As an investor in both Lending Club and Prosper loans, I keep an eye on the interest rates that both p2p lenders charge. Interest rates for p2p lending present a bit of catch-22 for the industry. High rates attract investors, but turn away borrowers. Low rates do the opposite. So I was a bit surprised when Prosper emailed me to say it had increased rates on some of its best borrowers by a whopping 2.5%.
Prosper uses a letter grade scale to assess the credit worthiness of its borrowers. The highest grade is AA, followed by A, B, C, D, E, and finally HR (“high risk”). Prosper left rates for AA borrowers alone, but raised the rate it charges A and B rated borrowers for 3-year loans by up to 2.5%. Here are the details of the changes:
|Prosper Rating||Previous Rate||New Rate||New Estimated Return|
Why did Prosper raise rates?
Prosper isn’t saying much about why it raised rates. In the email I received, all Prosper would say is that it “made these changes to ensure that our lower-risk loans remain competitive within the marketplace.” Competitive within the marketplace likely means competitive with Lending Club. Regardless, my guess is that Prosper has more A and B rated borrowers for 3-year loans than they do lenders. By increasing rates, they encourage more lenders to invest in these notes.
Comparing Prosper interest rates with Lending Club rates is like comparing Magic Johnson and Larry Bird. They were both great basketball players, to be sure, but their approach to the game was dramatically different. The same is true with how Prosper and Lending Club determine interest rates.
Both p2p lenders use a credit grading system, but the systems are different and difficult to compare. How they calculate default rates also varies. The terms of a loan further complicates the comparison. Prosper offers loan terms of one, three and five years; Lending Club offers just three and five-year loan terms. All of that said, the rates between the two are generally consistent, with one exception. For its riskiest loans, Prosper rates go as high as 35.64%. Because Lending Club tends to be more picky when it comes to borrowers, its top rate is much lower – 26.15%.
But if you are looking for lower risk loans, Prosper’s increase of up to 2.5% certainly sweetens the pot. You can get more details about its rates directly at Prosper.com.