There are quite a few different "social lenders" springing up nowadays, based largely on the success of the two biggest peer to peer lenders, Prosper and Lending club. Based purely on the fact that we do not have time to investigate every peer to peer lending club that pops up, we have decided to limit our review to the two largest and most reputable of the bunch, Prosper and Lending Club.
Which Peer to Peer Lending Club Has the Best Rates?
The truth is, for identical borrowers, the rate difference between the two is negligible. It's the WAY that they grade their borrowers that makes the difference in rate. Meaning you may grade higher with Prosper than you do with Lending Club and therefore get a better rate. Or, vica versa.
Prosper uses an Ebay auction styled bidding system, this allows the interest rate to be set by the would-be lenders through bidding. At Lending Club the interest rate is assigned to loans by a formula, and lenders either accept that interest rate or not; there is no bidding, ala Craig's List. So learning how each P2P lender assigns interest rates is the key.
How Prosper Sets Interest Rates
With each P2P lender you will be asked to set up a loan profile or what Prosper calls a "Loan Listing", then it is presented to lenders who can select or bid on your loan. Prosper uses an auction type system, sort of an inverse Ebay platform. The difference is that Ebay prices start low and are raised by bidding, and the Prosper loan profiles start with a higher rate and are bid down by the would-be lenders.
So using Ebay as an example, you set up your loan profile and you assign it an interest rate. Prosper suggest that you set your profile up with a higher rate because it will attract more lenders. If you do not get the rate you want you under no obligation to take the loan. Then put your loan profile into the auction.
Now what happens is, the lenders start bidding on your loan. Each bidder will "bid" an interest rate that they are willing to do your loan for. When they set their bid rate, they are aware other that other lenders are bidding on the loan, which encourages them to bid lower rates to get the loan.
The key is, they are unable to see what the other lenders are bidding. As the bidding continues, your loan profile interest rate comes down until eventually the lenders stop bidding. Bidders are required to follow through with their loan bids, but borrowers are not obligated to take the loan. So, the fact is, Prosper doesn't set the interest rates, the lenders do. Lending Club is quite different.
How Lending Club Sets Their Rates
Lending club grades your loan by by credit score and assigns it a "loan grade" these levels are A - G. Each level has a set of sub-levels that are numbered 1-5. Use the following image as an example:
The sub-levels are based on the borrower’s debt-to-income (DTI) ratio and what Lending Club calls a " loan guidance limit". The loan guidance limit is different for each credit grade. Meaning, Lending Club has pre-determined what each loan grade's loan limit should be, i.e. Level "B" can have a loan up to $20,000, grade "A" can have a loan limit up to $30,000. So, the sub-level (or risk factor) is determined by how much you need to borrow against that that cap.
It's kind of like the loan to value (LTV) when you are buying a house. If the home is worth 100k and you put 20k down, your loan to value is 80% and effectively you have lowered your risk level to the bank. When you ask for less money than Lending Club's pre-set loan guidance, you get a better sub-level grade.
So, how do I know Which Company Has the Best Rate?
Well, the truth is, unless you put your loan into the Prosper loan auction and compare it to the set levels that Lending Club offers you may never really know. However there are a couple of things that we can do to give us an idea where we are going to do better.