically, I could get it from these accounts.  

In the Prosper vs. Lending Club debate however, Lending Club gets the liquidity points because Lending Club has a secondary market for its notes.  If you own a note you no longer want, whether the reason is because you want to get rid of that particular note for fear it will default or whether you just want to cash out, Lending Club allows you to offer the note for sale.  You can offer it for more than the current value, or less and you have to pay a 1% sales commission.  I have read blog articles that have concluded that if you want to liquidate your portfolio and start off by offering your notes at a 5% premium, and slowly lower the price, you will probably break even overall, though you will profit on some notes and lose money on others.  While Prosper used to offer a secondary market they have announced its discontinuation.  


Personally, I prefer Lending Club's website.  One thing in particular that I like is the ability to group notes into a "portfolio". I have different portfolios for different strategies I've tried.  Once loans are in a portfolio, Lending Club can give you statistics about that portfolio.  If you decide to put a loan in a different portfolio, that is as easy as pushing a button.  

Another thing I like about Lending Club is that they give you an estimated account value, which writes down late loans incrementally, rather than all at once.  In other words, with Prosper, if you have $1,000 worth of current loans and then one $25 loan is not paid when due, the value of your account, as shown on your website does not change for over 120 days, and then it takes a $25 hit on the ay the loan is written off.  Lending Club,on the other hand, allows you to set your dashboard to give you an estimated value, based on their experience with notes that reach varying degrees of lateness.  For example, Lending Club has found that about 25% of the value of loans that enter grace period (1-15 days late) is lost, so if a note enters grace period, your estimated account value will drop by 25% of the value of that note.  

Real Life Results

Lending Club

I started my Lending Club account in July, 2014.  It has always been the account I play with, trying different strategies I find on blogs, or trying services that invest your money for you.  The total I've invested in Lending Club is $17,550.  Right now my account consists of 
  • 4.05% A notes
  • 4.31% B notes
  • 30.82% C notes
  • 27.57% D notes
  • 27.32% E notes
  • 3.99% F notes
  • 2.14% G notes
XIRR is considered the most accurate way to track the overall performace of these accounts, since money can be added or taken away, and there are times when some money is earning no interest.  You can calculate it using Excel or by using this online calculator.  Right now my XIRR return for my Lending Club account, using the actual value that does not mark down late notes, is 8.09%.  If you look at my dashboard, which gives the rate of return based on money invested in notes (in other words if you have money that is uninvested, it is not counted) it gives my rate of return as 8.50%.  Using the adjusted number, which accounts for late notes, my XIRR return is 6.22% as opposed to the dashboard value of 6.43%. 

Since I've been investing in Lending Club I've received $5086 in interest payments and I've lost $2183 to defaults.  Put another way, I've lost about 42% of my interest to defaults.


I have invested a total of $15,850 in Prosper.  My XIRR return is 9.33%.  The return shown on my dashboard is 12.96%.  My Prosper account has always been auto invested either by me or by a service.  Since Prosper does not allow me to create portfolios I have no easy way to determine which is which.  My Prosper portfolio consists of 
  • 8% A notes
  • 13% B notes
  • 16% C notes
  • 45% D notes
  • 13% E notes
  • 5% HR notes
With Prosper I've lost 44% of the interest paid to defaults.  

With both Lending Club and Prosper I am no longer investing in A and B notes.  


Both Lending Club and Prosper are viable investment choices.  My returns appear higher with Prosper but the account is a few months newer and has had recent infusions of cash which may skew the results.  I prefer Lending Club's website and its access to the secondary market.  

Do you invest via Lending Club or Prosper?  How are your returns?  Do you have a preference between platforms?

Disease Called Debt

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