There are two main players left in the Peer-To-Peer lending industry after the collapse of Loanio and Pertuity Direct. This article will contrast the pros and cons of each and provide insight on how to be successful with P2P Lending.
Lending Club (LC) grew steadily in 2009, having achieved SEC broker-dealer certification first and leveraging that to gain significant ground on Prosper. However, as of this posting, LC is the underdog in this fight since Prosper has nearly twice the total amount of funded loans. To continue to grow, LC has been steadily improving the overall loan quality (something I know a bit about, having suffered a fair amount of defaults with my 2008 loans) and the result can be seen in the average return to lenders (9.7%).
Here's how it works at LC: Borrows submit a request for a loan. The request includes a reason for the loan, total amount requested, credit defaults, credit score, etc. The pertinent financial background is checked by LC and a loan rate is set. Lenders can then view the borrowers profile and loan rate. Loan filters and an automatic loan picker make it very easy to select a diversified loan portfolio. The minimum amount you can loan is $25.
Pros â€“ There are plenty of borrowers to choose from, so diversification of loans is typically not an issue. The known loan-rate makes selection very simple.
Cons â€“ Website can be a bit clumsy and slow, though I have noticed that the site is continually improving.
Prosper takes a different approach to loan selection. Here, you bid on the loans until the loan interest you are willing to give matches what the market is willing to give. This is known as a reverse auction. Personally, I find the bidding process annoying. I really like the design of the website, though. Very intuitive and well organized. Loans on Prosper are currently earning an average of 10.4%.
Pros â€“ As with LC, there are plenty borrowers to choose from. Plus, Prosper has a little more working capital then LC and the backing of Google CEO Eric Schmidt.
Cons â€“ Auction style bidding process just makes things more complicated than they need to be.
For my money, Lending Club is the clear choice. I keep all my loans at the $25 minimum, which means that I typically have to jump and invest every week or so in order to my loans spread out amongst the borrowers. On top of that, I avoid loans for questionable purposes (such as a wedding or a vacation) and I avoid anyone that has defaulted in the last two years. Both companies offer an opportunity to sell your
I'm a big fan of P2P lending and Lending Club. What's not to like? You can make a sizeable return while helping your neighbors. I encourage any investor looking to expand their portfolio beyond stocks/bonds to sign-up for an account. But, as always, keep things in perspective: P2P lending should be part of well balanced portfolio. Don't go too crazy!