Peer-to-peer lenders are giving banks a run for the money. Over the last several years, peer-to-peer lending, online communities where investors and borrowers do business with one another with the hopes of both benefiting.
When it comes to P2P lending, the grand daddy is Lending Club, followed by Prosper, and a host of others, like Kiva.org, and those with specific targets, for example, FundingCircle.com, specializes in business loans and SoFi.com, student loans. There's a whole new world out there.
In the first of a series of blogs on P2P lending, Lending Club and Prosper are in the spotlight.
Lending Club is the undisputed P2P heavyweight champ. It has 75% of the market, according to CEO Renaud Laplanche. Last year was Lending Club's largest ever. It hit $100MM in revenues, it crossed $3 billion in loans originated through the platform, $2 billion which came in 2013 alone, says Laplanche.
Loans generated through the platform have helped almost 284,000 borrowers and more than $350 million in interest has been paid to investors. Lending Club received $103.2 million in funding and in May of last year, Google bought a minority stake in Lending Club as part of a $125 million second round with existing investors. The board of directors boast big names like John Mack and Larry Summers.
Prosper has more than 2 million members and more than $692 million in funded loans. Last September Prosper announced it had raised $25 million in additional funding to accelerate the company's growth. The round, which was led by existing partner Sequoia Capital, also included a new investment by BlackRock, the world's largest asset manager.
If you want to see how the two stack up against each other in terms of interest rates, fees and the like, spend a little time on their sites. But in the meantime, some investors and borrowers weigh in.
'I have been using LendingClub.com for over four years and Prosper.com for about year as an investor. I prefer Lending Club because I'm better able to filter the types of notes that I want to invest in," says Phillip Parker, founder of CardPaymentOptions.com.
He says overall, his experience with peer-to-peer lending has been nothing but positive. "I take a mildly conservative approach with my investment strategy and I've seen yearly returns ranging from 11-15% and less than 1% of my total loans have defaulted and I'm able to sell off notes that I think will be problematic," says Parker.
Rob Berger, founder and managing editor of The Dough Roller, has been an investor with Lending Club and Prosper since they launched.
"The two platforms have changed significantly over the years. You may recall that Prosper was originally based on bidding, much like eBay. They've changed to more of a Lending Club model, where the rates are based on the borrower's credit risk," says Berger.
His returns have varied over the years from a high of 15+% to a low of 2.5%, "But I've never lost money. Today my strong preference is in favor of Lending Club, although I continue to invest in both. Lending Club is more active with more available loans, its interface is easier to use," says Berger.
One thing he cautions readers of his blog, "Don't underestimate the risk of P2P lending. Many look at the potential returns, compare them to the low rates on deposit accounts, and they dive head first into P2P notes. They are not comparable. On a risk-adjusted basis, I think I've done fine with P2P lending, but the risk is substantial. It's at least on par with high-yield corporate bonds, and probably riskier."
Nick Loper, an investor on Prosper for the last three years, is excited by the monthly cash flow the investments generate, but he says it's harder to find attractive loans to lend on as institutional investors are buying up most of the inventory. "You need to use an automated software tool to find the very best notes before they disappear," says Loper. But he is earning low double-digit returns and, "I like the idea of putting my money in people and small businesses instead of the stock market."
He says he is disappointed that Prosper has removed the loan description from the borrower's application process. "You as lender, no longer read their personal story on why they need the money. All in all, it's been a fun and profitable experiment and diversification from mutual funds and other investment options."
For sure peer-to-peer lending is not without challenges. "For more than two years I've been using Lending Club as an investor. I was looking for stable, alternative investments. Overall it's been a good experience with good returns, but there have been some issues. I have had a hard time finding loans I thought were suitable due to demand from large investors, and some people who go into bankruptcy soon after receiving a loan, says Daniel Packer who writes the blog, sweatingthebigstuff.com.
He withdrew $1,000 about six months ago because of the issues. "The interest rates I earned are great. I just didn't want my cash to earn 0% while I was looking for loans and I did not want to spend a lot of time doing the research and being on the site," says Packer. "Their recent change to allow investors with over $5,000 to use their PRIME (automatic) investing service has definitely helped," he says.
In the last quarter, Christy Haussler attempted to use both Prosper and Kabbage to get a loan to purchase a small business. "I have a credit score of 787 and had very little existing debt, with a nearly 6-figure income from a job I had been at for five years," says Haussler.
Yet, she was unsuccessful in getting funding. "I could not even begin a campaign to attempt to get funded. The issue with both of them is that they stated that I did not have enough instances of credit on my record, so I did not meet the minimum requirements to attempt funding. After two unsuccessful attempts, I did not pursue any more peer-to-peer lending options for funding a business."
The consumer credit market is a $2.7 trillion industry. "There's no practical limit to the growth of our platform. Lending Club has doubled every year since inception," says Laplanche.
Peer-to-peer lending continues to expand. Brendan Ross, who manages a $25 million hedge fund that solely invests in P2P small business loans, through online lenders like Dealstruck, IOU and Quarterspot that specialize in small business lending, highlights how the industry continues to change. "A new alternative, just launched by well known P2P journalist Peter Renton is Lend Academy Investments. Investors with a minimum of $25,000 can have professional investment management of their loan portfolio. This is an exciting new product that will change how investors think of third party manager is P2P."