Prosper Or Lending Club: Which Is Better?

P2P loans do a lot for our financial independence.

  • They geyser cash.

Hundreds of dollars spit out of my P2Ps each week. Which gives me the recurring option of reinvestment into P2Ps or withdrawal for rebalancing.

  • They just crush it on yield.

Getting 500% to 1,100% the yield of U.S. Treasuries is a run-of-the-mill performance. Even when P2P investing is done the laziest, most counter-productive way possible, P2Ps still yield like crazy.

  • Their 0.2 correlation coefficient with U.S. stocks means they have amazeballs diversification credentials.

Investing up to 10% of our portfolio holdings in P2Ps is the FL-approved allocation of greatness, provided it’s done the right way.

So we can’t wait to plunge in and glisten with the juicy spray of volatility-reducing, profit-infested cash flow.

But before we do, there’s something we’ve neglected.

And it warrants our attention. Because, as much as we love the theory of being really ridiculously good-looking and wealthy, it’s the melding of theory with practice that makes us Luchadores really sparkle.

Prosper or Lending Club: Which Is Better?
Prosper or Lending Club: Which Flavor of P2Ps Is Right for You?

This post is about the practical first step of P2P investing. And it’s kind of a biggie since you don’t want to get Fluffy’s morning constitutional on your Pumas right off the bat. Here’s how to do P2Ps the most efficient way possible by choosing the online platform – the flavor of P2P investing – that is best for you.

Big Ask

Query: If I can only open one P2P account – either on Lending Club or Prosperwhich do I choose?

You don’t have to choose, of course. You can costlessly multi-home here. But there’s still good reason to want to know because the heart of what’s being asked is: If one platform’s superior, wouldn’t it be economically efficient – and life efficient – and therefore awesome-r to just invest there?

It’s a very FL-styled line of inquiry, connecting the theory of what we’re all about here – life-maximizing finance and awesomeness – with the practice of executing it in the most Luchadorian style.

So let’s set our sights on the most significant criteria to take into account as you decide.

I’ll also share my personal experience on both platforms – which includes why I’m funneling most of my new P2P investment dollars into just one platform these days.

State Patrol

Whether you invest in Lending Club or Prosper (or neither) may come down to which state you live in.

Lending Club and Prosper aren’t open to residents of some states for reasons that stretch the very bounds of reason.

I won’t editorialize about how stupid state governments are for disallowing access to these platforms. It’s stupid on its face, so you don’t need me to tell you it’s stupid. It just is. And we all know it. Stupid.

Here’s a rundown of the states where each platform is available. Any state appearing on only one list is highlighted for your viewing pleasure.

Lending Club first:

“Individual investors can invest in Notes if they are a resident of:
Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Illinois, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.”

For Prosper, the list is a little different:

“Prosper is currently available only to lenders who reside in the following states: Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming.”

To compensate for the fugliness of those blocks of state names, here’s a pretty map from Prosper showing its residency requirements. Note: restrictions for both LC and P change from time to time, with more states being added to both platforms’ rosters on occasion.

[UPDATE: As of October 2016, Prosper allows investors from all states except Iowa, Maine, North Dakota, Pennsylvania and Vermont to participate. Many thanks to Luchador Shaun who gave me a head’s up about this out in his comment appearing below! Note as well that it appears Maine once allowed investors but may not at present. I’m awaiting further info on this.]

Prosper Investor Residence Requirements
Prosper Investor Residence Requirements


The main takeaway from our digression into cartography: Lending Club has more coverage, so it’s the platform most likely to be available to you. Consider yourself lucky if you live in a state with access to both.

But fear not if you’re in a Lending Club-only state and really want at those Prosper-originated notes.

Both LC and P enable users to participate in a single secondary market for notes, known as FolioFN. So, even if you just have a Lending Club account, you could still purchase notes originally available on Prosper via this secondary market. Secondary market notes, though, only become available once their original purchaser chooses to sell them. Which is why FL will get into both the nitty and the gritty of selecting the most yieldalicious notes of FolioFN in an upcoming post.

Also, even if you live in a state that forecloses both LC and P participation, you can still buy notes on the secondary market with a FolioFN account. Stupid states.

Face Time

If you’ve got access to both LC and P, functionality of the user interface is a valid consideration when getting started with P2Ps. That goes for any investment vehicle, really.

There’s nothing worse than knowing – in theory – what you want to do, only to be shackled and chained by a balky interface. Except for maybe being seated next to Howie Mandel on a trans-Atlantic flight. That’s probably worse.

For the investor new to the P2P loans asset class, there can be an overwhelming amount of info to process. You want a clean interface that allows you to focus on money matters rather than menus.

Based on my experience with both platforms, Lending Club has the cleaner online interface that makes getting started a bit easier.

Notably, Prosper just updated its online experience to be much prettier. But I think it’s still sort of clunky to interact with. Others are likely to have different views on this since interaction is little more than a matter of taste. This is just my pair of coppers.

Beyond the superficial stuff, though, LC provides some serious data mining capabilities; offers easy notes data downloads directly to Excel; and puts way more transparency into the particulars of each note under consideration for purchase.

It has a significant edge over Prosper in this regard.

I’d like Prosper to step up its game here. Let’s get some Excel download capabilities going so I can do my whole econ-nerd thing without spending an hour cleaning up data I copied and pasted from the website.

Prime, Select and Choice

Lending Club has more notes available at any given time for investment.

It’s the larger platform, not only in terms of geographic reach, but also total loan throughput. Which is likely why I’ve never had difficulty finding good notes for investment on LC.

As of March 31, 2016, LC had funded over $18 billion in loans. Billion. With a “B.” And over $2.75 billion in Q1 2016.

Lending Club Total Note Issuance
Lending Club Total Note Issuance

With Prosper, on the other hand, pickings can be slim at times.

Now, Prosper’s funded over $6 billion in loans, so it’s by no means small. But at a third the size of LC, the difference in note selection has been noticeable in my own investing practice.

The amount of “deal flow” through LC is simply greater, which makes getting your investment soldier dollars into battle a much faster affair.

Since time is money with investing, that’s important. The longer your cash sits idle, the lower your overall returns, all else equal. You don’t want your cash infantry sitting around playing shuffleboard because there aren’t any good notes to buy.

Point for LC here.

But there’s one big advantage for Prosper over LC based on my experience that has caused me to invest many, many more new dollars via Prosper than Lending Club.

All About the Benjamins

Prosper seems to provide slightly better risk-adjusted returns. In technospeak, they’re pricing their notes’ risk a bit better. And that’s kind of a big deal when talking about investing.

When you don your personal CFO hardhat/cuff-links, you care most about returns. The other stuff is just nuisance.

Well, yeah, that’s great, Chief. But you still gotta execute.

Which is why things like interface, note selection, data availability and investor requirements still count.

But about those returns… Here’s a head-to-head comparison of Lending Club and Prosper returns based on my own experience that just happened to resemble a real-world economics experiment.

First, the real-world, somewhat-unscientific, but-still-valid-in-FL’s-humble-opinion experiment design:

  • My initial investment criteria in both LC and P were virtually identical.
  • I used their automated note selection tools and established note-quality allocations that were basically the same. (This, by the way, is not recommended.)
  • I put roughly the same amount of money into each.
  • I started the accounts at about the same time.

Short of a lab coat and beaker, it was a pretty solid real-world experiment for purposes of comparison. Exogenous variables were controlled for, and the internal investment selections were done as similarly as could be. Additional controls probably wouldn’t have impacted the results. So, for purposes of my own decision-making, I consider the results valid.

Years into the experiment now, my LC returns are hovering at around 5%.

Lending Club Annualized Return
Lending Club Annualized Return

My Prosper returns have been more like 6%. (Note: “Seasoned Annualized Net Returns” are the applicable returns for purposes of this comparison.)

Prosper Annualized Return
Prosper Annualized Return

The margin of difference isn’t huge – around 0.6% percent right now. But the delta is still significant, especially for larger portfolios.

On a 10% allocation of, say, $2 million, we’re talking $200k invested in P2Ps. A 0.6% difference on returns is a cool $1,200 per year.

To the Luchador mind, putting up with a clumsy-ish interface and limited data analytics seems like fair dues for $1.2k annually.

Now, I’m sure other P2P investors have outperformed with LC over P.  I’ll simply note that my returns differential is consistent with the anecdotal accounts of others I know who’ve invested in both platforms.

Basically, they’ve slightly outperformed with Prosper. But just ever so slightly.

That delta’s enough for me to favor Prosper in my new dollar allocations. But I’m glad to have accounts with both because they collectively provide me maximum opportunity in this asset class.

Open the Kimono

If you can, I’d encourage you to open an account on both platforms. Poke around and get a feel for things like you’re on a second date.

You can open an account without funding it. So if you don’t like one’s interface or note selection, you can abandon or close the account without penalty.

In the meantime, you can rest easy knowing that FL will be back soon with more on P2Ps, including supercharged strategies to poach the best notes for max returns and min effort.

Until then, Luchadores, gimme thoughts on your preferred platform and other criteria you considered when participating in one versus the other.

Update: Please read the latest FinanciaLibre post about issues facing Lending Club and the implications for P2P investors, Scandal at Lending Club: Caveat Emptor.


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