Peer Lending Returns Still Sizzling

The Marketplace Lending experience for lenders has changed and has gotten even better since our last review.

First, great news: both Lending Club and Prosper are still very good investment options.  Read our previous article here.  Both peer-to-peer lending companies are still in business since our last review, so what’s changed in the past year?

As predicted, both Lending Club and Prosper remain a hit with both investors and borrowers.

Prosper has now funded over $4,337,000,000 in loans since 2006.  Lending Club remains in the lead, though, and has funded over  $11,167,000,000 worth of loans.

Marketplace Lending is still profitable for diversified investors

prosper diversification (1)

 

 

Lending Club diversification
Both Prosper and Lending Club have updated investor statistics on their websites. Prosper states that investors who have invested in 100+ loans since 2009 have not lost money.

Lending Club confirms this diversification trend, and state that 99% investors who have invested in 100+ loans of ‘relatively the same size’ have not lost money.

It is important to note that the minimum investment in each note is $25.  Some quick back of the napkin math tells us that a solid ‘trial’ investment in either Prosper or Lending Club would be at least $2,500.

Some pain points have been alleviated

lc chargeoff rates

In October 2014 Lending Club has improved their underwriting and has decreased their expected charge off rates.

A lower expected default rate is great news for investors.

http://kb.lendingclub.com/siteupdates/articles/Site_Updates/Recent-and-Upcoming-Changes-on-the-Lending-Club-Platform-August-2014/

Meanwhile, Prosper has created a backup servicer company and bankruptcy vehicle to help protect investors if Prosper goes belly-up.

“A new legal entity called Prosper Funding LLC has been established, which is a wholly owned subsidiary of Prosper Marketplace, Inc. Prosper Funding LLC is now the owner of all loans and the issuer of all Notes on the Prosper Marketplace. As a result, all Notes (both new and previously issued) are now fully protected in the unlikely event of a Prosper bankruptcy.”

http://blog.prosper.com/2013/02/14/prosper-unveils-new-protection-for-lenders/

Both better underwriting (the quality of the loans) and Prosper’s bankruptcy vehicle are plusses for investors.   But challenges have arisen, too.

The competition for Marketplace Lending loans is increasing

These improvements have spurred even more large investors to get in on the action. Besides the old challenge of going through and manually picking out notes, now retail investors are faced with a time crunch:  buy the best loans before the big hedge fund investors can.   But it’s been reported that the best loans are gone in either minutes or seconds after their released on the marketplace.

From the New York Times:

“[I]nvestor demand is now outstripping the loan supply, spurring fierce competition among investors to snatch the best loans first. And the original P2P investors — the dentists, dabblers and stay-at-home moms who helped establish the market — are finding themselves outgunned by the cash-rich, algorithm-wielding arrivistes.”

The rise of Automated Investment

“If you can’t beat ‘em, join ‘em,” I say.  Both Lending Club and Prosper have developed automated solutions to help level the playing field for retail investors.  In addition, paid third party investment advisor services have also sprung up to help smaller investors compete for the best loans.

The top three Automated Investment tools for retail customers are:lending club logo

1) Lending Club’s “Automated Investing”
prosper logolendingrobot logo

2)  Prosper’s “Automated Quick Invest”

3) Lending Robot’s “Fully Automated Mode”

Lending Club’s Automated Investing started around December 2013 and is the newest of the bunch.  It is free for investors with accounts over $2,500 and allows investors to spread their financial investment either through a loan grade filter or one filter that is user-defined.

Lending Club automated mode

Prosper’s Automated Quick Invest is the oldest of the three automation programs and was deployed in early 2011.  It hasn’t been updated much since.  It is likewise free for investors with no minimum account size.  Similarly to Lending Club, Prosper allows investors to reduce risk by choosing loans with specific grades.

prosper automated mode

LendingRobot was started in May 2013 and is one of the first commercially available Marketplace Lending automation programs.  It recently raised $3 million in Series A funding to grow its company, and can manage both Prosper and Lending Club accounts.  In June, 2015 the company released their Fully Automated Mode, which according to a recent press release aims to “simplify the Marketplace Lending experience for individual investors.”

lendingrobot fully automated modeLendingRobot’s Fully Automated Mode is unique in that it ranks loans as soon as they come out and buys the top 25% of loans matching the investor’s specified risk tolerance.

This method simplifies the process of risk assessment for investors, since unlike the other automated programs investors don’t need to learn about grade types or successful loan attributes (there a couple dozen loan filters for both marketplaces).

According to their website (with the typical disclaimer that past performance does not equal future success), their algorithm has tested to give about 2.5% higher and better returns (2% after their 0.45% fee) than the marketplace average.

average lending club return

average prosper return

 

prosper logo lending club logo  lendingrobot logo
Minimum Account Size None $2500 None
Cost Free Free First $5k managed free, .045% / year above $5k
Automatic Reinvestment of interest and principal Yes Yes Yes
 Automatically selects amount to invest per loan Manually Set Manually Set Automatically Set based on ideal diversification
How are loans picked? By Loan Grade By Loan Grade Top 25% of loans by Expected Return within specified Risk Tolerance
Cherry-picks loans No – buys in bulk No – buys in bulk Yes
Participates in every round if funds are available Maybe not “on certain occasions your final loan allocation may be different from the order you submitted.”
Maybe not – “there may be weeks when many orders are placed and weeks when no orders are placed.”
Yes
Shows estimated cash flow NO Yes Yes
Solution for Limited Inventory No No – “Automated Investing is not a solution for limited inventory” Yes
Ability to create Advanced filters Yes – One Filter Allowed Yes – One Filter Allowed Yes – Up to 10 Filters Allowed
Automated Secondary Market NO No Yes, for Lending Club accounts

Both Prosper and Lending Club are solid investment options.  It is impossible to say which marketplace is ‘better’; both are seasoned marketplaces and continue to make extraordinary strides in improving the investor experience.

One plan would be to try out both marketplaces and manage both from one LendingRobot account.  In fact, we’ve secured a bonus $5,000 in freely managed funds to do just that – our readers can open an account on both marketplaces and have $10,000 between the two accounts managed for free. Invest now and try them both out today. Let us know which you think is better.

Get your $10,000 managed for free at https://www.lendingrobot.com/ref/ModestMoney/

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