Both Prosper.com and Lending Club offer fixed-rate unsecured loans that amortize over a period of 3 years or 5 years. Although the loan products that borrowers are getting are essentially the same from both companies, the interest rates that borrowers will pay can vary dramatically between the companies.

Over the last couple of years, the interest rates that borrowers have had to pay on peer-to-peer loans has dropped steadily because of excess supply of investment funds from investors and a generally low interest rate environment in the United States in general.

Currently Lending Club is originating far more loans than Prosper.com. The interest rate that Lending Club charges ranges from 6.78% for borrowers with perfect credit scores, all the way down to 20% for high-risk borrowers. Lending Club also charges an origination fee between 1.25% and 4.50% of the loan depending on the borrower’s credit score.

Prosper.com’s interest rates start at 5.9% for borrowers with perfect credit. The interest rates that you will pay on Prosper.com will vary dramatically based on the type of loan that you receive, how much the loan is, and what you plan on using the money for. The reason for this is that lenders bid to fund part of your loan amount at an interest rate that they specify.

Prosper.com typically charges 3.0 % as an origination fee (they call it a “closing fee”) for all borrowers with “A” and “B” credit ratings. Borrowers with “C”, “D”, or “E” credit scores will pay a closing fee of 4.50%. Borrowers with AA credit (the best credit rating), pay a 0.50% origination fee. Prosper.com also charges a 1.0% annual loan servicing fee.

To get a loan on Lending Club, you have to have at least a 660 credit score. Borrowers on Prosper.com must have a credit score of at least 640.

Which company is a better deal for you will vary based on your credit score, loan amount, and purpose for the loan. With Lending Club, you’ll know up-front what interest rate you’re paying. With Prosper.com, you would previously have to wait until the bidding period is over, but they recently changed their lending model to match Lending Clubs’ model.

This article (Prosper.com and Lending Club: Which Company Has the Best Interest Rates?) was originally developed by and is property of American Banking News. Checkout American Banking News for up-to-date banking news and peer to peer lending news.

The Federal Reserve appears to have no interest in raising their target interest rate above near zero for the immediate future, leaving interest rates on savings accounts depressed. “High-Yield” savings accounts are offering interest rates as low as 1% and man savers have been left disappointed. As a result, some people are looking to move their money out of banks and investing the money through peer-to-peer lending firms such as Prosper.com and Lending Club to receive higher interest rates, but can one compare peer to peer lending with an online savings account?

Interest Rates

When considering interest rates, creating a diversified loan portfolio with Lending Club or Prosper will offer a much better rate of return than what one would receive with a high-yield savings account. Currently banks are offering interest rates between 1.0% and 2.00% APY. Lending Club investors (according to Lending Club) have averaged 9.68% APY and Prosper.com investors (according to Prosper.com) are averaging 10.01% APY.

What about Risk?

If interest rates were the only consideration, making loans to people through peer-to-peer lending institutions would win hands down, but investors also have to factor in risk. With a high-yield savings account, investor’s returns are guaranteed to them by the full faith and credit of the Federal Government through the FDIC.

By lending small amounts of money to a large number of people, your interest rate is wholly dependent upon people repaying their loans. Lending Club and Prosper have been able to minimize this risk by spreading out your investment risk to many different borrowers. Although there’s going to be a percentage of borrowers that do not repay their loan, somewhere in the 1-5% range, overall it can still be much more lucrative to loan to individuals through these peer to peer lending institutions than it is to put your money into a bank.

What about Liquidity?

With a high-yield savings account, one can withdraw their money from the bank with no penalty. With most CD’s, there is usually only a relatively small and painless penalty to take out your funds and turn them into useable cash. With Lending Club and Prosper, it’s much more like you’re investing in a certificate of deposit than with a traditional savings account where you can take the money out right away.

Typically, investors hold the loans that they make through the end of their term. Lending Club has developed an innovative solution to allow lenders to get out of their loans though. The company has partnered with FOLIOfn to develop a note trading platform that allows individuals with Lending Club accounts to buy and sell their loans.

Other Considerations

With a savings account or CD, you can deposit your money and never think about it again until you want to take it out. With Lending Club or Prosper, you have to individually choose loans or have them chosen for you with a matching system. There is definitely more leg work involved with peer-to-peer lending sites, but the extra work may be well worth the reward of much higher interest rates.

The Verdict

Services such as Lending Club and Prosper should not replace your high-yield savings account for short-term savings that may need to be liquidated within a period of a few months, but if you have some savings that you would like to invest for 3 years or longer, using sites such as Lending Club and Prosper can be a great way to get a much better rate of return on your money than through a traditional savings account or CD.

This article (Comparing Peer to Peer Lending and Online Savings Accounts) was originally developed by and is property of American Banking News. Checkout American Banking News for up-to-date banking news and peer to peer lending news.