LendingClub vs. Prosper – Which is the Better Option for P2P Lending and Investing?

Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!

The following is a post by MPFJ Staff Writer, Jeff.  Jeff blogs about finances, health, and the environment over at Sustainable Life Blog.
Over the last few years, LendingClub and Prosper have gotten a lot of press.  Both are “Peer to Peer” (P2P) lenders, which basically means that one person is lending money to another person.  It’s like lending your coworker a dollar to go hit the vending machine in the break room, but on a much larger scale.

The Borrower

LendingClub and Prosper each have borrowers looking to borrow money for all sorts of different things: Wedding expenses, small business loans, home additions and new cars, but by far the most common reason that people turn to the sites is because they are looking to consolidate their credit card debt.  For the borrower, it’s something of a no-brainer – they can pay off their credit cards that they were paying 18%+ interest to, and get a loan with an interest rate dependent on their credit profile.  Some of these rates can be as low as 6-7%, and some can be as high as 12-14%.  Either way, the borrower generally comes out ahead.  The borrower is the first “peer” in the transaction.

The Lender/Investor

The second “peer” of course, is the lender.  Savings rates are abysmal right now, with even high quality accounts paying at, near, or slightly less than 1% interest.  P2P lending offers the chance at a far greater return than a traditional savings account (though with more risk).  A small fee is charged by LendingClub or Prosper to administer the loan and facilitate payments, but the rest of the interest charged to the borrower is yours.

The lender can choose the term that they would like to invest in (typically 36 months), and the company will send the borrowers payment to you every month.  You can choose to lend whatever amount that you like, though most investors lend in $25 increments so that they can further diversify their P2P portfolio.

Now that you know the basics of Peer to Peer lending, lets look at the two major players:


LendingClub is based out of San Francisco, CA.  Though you can use LendingClub in most states, it is not approved in all states (It’s approved in CA, CO, CT, DE, FL, GA, HI, ID, IL, KY, LA, ME, MN, MO, MS, MT, NH, NV, NY, RI, SC, SD, UT, VA, WA, WI, WV & WY).

If you’re not reading from one of those states, you’re unable to invest in the origination of LendingClub notes, but there is a secondary market that you may purchase the loans from called foliofn.  I personally have never used foliofn to trade any of my notes, but I have heard good things about the service, which is run by LendingClub.  

LendingClub has a prospectus on file with the SEC, and has people reviewing each borrower individually before they disperse money to them to make sure that they aren’t just going to take out a large loan and walk off with it.  Lending club also reviews each borrower’s loan and assigns a grade and a number to the loan.  The grades range from A-G and are accompanied by a number.  For instance, the top rated loans that will get the lowest interest rate are A1 grade, while the lowest grade loans that will get a higher interest rates are G5.

When viewing loans, you are able to see quite a bit of relevant information about the borrower: their credit score, where they live and work, estimated costs of living in their area, whether or not they have any previous bankruptcies and more.  In addition to the information provided, you can ask the borrowers questions, either pre-canned questions such as “what is the purpose of this loan” or a question that you write yourself, in order to gain more information about the borrower.

In addition to this, LendingClub also estimates your probable rate of return, adjusted for the risk of default for the loan grade that you selected.  Loans graded A have a lower default rate than loans graded G, so the chances of default will be lower, but so will your interest rate.  They use historical loan data for notes graded similarly to determine the possibility of default for all notes in the system.

My Personal Experience with LendingClub

I’ve been a member of LendingClub for about a year now, and things are going well.  
I initially invested $300, but about 2 months after that, I was liking what I saw and invested another $700, to bring my total investment in the service to $1,000.  I am getting an 11.77% interest rate, and have not had any charge offs or late payments to date.  I have had four notes get paid off early, but everything else is going well so far.  It’s generated a nice little passive income stream for me, to the tune of $36.75 per month.  When the payments come in, I wait until I have enough to invest in a new note and reinvest the proceeds.  
My cash is spread across 50 notes, all with a 3 year term.  Most of the notes that I picked initially were A and B grade, but lately I’ve been investing in a bit lower grade C & D notes to juice up the return a bit.  Once I counter balance everything, I’d like to get about 25% A grade, 35% B grade, 15% C grade, and 15 % D grade and 5% E grade notes.


Prosper works essentially the same as LendingClub.  A person posts a loan out for something that they need cash for like credit card refinancing or a wedding, and they are graded by Prosper.

Once those are graded by prosper, the investor has a chance to purchase/invest in a note that comes with an interest rate set by prosper.  According to Prosper.com, they have a seasoned return rate of 9.28%, which is far better than you’ll get investing in a traditional savings account, but comes with a lot more risk as well.  

Like LendingClub, prosper has a prospectus on file with the SEC.  Prosper also isn’t available in all states.  Prosper is available to lenders from Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, West Virginia, Wisconsin and Wyoming.

While there were major problems at Prosper when the company first started that involved the default of lots of loans, things seem to have settled down and gotten a bit more normal.  It looks like there are far less defaults than there were when Prosper started.

One important thing to note about both LendingClub and Prosper.  The key to both of these services is diversity.  You’ll want to make sure that you diversify your funds across as many notes as possible to avoid 1 default causing a problem with your whole return.  This typically takes a rather large sum of cash to properly diversify across multiple notes.  However, it could be done with a sum as low as $1,000.

How about you all? Have you ever invested in P2P loans with either of these companies? If so, what type of return did you achieve? Was it worth any risk of default you were exposed to?

Share your experiences by commenting below!


  1. I have been investing in Lending Club since 2009 and Prosper since 2010. I have been very happy with my returns at both companies (over 10%). I just want to emphasize the point you made about diversification. If investors stick to the $25 minimum and use a simple filtering strategy it is quite easy to make decent returns. And if you are willing to do some research then 10% returns or more are well within reach.

    • Thanks for sharing LendAcademy! I'm curious – do you have a preference between the two, Prosper and LendingClub?
      My recent post LendingClub vs. Prosper – Which is the Better Option for P2P Lending and Investing?

      • I believe in utilizing both companies. Right now I have more money in Lending Club but I am still adding money to both them and Prosper. I believe it makes sense to diversify by investing with both platforms.
        My recent post Realty Mogul Brings P2P Lending to Real Estate

        • That definitely makes sense! And for you, defaults haven't been a big hindrance in your investing with P2P?
          My recent post LendingClub vs. Prosper – Which is the Better Option for P2P Lending and Investing?

          • Defaults are a big part of p2p lending particularly when you invest the way I do in the higher risk end of the spectrum. I have had hundreds of defaults but I am still maintaining returns above 10% so I accept the defaults as a cost of investing.
            My recent post Realty Mogul Brings P2P Lending to Real Estate

    • sustainable life says:

      Glad you stopped by lend academy. I think that diversification is the key to success here. Keeping your risk spread out in 25 dollar increments will save you in the long run, I believe.
      My recent post Tax Season Challenge Update

  2. This is not something I have looked into that much, so is very informative for me. I'm sure it would take some convincing from my spouse to invest in P2P lending since she is very risk averse. Thanks for the overview.
    My recent post Basic Electrical Work – A Great Place to Enter the DIY World

    • Thanks for sharing Greg! While I do invest around $500 per year in microloans from Latin America (around 3% yield, so much lower than these p2p options above) because I like the “causes” they represent, I have not started investing in LendinClub and Prosper either. While I think it would be interesting to devote around $1000 to it, I just prefer to keep things simple with my passive investing strategy.
      My recent post LendingClub vs. Prosper – Which is the Better Option for P2P Lending and Investing?

    • sustainable life says:

      That's great greg! I've had a lot of luck with it, and my spouse is also pretty risk averse. If I were you I'd try a smaller amount (like 500) and do mostly a, b & c grade notes, then track progress for a while and see what happens.
      My recent post Tax Season Challenge Update

  3. I believe both companies have bright futures ahead of them, even though Lending Club has a dominating market share. The industry as a whole has shown incredible promise.

    I have been investing in Lending Club since the spring of 2009 and have found it to be an incredible easy, and relatively low risk means of investment. Recently I rolled over $10,000 into a Roth IRA with them in addition to my taxable account. My taxable account has achieved over a 10% return for the last four years. The IRA is too young to predict long-term returns. I am planning on expanding and opening an account with Prosper later this year.
    My recent post The Right Job – Turning Down a 30% Raise

    • Thanks for sharing writing2reality! How do you factor the lendingclub holdings in to your overall asset allocation? Are there part of fixed income? Do they provide a low enough risk to counter-act the equity portion of your portfolio?
      My recent post LendingClub vs. Prosper – Which is the Better Option for P2P Lending and Investing?

      • Currently, peer-to-peer lending accounts for less than 10% of my various investment portfolios, and I slot them squarely into an alternative investment spot in my overall asset allocation. I would, if limited in options, categorize them as part of my fixed income allocation. I do believe they are relatively low risk in relation to the returns one can achieve, and held up quite well during the worst parts of the recession.
        My recent post The Right Job – Turning Down a 30% Raise

        • Thanks for sharing how you handle the allocation. Seems like a good way to approach it! I wonder if at some point, there will be some sort of index fund that tracks the p2p loan market? That'd be interesting!
          My recent post LendingClub vs. Prosper – Which is the Better Option for P2P Lending and Investing?

    • sustainable life says:

      Thanks for stopping by writing, great to hear that you've had such success with lending club. I have personally never tried out their IRA services, so Its nice to hear that everything is working out for you. Glad that your returns held up during the downturn – I didnt start investing with lending club until 2012, so im glad that you were able to share what happened.
      My theory is that during the downturn people really wanted to get focused on finances, and did a lot of credit consolidation with lending club.
      My recent post Tax Season Challenge Update

  4. Ive been investing with prosper for about 8 months now. Its going great so far. If you are earning 11% on $1,000, how are you getting $37/mo?

  5. Thank you for sharing your experiences. I am a big fan of p2p lending. You need to accept the defaults are a normal occurance in p2p lending. They don't pose a problem as long as they don't happen more than you factored them in when deciding for a risk band. The aim is to minimize default risks by filtering loans.
    I have personally invested in Smava, Auxmoney, Isepankur, MYC4, MyElen and Zidisha and too much defaults have only been a problem on MYC4 causing me to pull out of that one. Best experience is with Isepankur so far.
    My recent post Isepankur Launches Secondary Market – P2P Loans Now Tradeable

  6. I just wrote a very similar article on my site 🙂 I actually prefer Lending Club between the two regarding my own preferences, but both are great companies and I have active accounts on each. I am earning above 15% with my Lending Club account, and above 13% with my Prosper account.

  7. Lending club has certainly come a long way and growth has been phenomenal to say the least. And I guess with the growth and increased awareness among people, its sorta starting to saturate and even to an extent devaluing the level of returns among investors.
    Still, its a great way to make some small passive income and help out someone who really needs the money, it does take time though sifting through the loanees looking for the best persons to invest in, then again, one can always spread their bets.
    Modest Money recently posted…Lending Club Review – Peer to Peer Lending Platform ReviewMy Profile

Speak Your Mind


CommentLuv badge