Peer-To-Peer Lending – Size Does Matter

If you’ve visited this site before, you know that I’m a huge fan of peer-to-peer lending. Investors need to put their money somewhere and when interest rates are so low, we have to get creative. P2P lending has done just that – provided us with a nice alternative to fixed income products and money market rates.

Over a year ago, I deposited a small amount into a Lending Club account to basically test what I had read. At the time, the stated returns seemed too good to be true. I didn’t see how I could earn ~ 12% when products like CDs were paying less than 1%. Well, my small deposit has performed exactly as stated, so I’ve decided increase my exposure and deposit much more.

Read More: The Growth Of Peer-to-Peer Lending

An Even Investment

Instead of choosing between Prosper and Lending Club, I decided to make an even deposit of $20,000 into each lender. This uncovered a new, unforeseen issue – size does matter when choosing which lender to invest with. Currently, Lending Club issues many more loans that Prosper, making it easier to fill your order. As you can see in the graphics below, neither one was able to fill my entire $20,000 order right away. Prosper maxed out at only $4850 and Lending Club was able to locate $5000 in loans. In order to get the numbers that high, I had to increase the amount I was willing to lend from $25 to $50 per loan. By doing so, I’ve increase my risk as my exposure to a specific individual is double.

Prosper estimated return

 

Lending Club estimated return

Quality Of Loans

Another difference between the two is the quality of loans found. I’m a pretty risk-tolerant investor, so I’m willing to take a larger risk for a greater reward. Unfortunately, Prosper did not have any loans available below the credit rating of B. As a result, my estimated return is only 6.46%. That’s still much better than most other products, but not as high as Lending Club, which estimates my return at 13.32%. The higher return is calculated based on 17% of my money going to borrows that are rated in the four lowest tiers. In my opinion, that’s a small amount relative to the return and I’m willing to take that risk. My numbers also assume that each order will be filled in its entirety. If you’ve invested in P2P lending before, you know that is not always the case.

4x Loans

To date, Lending Club has issued $2,269,654,975 in loans compared to Prosper, which has issued $590,000,000. Both companies are growing very rapidly, but Lending Club is currently greater than four times the size of Prosper in terms of loans issued. As you can see this not only affects the amount of loans available, but also the expected rate that you’ll receive on your funds.

Lending Club loan growth

The fact that I placed an even amount into each lender will make it very easy to compare the returns. Hopefully, both will continue to fill my needs on a fairly even bases. Each month, I will post a summary to compare the performance of Prosper and Lending Club.

 

Comments

  1. says

    Good to see you back! It’s nuts that you write on this! I was just looking at Prosper and Lending Club’s borrower rates yesterday! In fact, I was looking at an old post you had written on the very subject :)

    It makes more sense to me now how they pay the lenders a good percentage–both brokers charge the borrower a 5% origination fee, so that right off the top goes to the broker, whereas I assume most of the yield goes to the P2P lender.
    Todd @ Fearless Men recently posted…Become a Better Man: Humility is a Strength and Trait of A Real ManMy Profile

  2. says

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