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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 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:
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.
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.
My Personal Experience with LendingClub
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.
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!