Lending Club and Prosper Rate Differential: Opportunity or Not?
By Pinyo • Jan 14th, 2008 • Category: Credit and Debt, InvestingIn my post, “My Foray into Prosper as a P2P Lender,” one of my readers (PeerLend.com) introduced me to Lending Club:
“In early December [2007], Lending Club opened their (formerly FaceBook users only) lending application to the wider public. They do things a bit differently than Prosper, as they underwrite the loans (i.e., bucket by credit grade and set interest rates for each bucket). They have a 640 FICO minimum for borrowers, as well as a max. 30% DTI, so maybe a better pool of borrowers. Plus they have a $25 minimum bid, which means you can diversify into twice the number of loans as with Prosper’s $50 minimum.”
Since then, I’ve signed up with Lending Club to have a look around. I haven’t start lending yet, because I still want to focus on Prosper and learn more about the implications and risks of investing in this space. Basically, I am taking it slow. Anyway, one thing I did notice right away is the rate differential between the two peer-to-peer lending sites. At the first glance, Lending Club has better rates for borrowers, and Prosper has better rates for lenders (data from PeerLend.com as of 1/2/2008).
| Site | Minimum | Maximum |
| Lending Club | 7.12% | 17.86% |
| Prosper | 7.70% | 36.00% |
Both sites break down their credit rating structure into seven credit grades, and these are the average interest rates (data as of 1/2/2008):
| Rating | Prosper Rate |
Rating | Lending Club Rate |
| AA | 8.24% | A | 7.75% |
| A | 10.53% | B | 9.83% |
| B | 13.91% | C | 11.41% |
| C | 18.50% | D | 12.99% |
| D | 23.07% | E | 14.57% |
| E | 26.37% | F | 16.15% |
| HR | 27.13% | G | 17.72% |
I know that there are people with good credit ratings on Prosper who borrow to reinvest in Prosper. So this is really interesting because there seems to be an opportunity here for savvy investor to borrow from Lending Club, lend to Prosper, and make money off the difference. Or, is there? After further investigation, it appears that these seven credit ratings are not created equal; specifically, Lending Club doesn’t go as deep into the high-risk sub-prime territory as Prosper does. Moreover, it appears that the idea of borrow-to-reinvest within these peer-to-peer networks is not as practical as it first appears to be. For example, there is a good article, “Borrowing money to lend on Prosper: Wise or Foolish?” on Prosper Lending Review about this topic.
Why am I telling you all this?
- Due Diligence – This is one of those too good to be true scenario. But after some investigative work, it wasn’t hard to see that the opportunity really isn’t there.
- Efficient Market Hypothesis — Although P2P lending is minuscule compared to the stock market, I do believe that there are enough people in the P2P space to make this kind of opportunity improbable. For instance, if this opportunity is real…
- There will be more borrowers at Lendng Club. This will push the interest rate up as more people compete to borrow.
- There will be more lenders at Prosper. This will push the interest rate down as more people compete to lend.
- The net effect is therefore a smaller spread, making this type of opportunity unprofitable.
- Don’t Rush – It’s easy to get enamored with something new. Just like any other investments, there are inherent risks that may not be very obvious. This is why I am only investing a small amount in peer-to-peer lending.
If you want to try out peer-to-peer lending, please do — it’s good to experiment and find new ways to grow your money. Beside, you can get $25 sign up bonus by using either one of these links: Lending Club and Prosper. This makes your first loan on Lending Club virtually risk-free. However, just be cautious. If the sub-prime debacle could burn multi-million dollar companies with hoard of MBAs, it could burn you also.
More about peer-to-peer lending:
- Get Rid Of Your Debt With These Debt Defying Strategies @ The Digerati Life
- Revealing the Keys to Prosper Success @ Lazy Man and Money
- What is Peer to Peer Lending? @ Money Smart Life
- Number of borrowers on Lending Club increase @ Prosper Lending Review
- The Market Versus The Experts @ Prosper Blog
All posts by Pinyo
Hi Pinyo,
For the reasons already stated in the “Borrowing money to lend on Prosper: Wise or Foolish?” post in my opinion borrowing money to lend at Prosper would not be a good idea.
Overall defaults for older loans on Prosper are reaching an average close to 20% as stats on ericscc and lendingstats show
Be careful… A “E/F/G” on Lending club is a “C” on Prosper.
If you are lending on any of the peer-to-peer lending sites, I think it is a good idea to allow your portfolio to mature considerably before investing borrowed funds. Investing on margin is a good way to enhance returns, but you better be sure that your return is higher than the interest rate you pay on any borrowed funds. I think you should probably wait until your portfolio is at least 18 months old to get a good idea as to what your total return is before you borrow any money to lend.
@Claus - welcome to Moolanomy. Thank you. I don’t intend to borrow and reinvest any time soon (if ever). I think the spread is too thin. That defaults rate is alarming. I will have to take a look.
@RateLadder - After looking at the chart, I reached similar conclusion as well. Otherwise, the differential doesn’t make sense.
@WealthBoy - Good advice. I would go a step further and say, don’t invest in P2P unless you are already well diversified in more traditional investment vehicles.
Good post. This is very interesting stuff. I especially like the part about the potential arbitrage scenario, that’s what it is at the end of the day.
But I think your reasoning is solid, a window like that tends to close fast, that’s why you have to act fast and in an illiquid marketplace (like this) you can also get stuck.
This is all very interesting, i may have a new non correlated investment for clients to further diversify their portfolios, not really, but who knows down the line.
I noticed you guys all talking about $50 here, $100 there. Are there lenders with ten’s of thousands outstanding? or is it still in it’s infancy?
Cairan - Thanks. I think P2P lending is not mature enough for professional recommendations yet, but I think it eventually could be.
According to the statistics here:
http://www.lendingstats.com/
There are lenders that have nearly $1 million invested in Prosper. I suspect these are organizations that manage the money as part of a larger portfolio for their clients.
For a better comparison, look at the actual average rates in prosper, rather than the max. I don’t know of any loan that went for the max.
Pinyo I really liked this comparison, thought it summed both sites up nicely and must have taken a while to compare