Prosper vs LendingClub SmackDown – Who Has Better Interest Rates? – The rolling pin
If you think Prosper and loan club set interest rates the same way, think again. In fact, the way they set interest rates is fundamentally different.
Prosper versus Lending Club: Borrowers
Perhaps the most significant difference between Prosper and loan club is the qualifications of the borrower. Lending club demands higher, lower credit score debt to income ratio, and a longer credit history. In contrast, Prosper has developed a proprietary scoring formula called Prosper Score. with a borrower FICO score, Prosper assigns each borrower this rating. Then they use the rating to set interest rates.
Whether you are a lender, a borrower or both, it is essential to understand the difference and how each site sets interest rates. So in this SmackDown in between Peer-to-peer lending giants, we’ll look at how each sets interest rates, then discuss how to gauge which one is best for you.
|Amount of the loan||$1,000 to $40,000||$2,000 to $40,000|
|Interest rate||6.95% to 35.89%||7.95% to 35.99%|
|Costs||1% to 6%||2.41% to 5%|
|term of the loan||3 to 5 years||3 to 5 years|
|Qualification||Credit score: 600 or higher
3 years of credit history
Debt to income ratio of 40% or less
|Credit score: 640 or higher
Debt to income ratio of 50% or less
|Availablity||Not available to residents of Iowa, West Virginia, Guam, or Puerto Rico||Not available to residents of Iowa and West Virginia|
How Prosper Sets Interest Rates
Several ingredients go into Prosper’s interest rates. As a first step, borrowers must meet the following requirements:
- They must be US residents;
- They must have a FICO credit score of 640 or higher (if you don’t know your score, you can get it at MyFICO website for a small fee);
- They must have a bank account; and
- They must have a social security number
Once a borrower meets these requirements, Prosper determines rates based on the following:
- Note of Prosperity
- Expected loss
- term of the loan
- Economic environment
- Competitive environment
Among these factors, the Prosper rating is the most important. It includes two scores: a borrower’s FICO score and the Prosper score. Prosper devised the Prosper Score, which he says gives a more accurate picture of creditworthiness than a traditional credit score.
Prosper developed the Prosper Score using its loan data. The score attempts to estimate the likelihood of a loan being past due for more than 61 days. The score, which ranges from a low of 1 to a high of 10, is based on the following factors:
- Number of transactions
- Number of overdue accounts
- Number of requests
- Number of recently opened trades
- Amount of credit available on bank cards
- Use of credit card
Each borrower is then assigned a rating which, together with the duration of the loan (three or five years), produces an interest rate. Since these rates may change daily, you should visit the Prosper official website to see current prices. But as of the date of this article, here are the notes and interest rates for each Prosper note:
Read more: prosperous exam
How the Lending Club Sets Interest Rates
To understand how the Lending Club sets interest rates, the first step is to review the qualifications of the borrower. Lending Club is pickier than Prosper. It’s good for investors, but not always so good for borrowers. Here is the list of borrower qualifications:
- To borrow through Lending Club, you must be a U.S. citizen or permanent resident and at least 18 years old with a valid bank account, valid social security number, and FICO score of at least 600.
- Borrowers will need a debt ratio (excluding mortgage) of no more than 40%.
- In addition, your credit history must demonstrate that you are a responsible borrower:
- at least three years of credit history, showing no current defaults, recent bankruptcies (seven years), open tax liens, charges or non-medical collection account within the last 12 months;
- for credit scores of 740 and above, you must have fewer than nine inquiries on your credit report in the last six months;
- for credit scores below 740, you must have fewer than four inquiries on your credit report in the past six months;
- use of revolving credit less than 100%; and more than three accounts on your credit file, more than two of which are currently open.
Based on all of the above data, Lending Club assigns a score to each borrower. Credit grades range from A to G, and each letter grade has a sub-grade ranging from one to five. For each rank and sub-grade, the Lending Club sets what it calls a base rate. Lending Club then adds an adjustment for risk and volatility to the base rate.
Now at this point your head may be spinning. The good news for borrowers is that Lending Club can calculate all of this in an instant once it has your application, credit score, and credit history. But to give you an idea of the rates to date, here is an overview of the rates for grades A to D:
How to determine what is best for you
Borrowers want the lowest interest rate possible. Investors want the highest possible interest rate given the risk they are assuming. So how do you compare Lending Club and Prosper?
I have invested in loans on both sites for several years. I’ve generally had very good experiences with both. From this experience, I concluded that both companies are good options. However, Lending Club has a slight advantage for investors and Prosper has a slight advantage for borrowers.
A big part of my conclusion is the fact that Lending Club standards for borrowers are higher. This protects investors, but may eliminate Lending Club as an option for many borrowers.
Comparing rates between the two sites is difficult because they each use proprietary rating systems. You can’t just compare one note to another. As a borrower, I would look at both to see which offered the lower rate. As an investor, I would use loan club for high quality investments. But I would turn to Prosper if I wanted to take on additional risk in exchange for the possibility of higher returns.
Check interest rates
As a borrower, the only way to know for sure who has the best rate is to check. With LendingClub and Prosper, you can check your rate without hurting your credit score. It’s a good idea to do this preliminary shopping around before formally applying for credit from either creditor.
As LendingClub explains:
[C]checking your rate will not affect your credit score. Applying for a loan through LendingClub generates an indirect credit application, which we use to understand your creditworthiness. This is only visible to you, not to creditors or other users of your credit file.
Prosper versus Lending Club: Investors
First, the investment is not available in all states. For LendingClub, you must reside in one of the following states:
Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, 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.
Prosper is available in fewer 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, Dakota North, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming.
Second, you must have a minimum income and/or net worth. Additionally, these requirements may vary from state to state. Generally, you need either an annual salary of $70,000 AND a net worth of at least $70,000, or a net worth of at least $250,000. In some states, including California, the rules are a little different.
My experience as a P2P investor
As stated above, I have invested with Prosper and LendingClub for years. For this comparison, I thought I’d share with you my actual feedback so far.
One thing is essential to keep in mind. You cannot simply compare interest rates. You also have to consider the risk. In the case of Prosper, most of my ratings fall into categories C and D. For LendingClub, most ratings fall into categories B and C. Companies define these categories according to different criteria. But my overall risk is similar on both platforms.
My annualized net returns from Prosper are 5.18%. This return is based on a portfolio of bonds with the following characteristics:
My returns through LendingClub are higher, reaching 6.58%. At one point, I experimented with buying tickets on the secondary market. Given the time it took to assess those ratings, however, the return just wasn’t worth it.
If you want to register as a lender or borrower, you can use the following links: