A Club for Lending (Part 2): Battle Royale

Last week I put up a quick, descriptive post on P2P lending (here is another introductory article on P2P lending).  Now I’ll go into a little more detail.

Why did I choose Lending Club over Prosper?  A few different reasons, but they’re all related to my confidence in Prosper succeeding as a business.  Prosper is currently under litigation in a class action lawsuit for allegedly selling unqualified and unregistered securities (more info).  The case has not yet been resolved. 

Furthermore, Prosper uses more lax requirements for borrowers than Lending Club.  Prosper had a relaunch in July 2009 where it tightened credit requirements that lead to a lower default rate, but the numbers before that are quite scary (and Prosper still has looser credit requirements than Lending Club).  Indeed, more than half of Prosper investors lost money due to more than 22% of all money borrowed being charged off (that is, borrowers stopped making payments). 

To add on to this, there are currently ongoing concerns over the solvency of Prosper.  The loans originated on these P2P lending sites will still exist even if the site shuts down, but I want to put my money with the company that looks to be on the upswing, not one that looks dangerous and on the verge of bankruptcy (#3 on this list of the risks of P2P lending, from Social Lending Network).

Compare this to Lending Club, where over 90% of loan applications are declined due to not passing requirements.  Because of this, defaults throughout the history of the site remain less than 3% (even through the financial crisis), with over 90% of investors making money, averaging 9.64% net annualized return since inception in 2007.  Now I use my own filters to pick out loans, and I could use those same filters that I have on Lending Club on Prosper.  But I want my filters to find loans that are the crème de la crème, not the crème de la crap.

I’m being a bit harsh.  If Prosper improves its financial footing, I may put some money in the site.  I do like having Prosper around as competition to Lending Club because Prosper has features that I want Lending Club to incorporate, such as the ability to filter for previous borrowers, who are extremely likely to pay back their loans in full.

Okay, now that we have that squared away, how does Lending Club actually make money?  Pretty simple, really.   Borrowers pay a one-time processing fee from 2.25% to 4.50% of their loans, while investors pay a 1% service charge on each payment received from borrowers.  I actually prefer to have to pay a 1% service charge.  Why?  Because that means Lending Club has a vested interest (getting paid) in picking out quality loans.  Cool.

Next week I’ll show you the filters I have to choose loans and the results I’ve had so far.  This might take a couple weeks because I use a lot of filters and want to explain each one at least a little bit.

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