The two companies’ announcements were less than a day apart, but reflected a world of difference between the leading U.S. peer-to-peer lending companies in the realm of loan pricing. On Wednesday evening Prosper published a blog post entitled “Why Prosper’s Auction Model Was Worth the Wait“, and on Thursday Lending Club released an “Investor Update”  informing lenders that the average borrower interest rate would be raised by 0.50%.

In the blog post, Prosper CFO Kirk Inglis bragged that Prosper is the only consumer lending site that gives investors full pricing control through its auction marketplace. Bravado aside, Inglis’s argument was that without auction pricing, investors wouldn’t have the opportunity to price loans according to their personal risk tolerance. Prosper has always had an auction pricing model, and CEO Chris Larsen emphasized in the company’s relaunch message that selling securities at auction in the Prosper style (where bidders place binding, irrevocable bids) had not previously been allowed by the SEC.

Bankrate Personal Loan rate trend, 31 Jul 2009Reflecting Lending Club’s opposing approach to loan pricing, CEO Renaud Laplanche stated in his investor update that as of July 30th, the average interest rate charged to borrowers would be raised by 50 basis points. Lending Club cited as the reason for the rate change “the consistent rise in rates charged by major credit card companies and banks over the last few weeks,” although according to Bankrate.com’s personal loan rate trends (at right), rates have been steady since late May.

Despite the overall increase in rates, A-grade borrowers on Lending Club will actually see a decrease in rates of  0.46%, “to reflect the outstanding performance of the A grades and reinforce Lending Club’s attractiveness to the most creditworthy borrowers.” Lending Club has made 868 A-grade loans to date, and although a handful are behind in payments, none of them have defaulted (defined as 120+ days past due).

Now that Prosper and Lending Club run otherwise identical social lending sites, expect more posturing on the few differences, like loan pricing. So far it remains to be seen which pricing model will prevail. Prosper‘s is certainly more flexible and requires less company intervention, but lenders weary of Prosper complain that investors “pile on” to good listings, driving rates lower than they should be for the risk involved. A Lending Club investor’s recent advice to a new lender on a discussion board warned “Last, but most important. DO NOT use the Lending Match option.” Apparently, for this investor, Lending Club’s pricing was reliable, but their underwriting was not.

What do you think? What are the pros and cons of the loan pricing models? Add your thoughts below.

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