Guest Post by Nate Matherson, Co-founder of LendEDU
If you’re looking to diversify your portfolio outside of investing in just stocks, bonds, or mutual funds, peer-to-peer loans could be one option. Peer-to-peer lending means you actually use your funds to help out other people who need to borrow money. You’ll be paid back over time with interest, but you take the risk of a borrower defaulting and not repaying what is owed.
There are two primary platforms where you can invest in making personal loans to your peers: LendingClub and Prosper. I’m currently an investor with the LendingClub platform, but you’ll likely want to compare both options when deciding where to invest your cash so you can decide what’s best for you.
Your Guide to Investing with LendingClub vs. Prosper
- Offer the opportunity to open a taxable account, or a traditional or Roth IRA. Prosper also allows SEP and Simple IRAs while LendingClub allows 401(k) rollovers, trust accounts, corporate accounts, and custodial accounts for minors.
- Allow borrowers to obtain loans of up to $40,000
- Provide information on borrower credit history to would-be investors
- Allow you to invest as little as $25 per loan you help to fund – but Prosper allows you to invest any amount that’s $25 or more while LendingClub requires you to invest in $25 increments.
- Have minimum credit scores for borrowers, although Prosper requires scores of 640 or higher and LendingClub requires scores of at least 660.
- Allow you to personally select loans to invest in or provide the opportunity for automated investing so you can set parameters and have your funds invested in a mix of different loans.
- Charge a 1% investor service fee of investors. Both also charge additional fees when a borrower defaults and a loan goes into collection.
However, while the two sites have some commonalities, there are also differences between them to be aware of. For example:
- LendingClub has a minimum deposit of $1,000 for taxable accounts and $5,500 for IRAs while Prosper allows you to begin investing with as little as $25.
- Prosper is slightly older, as it launched in February 2006 while LendingClub launched 18 months later in 2007.
- LendingClub advertises historical returns of 4% to 6% annually, while Prosper advertises historical returns of 3.5% to 7.5% across all ratings platforms.
- LendingClub charges fee of up to 40% on amounts that are collected on delinquent loans, while Prosper indicates that collections or servicing agencies are compensated by keeping a portion of payments collected in accordance with a pre-determined fee schedule.
What are the pros and cons of LendingClub vs. Prosper?
Because LendingClub and Prosper do have so many similarities, it can be difficult to choose between them. However, evaluating the pros and cons of each site could help you decide which is right for you. For example, some advantages of LendingClub include:
- LendingClub is available to investors in more states. You can invest through LendingClub in Washington D.C. and all states except Alaska, New Mexico, North Carolina, Ohio, and Pennsylvania. You can invest through Prosper in D.C. and in all states except Alabama, Arizona, Arkansas, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, and Vermont.
- LendingClub makes it easier to evaluate loans: LendingClub provides investors with the opportunity to download a spreadsheet of all available loans on the site, which makes analysis easier. Prosper does not allow would-be investors to download loan information so you’re restricted to using the site’s tools to compare and analyze loans. Both LendingClub and Prosper give consumers flexibility to use the personal loan for a wide variety of use cases. Personally, I typically only invest in personal loans that are being used for credit card refinancing. It is my opinion that consumers who are looking to refinance a credit card are making a thoughtful financial decision for a better financial future. On the contrary, I have avoided personal loans being used for things like large purchases, vacations, and other more transactional purchases.
- LendingClub has a higher minimum credit requirement: Lending to borrowers with lower credit means taking on increased risk.
However, some advantages of Prosper compared with LendingClub include:
- More flexibility in investment options: You can invest any amount above $25 in any loan with Prosper, rather than having to make investments only in $25 increments.
- A better loan filtering platform: Prosper’s in-platform filtering tools and Quick invest option are easier to use than LendingClub’s filtering tools, making manual investing easier.
- Lower account minimums: While LendingClub has high minimum investment requirements for both taxable and retirement accounts, Prosper allows you to begin investing with just $25.
Which is Right for You?
Both LendingClub and Prosper give you the chance to invest money in a different kind of investment so you can make your portfolio more diversified. Since there are benefits to each different peer-to-peer investing service, you’ll want to compare both options and see which one seems like a better fit for your particular situation.