Although the companies are neck-and-neck in the race for regulators’ favor, Lending Club continues to dominate the P2P lending race, with almost 5 times Prosper’s loan volume in August 2009 at $4.3 million in loans issued vs. Prosper’s $905,000 in loans issued. Prosper has only been back in operation for a month since reopening with clearance from the SEC, but at the midpoint of September, loan volumes continue to look 5:1 in favor of Lending Club.

At 54% of the population, both Prosper and Lending Club still have a lot of work to do with state securities regulators; so far it is clear that the low-hanging fruit has been harvested. But Texas (8% of the population), Pennsylvania (4.1%), and Ohio (3.8%) are the next-biggest states to conquer, and just adding those three states would increase the addressable market for either company by nearly 30%.

Related posts:

1. Prosper Adding States at a Good Clip
2. Lending Club Adds Self-Directed IRAs
3. Lending Club vs. Prosper, One Week In

Lending Club continues to grow at a solid pace, and is on track to fund about $4.1 million in loans during August 2009, which would be an increase of 6% over the previous month. This also puts Lending Club at about 4x the monthly loan volume of their nearest competitor Prosper, who relaunched in July and will be completing their first full calendar month with around $1 million in loans funded. To date, Prosper’s aggregate loan volume of $180 million still dwarfs Lending Club’s progress.

At $4.1 million, Lending Club’s August 2009 performance would not be their highest-grossing month ever. That high water mark was set back in March 2008, shortly before Lending Club closed down for SEC registration. Loans during that period likely included a high volume ofloans funded by Lending Club themselves, as disclosed in their S-1. Lending Club has since stopped the practice of bankrolling their own loans.

Unfortunately in the past, Lending Club has watered down their successes with claims like “Lending Club Hits $500 Million in Loan Demand“, boasting that they had turned away $500 million in loan requests. On one hand, it’s a lot like saying “our marketing is so lousy that we have to burn through nine customers before we find one worth approving”. But this aura of exclusiveness seems to be a cornerstone of the Lending Club brand, as it is cited frequently in interviews and during investor education calls. And having reached $50 million in loans funded, might just be working.

Graph credit: LendingClubStats.com

Related posts:

1. Lending Club Posts Strong 1H 2009, Loans Growing 7% Per Month
2. Lending Club to Announce $12 Million in New Venture Capital?
3. Peer to Peer Lending? Lending Club Funds 24% of Loans

Here are five reasons a personal loan from a peer-to-peer lending company are better than a credit card loan…

1. P2P loans have a fixed interest rate.

One of the big changes that goes into effect today is that credit card companies now have to give at least 45 days notice before changing interest rates or fees on your credit card. That’s a good improvement over the previous 15-day warning, but why bother with variable-rate loans in the first place?

Loans from social lending companies (Prosper, Lending Club, Pertuity Direct) are fixed-rate loans. You got your loan for 12.50%? Congratulations. You’ll never need to remember another number again. No need to look up prime or LIBOR, and no need to check your mailbox for a notice of rate change, because your P2P loan’s rate is fixed until you pay it off.

2. P2P loans have a predictable, fixed payment schedule.

Another new reform taking effect today is that credit card companies must bill at least 21 days in advance of payment. Whether this law passed or not, chances are your credit card bill arrives at roughly the same time of month. But what does vary is the payment amount. Unless you monitor your spending like a hawk (using Mint, Wesabe, or Geezeo), your monthly bill is probably a surprise, and never the same from month to month.

With a loan from a P2P lender, your monthly payment is fixed. It’s due on the same day every month, and the amount due never changes. Unless you miss a payment or incur a fee (which P2P lenders still charge if you’re late), your payment never goes up. This makes budgeting your debt much easier, and improves the chances of paying off your debt once and for all.

3. P2P loans are fully amortized

I wish “amortized” weren’t such a scary-looking word. It just means “evenly divided over a period of time”. If you get a 3-year loan from Lending Club, payments are fully divided (or amortized) over three years. That means you pay down your loan evenly, with no surprise payments in-between, and at the end of three years, you’re done! Your debt is paid in full.

Credit cards, on the other hand, take your balance, evenly divide (or amortize) it over 40 years (yes, I said 40 years!), and ask you for that amount as your minimum monthly payment. That means that if you have a balance of $5,000 on your 15% interest Visa card, never charge anything on that card again, and only make the minimum payment of $62.66 each month, you won’t pay it off for 40 years. And you’ll pay $25,077 in interest alone!

4. You’ll never miss a payment

Not that they’re trying to make you miss a payment, but credit card companies don’t make it that easy to pay your balance online each month. For my Chase Visa, I can either pay the minimum payment or the full balance, but they don’t set that up as a default option. And I only get my bill in the mail – don’t they know that I manage my life with my inbox?

From a P2P lender, your monthly payments are fully automated, and you get an email in advance so you can make sure your account has enough cash. Welcome to the future.

5. You’re paying actual people, not a faceless corporation

If the lower rates, fixed interest rate, regular montly payment, or automated payments of a P2P loan didn’t do it for you, then do it for your neighbor. Sure, banks use your neighbor’s cash to make you a loan, but on the 15% interest you’re paying, your neighbor might get 2%. Through a P2P lender, you’ll have a lower interest rate (like 12%), and your neighbor will recover 10% of that.

A lot of P2P lending companies like to claim that they are “cutting out the middleman” (and let’s be honest, what business doesn’t like to say that?), but in reality, they’re just playing a more efficient middleman. Just like Netflix destroyed Blockbuster’s business by not opening brick-and-mortar video shops, P2P lenders are undercutting banks’ rates through slimmer operations and better technology.

So should you toss your credit cards?

No, for goodness sake, don’t get rid of your credit cards. You’ll still need them to buy things – you can’t step up to the checkout at the Piggly Wiggly and ask if they take Prosper. P2P lending isn’t there yet, but you still need to buy things, and cash is so 20th century. Take advantage of the credit card companies’ largesse in fronting you money on your purchases, and use the time before your bill is due to get a loan from your neighbors through a P2P lender.

You also don’t want to close your credit card accounts because doing so can lower your credit score. Closing an account lowers your available credit balance, which is one of the key metrics that credit companies use to calculate your score.

So keep your credit cards, just use them more wisely. If you can’t pay your bill in full each month, go over to Prosper, Lending Club, or Pertuity Direct, get yourself a fixed-rate, fully-amortizing loan, and use that to pay off your credit card bill. And once you’ve done that, pay off your loan, go on a credit card diet, and live happily ever after free of debt.

Related posts:

1. Lending Club Raises Rates, Prosper Pushes Auction Model
2. Lending Club Posts Strong 1H 2009, Loans Growing 7% Per Month
3. Lending Club Issues $50 Million in Loans

Prosper’s reach now encompasses about 45% of the US population. For comparison, Lending Club, which reopened ten months ago, currently allows lenders from 26 states, or 52% of the population. Prosper and Lending Club more or less mirror each other in states available, with the important exceptions of Florida (6%) and Virginia (2.5%). Population figures are based on 2008 estimates by the U.S. Census.

What is the reason for these state-by-state registrations? Although both P2P lending companies have received approval at the federal level from the SEC, they must also register with state regulators in each state for clearance to sell securities. These are the so-called Blue Sky Laws, which give states the power to regulate securities sold in their jurisdiction. Conceived in the early 20th century, these laws focused on preventing frauds and schemers from peddling anything under the “blue sky”. In the current environment, however, they seem to duplicate the role of the SEC, and are more of a hassle than a benefit to investors.

Although Prosper is making progress with state regulators post-SEC approval, there are plenty of states also claiming their take for Prosper’s $1M settlement with the NASAA last December. To date, Alabama ($5,073), Connecticut ($12,602), Maine ($1,517), Michigan ($20,461), Missouri ($9,228), Montana ($2,214), Washington ($36,025), and Oregon ($15,000) have all collected on their portion of the settlement, bringing Prosper’s bill to a total of $102,117, way short of the $1,000,000 settlement amount. Aside from Alabama and Michigan, all of the other states have authorized Prosper to operate post-SEC approval.

Graphic from The Prosper Blog.

Update: Added Maine and corrected settlement amount on Alabama. Many thanks to Investar for the corrections.

Related posts:

1. Prosper Adds Florida Lenders, Lending Club Adds Missouri
2. Prosper Settles with State SECs for $1 Million
3. Prosper Won’t Stop ’til They Get Enough SEC Filings

In Kiva’s July newsletter, they promoted a video called “If I Had $25“, a play on the Barenaked Ladies hit “If I Had $1,000,000“, created by johnbr2, a musician from Decorah, Iowa:

The song is both Kiva-accurate (buying yaks and looms), well-sung, and hilarious. An interlude that discusses the “cultural imperialism” of Kraft dinner is particularly funny.

Among the highest-quality user-generated content, Zopa Italy takes the cake with entries from their Zopacontest, held in November 2007 to promote the upcoming launch of their site. Many entries are professional and captivating, but the winning entry went to Silvia Casali for her beautiful animation:

Lending Club’s video contest back in 2007 to promote the fledgling Facebook-based site yielded a bunch of entries, and the first place, $3,000 winner was the well-produced “Teddies” video, featuring a small-businessman-with-medical-bills storyline. Among the lot of excellent videos was one without fancy production value, but lovable in its honesty, titled “The Worst Entry For The Lending Club Video Contest“:

Back in 2007 a song entitled “Prosper Panhandler song” was posted by an artist called Underwater Bass Player. The bluesy ballad focuses heavily on Prosper’s now defunct user forums, and in the song, the author agonizes over which Prosper group to pick before eventually settling on one called “Everyday People“:

What other good social media have you seen related to P2P lending? Share it in the comments.

Related posts:

1. Zopa announces launch of Zopa Japan
2. Zopa US – the boy who cried wolf
3. Prosper Hosts Twitter Gimmick To Draw New Customers

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.

Reflecting 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.

Related posts:

1. Lending Club Adds Self-Directed IRAs
2. Prosper Relaunches with SEC Approval, Secondary Market
3. Prosper Adds Florida Lenders, Lending Club Adds Missouri

As of this writing, on the surface, Prosper is showing a strong lead, with over four times the available loan requests that Lending Club offers, 485 to 108. On the lender demand side, Prosper is also leading with 115 loan listings over 10% funded, compared to Lending Club’s 90.

Of course, Lending Club is more selective of its borrowers, and applying Lending Club’s borrower requirements to Prosper’s listings puts Lending Club in the lead, 108 loan requests to Prosper’s 98. Another detail in Lending Club’s offering is that loans that are 100% funded are taken out of circulation: there is no bidding, so loans go away once they reach the amount requested. When Prosper’s 27 listings that are 100% funded are removed, Lending Club has nearly a 50% lead, 108 to 71.

How did Prosper drag in so many borrowers so quickly after launch? Prosper has been operating since 2006, and they claim over 830,000 registered users. So it’s not hard to imagine that tapping a small percentage of their existing user base could generate a ton of listings. But the Prosper PR machine has also been hard at work, and appearances like the one below on MSNBC can’t hurt to bring in some high-quality borrowers like the ones Prosper will need to get through their new credit requirements.

Ultimately, measuring listings is a bit of a fool’s errand. What will matter in the long run will be whether Prosper and Lending Club can draw enough borrowers and lenders together to create a real business for the social lending middlemen. And those metrics will only be comparable once Prosper starts funding loans. So far they have actually funded one loan for $3,500, but if it’s a loan to the CEO’s dad, does it count?

Related posts:

1. Lending Club Raises Rates, Prosper Pushes Auction Model
2. Prosper Adds Florida Lenders, Lending Club Adds Missouri
3. Lending Club Posts Strong 1H 2009, Loans Growing 7% Per Month

The chart below, based on Lending Club’s downloadable statistics, shows loan volume in blue over the two years that the social lending site has been in operation. The red line shows the average credit grade* of Lending Club loans during those months (downward trend indicates improved credit quality).

The blue chart looks fairly ragged, but there are a few reasons for that:

• Lending Club opened as a Facebook-only application in Jun 2007, and only opened to the public (outside Facebook) in Sep 2007.
• In April 2008, Lending Club went into a self-imposed quiet period to register with the SEC. During that six month period, Lending Club continued funding a select number of borrower requests from their own funds.
• Although they re-launched with SEC approval in October 2008, Lending Club continued funding loans from its own pocket, up to a third of loans funded through 2008 and to a lesser extent in 2009. This helps to explain why loan volume jumped so dramatically coming off SEC approval. (Sales reports filed with the SEC since March 2009 seem to indicate that LC has curtailed the practice of funding their own loans.)

Surprisingly, the trend on loan credit quality is improving. Excluding the Facebook-only period, the average credit grade during Jun 2009 was just above a middle-B, the highest credit quality mix ever in Lending Club history. This could be based on a number of factors, but I suspect that it is a combination of lender anxiety (only funding the highest-quality loans as the economy drops further into recession) and Lending Club tightening  their underwriting policies as they watch defaults roll in on older portfolios. (The default rate on that early period of Sep 2007 – Apr 2008 is 10.35% according to Lending Club’s statistics page.)

In any event, this is a strong showing for Lending Club, and gives them the kind of momentum they will need to continue growing their business and the whole peer-to-peer lending space. It will be exciting to see what the second half has in store for them.

Here is the data for the chart above:

* Average credit grade is calculated based on the letter grade of each loan issued, regardless of the sub-grade. For example, A1 and A5 are both treated as an A credit grade.

Related posts:

1. Lending Club Issues $50 Million in Loans
2. Peer to Peer Lending? Lending Club Funds 24% of Loans
3. Comunitae Funds 10 Loans In First Month, Signs Up 5,000 Users

Why does Lending Club fund loans out of its own pocket?

We are committed to making the platform work for both lenders and borrowers.  We fund some of the loans only to ensure that all loans approved by our credit team get fully funded. The smaller loans tend to get funded in full by the lender community, but the larger loans can require additional funding, which Lending Club provides.

This makes the platform more efficient on both sides: borrowers get the full amount of their loan, and lenders avoid a situation where they would commit funds but the loan ends up not closing because it is insufficiently funded.

What is the plan for continuing this practice in the future? How much longer do you expect to be funding loans?

Our primary business model is to operate the platform, not to make loans. We only participate as a lender on a temporary basis to help the platform operate more efficiently.

There is no specific timeline for funding loans; we will continue funding portions of loans until large loans get fully funded by the community.  Our goal is to have the community funding as much of the loans as possible.

Why don’t you notify investors during the “In Funding” period about which loans are being partially funded by Lending Club itself?

We typically complete the funding of larger loans on the last day, so there is little opportunity or benefit to signal Lending Club’s funding in a particular loan.

Would you be willing to disclose the borrower profile and credit criteria under which Lending Club lends its own money to borrowers?

We do not apply any specific credit criteria. Any loan that has been approved by our credit team and is reaching the end of the funding period without being fully funded will typically get funding from Lending Club.  Also note that when Lending Club participates in a loan, there is no impact to pricing as in other platforms that are based on an auction model.

Are you concerned that by funding some but not all loans, Lending Club is creating a conflict of interest when it comes to collections? Seems like although it is in your best interest to collect equally on all delinquent loans, if you had a shortage of resources, you might prioritize the loans that Lending Club has participated in?

Our collections team and external collections agency have no knowledge of which loans have been funded by Lending Club, nor would it be a factor in their collections strategy if they had such a knowledge: our main interest is to grow the platform for our customers, not to make money on proprietary investments.

What percentage of your approved borrowers do not receive sufficient funding from investors to issue a loan?

As you have pointed out, Lending Club has funded roughly 25% of the dollar volume of loans since we reopened on October 14, 2008. That’s roughly the percentage of loans that would have gone unfunded if Lending Club had not funded them.  Note that this is different from other platforms that do not filter loans upfront, and can experience 90% to 95% of the loans being left unfunded.

It sounds like LC’s position is that every loan that has been approved by your credit team is properly priced and worthy of funding. If that’s the case, why not take the Pertuity Direct model (or the Zopa UK model) and just take lender money, allocate it across all of the approved loans, and give net returns back as they come in? Why bother with the individual loan requests?

We believe all loans approved by our credit team are worthy of funding but we certainly do not impose this view on our lender members. Any lender who has a different opinion can choose to fund specific loans that match his or her own criteria (which would not be the case in the alternative that you are mentioning). Many of our lenders enjoy the opportunity to control exactly which loans they invest in, and we give them the tools and the ability to do exactly that.

Regarding your statistics file, it has been stated that the downloadable file was removed from Lending Club’s statistics page because of privacy concerns on the part of certain borrowers. What privacy-related data was included on the statistics file which is not also included on your daily prospectus supplements?

None. The prospectus supplements and sales report are mandatory filings and we have no control over their content. The downloadable files, however, are both voluntary and more prominent, and they are the ones that created privacy concerns. 

You said there was no difference between the data in the downloadable stats file and the prospectus supplements, but by modifying the downloadable stats file you are only addressing one side of that issue. What if borrowers raised the same privacy concerns about the data in the prospectus supplements? Does the SEC have any understanding of borrower privacy issues, or will Lending Club borrowers simply have to deal with having their credit information, hometown, colleges, and employers posted publicly on the internet along with their loan request?

We are trying to strike the right balance between protecting the privacy of the borrowers and letting them share useful information with the lenders. Please note that the information that will no longer be included in the downloadable files (but will continue to be published anonymously as part of our mandatory reporting requirements) is both self-reported and optional. It is made clear to the borrowers that this information is public, and borrowers can decide not to provide such information.  

You have probably seen this post about how Lending Club’s practice of publishing certain borrower information makes the correlation of LC loan requests to actual identities fairly simple. As a company, does this concern you? Do you have any plans to change the way this information is collected or published?

The article you are referring to suggests that the main technique for de-anonymization is based on screen names. Some of our borrowers use screen names that can be traced back to their actual identity; some even use their first name and last name as screen name and share personal information about themselves publicly. While we do not encourage borrowers to do so, we respect their right to de-anonymize their profile.

When can we expect the downloadable statistics file to be back up on the Lending Club site?

We will put the statistics file back up as soon as this particular privacy issue has been resolved, which we are hoping to be the case in the next 2-3 weeks. Note that the new file will be minus a few fields that have the potential to compromise a borrower’s privacy.

Congratulations on raising the $12M Series B. Now that you have some extra cash, what are your priorities over the next 6-12 months?

Thank you. We will use the funds to further develop our platform and the Lending Club brand, and bring exciting new products later this year.

Related posts:

1. Lending Club Issues $50 Million in Loans
2. Lending Club Reveals $4.1 M in New Funding
3. Lending Club Posts Strong 1H 2009, Loans Growing 7% Per Month

To open an account, go to Lending Club’s retirement accounts page and start the process. There is a minimum account balance of $5,000, and a $250 annual maintenance fee (although the fee is waived for 2009).

This is a big step for P2P lending, and will allow Lending Club to capture the huge pool of self-directed retirement investors in the US.

Doing the math, though, the $250 annual fee seems to kill the returns, especially in the beginning. Ignoring the current promotion, investors will pay a $250 fee on an account balance of $5,000. That’s a 5% fee. Netting the 5% fee out of the average returns touted in the Javelin study of 9.05%  gets you a return of 4% per annum. If you choose a tax-free IRA, that’s equivalent to a taxable return of 5.5%. With 2-year CDs hovering around 2.5%, maybe this is okay. But as interest rates rise in the long term, this will be harder to swallow.

I give Lending Club a lot of credit for pulling this off, despite the unfortunate pricing structure. As time goes on, and you invest more in your self-directed IRA, the annual return should continue to rise. It just seems like a percentage pricing structure based on volume would have been better for investors (and in the long run, better for Lending Club and EntrustCAMA).

Related posts:

1. Prosper Adds Florida Lenders, Lending Club Adds Missouri
2. MicroPlace Advertising 6% Returns Heavily
3. Lending Club Raises Rates, Prosper Pushes Auction Model