Survey compares rates, fees and more for major P2P lending sites

Wednesday, May 30, 2012

Despite the worst of the financial crisis supposedly having passed, even consumers with a decent credit history are having a harder time qualifying for a traditional bank loan. Some borrowers also are more reluctant to do business with big banks again. One alternative that has been gaining in popularity is online P2P lending (or borrowing, as the case may be). But while the loans may be an easier, faster and cheaper option for some consumers, they’re not going to be the best option for everyone—and they’re not an option at all for some prospective borrowers. Consumer Action took a look at the “big three” P2P lending sites to see how they work, how they compare and what prospective borrowers need to know. (Click here to read more about alternative funding, including P2P and credit-builder loans.)

Eligibility requirements

There are three major peer-to-peer lending sites: Lending Club, Prosper and Peerform. All three require borrowers to be U.S. citizens or permanent residents and at least 18 years old. (Minors—anyone under 18—are not permitted to enter into legal contracts.) You must also have a Social Security number and an account at a financial institution.

Lending Club and Peerform both require FICO credit scores of 660, while Prosper requires 640. The FICO credit scoring scale goes from 300 to 850—generally, the higher your score, the better your financing options and the lower your interest rates.

All three sites offer unsecured (no collateral), fully amortizing—meaning the loan balance is paid off through equal monthly payments—fixed-rate loans that can be used for most legal purposes except post-secondary education expenses. None of the sites allows loans for college tuition, books or other related expenses because the Higher Education Opportunity Act requires that the borrower be given at least 30 days to accept or reject a loan offer, and P2P loans have a 14-day lifecycle (from listing to funding or expiration). (Peerform’s borrower agreement includes a long list of very specific uses for the money that are forbidden—from funding a pawn shop or taxi service to financing a furniture store or a hotel reservation service—but it is unlikely that these restrictions would preclude many borrowers.)

None of the three P2Ps is available to borrowers in all states. Lending Club and Prosper are the most widely available, both operating in more than 40 states. Peerform facilitates loans in only 13 states (see chart). State licensing and regulatory requirements prevent P2P lenders from operating in certain states.

Loan listing process

Borrowers who have been approved by the P2P lending site and have selected a loan option (in other words, agreed to a loan amount, repayment period, interest rate, fees and other terms) are ready to “list,” or post, their loan on the website for investors to view.

During the approval process—an evaluation of credit report data, income, employment, loan amount and term, and other information that may indicate ability and willingness to repay the loan—the P2P lending company may ask for additional documentation, such as pay stubs. Depending on how quickly you supply the required information, your loan could be listed on the site within just a few days, or sooner.

A loan listing tells prospective lenders how much you want to borrow and what you plan to do with the money. It also lists the interest rate the investor will earn (which is the interest rate you’ll pay minus the monthly loan servicing fee that investors pay), information taken from your credit report, such as delinquencies, public records and total number of credit accounts, and other information that could help investors make a lending decision.

All three P2P lending sites confirmed that a borrower’s real name and other identifying, contact or employer information is never shared on the site. Borrowers and lenders use screen names or member numbers to protect their true identities.

All three sites allow you to personalize your listing in some way, either by including optional information in your loan request or borrower profile or by personally answering questions from investors.

The listing will stay active until either it is fully funded or the 14-day listing period ends. If your listing does not receive at least the minimum required level of funding within the listing period, the listing will expire and no loan will be made. If you want to try again, you can create a new listing. Prosper borrowers have the option to accept the loan with 70% or more of funding. Lending Club and Peerform will issue the loan if it is at least 60% funded, and for at least $1,000, when the listing ends unless you notify them in writing of your desire to withdraw your loan request before the listing expires.

Once your listing is funded, the money will be deposited directly into your bank account within a few days. You can cancel your loan during the listing period without penalty, but once the loan is made to you, you do not have any right to rescind it. (You could, of course, repay the entire loan immediately, but you would be out the origination fee and any interest between the time you received the money and when you paid it all back. All three sites allow you to pay off your loan early without penalty.)

Loan limits and terms

Each P2P lending site assigns the applicant a grade on the company’s proprietary creditworthiness scale. While the exact formula differs among P2P lenders, all take into consideration factors that help estimate the loan application’s level of risk—for example, credit score, employment status, income, number of open accounts and length of credit history. The borrower’s grade determines the maximum loan amount, the term (length of repayment period) and the pricing (interest rate and origination fee) the borrower qualifies for.

Peerform loans range from $1,000 to $25,000 and must be repaid within three years.

Prosper has the same loan limit ($25,000), but has a higher minimum loan requirement at $2,000. It also offers the most term options—loans can be for one year, three years or five years. However, not all borrowers will qualify for the maximum loan amount or their choice of repayment term. An A rating allows loans up to the maximum $25,000 and the choice of one-, three- and five-year terms. B, C and D ratings still have a choice of term length but the loan cannot exceed $15,000. E-rated borrowers, too, have their choice of term length, but are limited to loans of $4,000 or less. An HR (high risk) rating limits you to a loan of $4,000 or less and a mandatory three-year term.

Lending Club offers the highest loan limit at $35,000 ($1,000 minimum). Loans for $15,975 or less must be repaid within three years, while loans above that amount qualify for a three-year or five-year term.

You may be able to get a lower interest rate by reducing the loan term. For example, Prosper charges a higher rate for E borrowers with a five-year loan (33.04%) than for HR borrowers—a lower rating than E—with a three-year loan (31.77%).

Interest rates

Interest rates are based on the loan grade assigned by the P2P company. The rate quotes in this story were all taken from the P2P websites on the same day, April 30, but are subject to change.

Lending Club assigns grades of A1 through G5, with rates ranging from 6.03% (6.78% APR on a three-year loan) for an A1-rated loan to 24.89% (27.99% APR on a three-year loan) for a G5-rated loan. APRs include the loan origination/closing fee (see next section for more information).

Peerform’s scale ranges from AAA to G, with interest rates on three-year loans increasing from 6.33% (6.54% APR) to 25.51% (29.83% APR).

Prosper’s grades range from AA through E, and then HR (high risk). Prosper’s interest rates range from 5.65% (6.59% APR) on a one-year loan for AA-rated borrowers who have had one or more previous Prosper loans (repeat borrowers may qualify for discounted rates) to 31.77% (35.80% APR) on a three-year loan for HR-rated borrowers with no previous Prosper loans.

You may be able to get a lower interest rate by reducing the loan amount. For example, Lending Club assigns each grade an upper loan limit. If you request a loan above that limit, you’ll be penalized with a lower grade and, therefore, a higher interest rate.

The initial application process on all three P2P lending sites takes just a few minutes. After you plug in some personal data (name, address, birth date, etc.) plus info about the loan (amount, term and purpose), the P2P company pulls your credit report and you receive a rate quote. That rate won’t change between application and listing. According to all three companies, having your credit report pulled for a rate quote is a “soft” inquiry,” meaning it will not affect your credit score.

All three P2P companies offer live assistance via a toll-free number.

Fees

Origination/closing fees

None of the P2P companies asks for a listing fee. However, all three charge a one-time fee when the loan is funded—Lending Club and Peerform call it an origination fee, while Prosper calls it a closing fee. The fee is a percentage of the loan amount, and depends on the loan grade.

Lending Club’s origination fee ranges from 1.11% for A1-rated loans with a three-year term to 5% for B- through G-rated loans with a five-year term.

Peerform’s lowest origination fee is .31%, for AAA-rated loans. The company’s highest origination fee is 5.50%, for loans rated E or below (F and G).

Prosper charges AA-rated borrowers with a one-year term .50%. All five-year loans have a closing fee of 4.95%, as do three-year loans for borrowers rated B through HR.

The origination/closing fee is subtracted from the loan amount before the money is deposited in your account. For example, if you request a $3,000 loan and there is a 4% origination or closing fee, you will receive only $2,880, but you will repay the full $3,000. If you need the loan to pay a particular bill or purchase something specific, ask for enough to cover that and the fee.

Check processing fees

Loan payments are made to the P2P company, which deducts the lenders’ service fee before disbursing the funds to them.

All three companies charge a $15 fee if you elect to make your payments by check. There is no fee for ACH payments (automatic debit from a bank account).

Late fees

All three P2P companies assess a late payment fee of $15 or 5% of the missed installment amount, whichever is greater.

Late fees are charged only once per late payment, when the payment is 15 days late. This fee is passed on to investors.

Failed payment fees

All three P2P companies assess a failed, or unsuccessful, payment fee of $15.

A failed payment occurs when there are insufficient funds in the account, the account has been closed or there are other barriers to payment from the account. This fee is retained by the P2P company. Lending Club and Peerform charge a separate fee for each failed attempt to collect the monthly payment. Prosper charges only one failed payment fee per payment period.

These fees apply unless your state caps late fees at a lesser amount.

Lending Club reports your account activity to all three of the major credit bureaus. Peerform reports only to TransUnion. And Prosper reports to Experian and TransUnion. Late or missed payments may damage your credit score and make it more difficult to get a loan in the future. Serious delinquency could result in your account being sent to collections.

Consumer Action’s Peer-to-Peer (P2P) Lending Survey

Data (interest rates and fees) were recorded on April 30. Consumer Action’s 2012 P2P lending site survey was conducted by Shaynah Jones and coordinated by Monica Steinisch. Note: You are prohibited from using Consumer Action’s name or any reference to its surveys in advertising or for any other commercial purpose.

	Lending Club	Peerform	Prosper
State availability	Available to borrowers in all states except Iowa, Idaho, Indiana, Maine, Mississippi, North Dakota, Nebraska and Tennessee	Available to borrowers in 13 states: Arizona, California, Connecticut, Florida, Georgia, Illinois, Louisiana, Maryland, Michigan, Missouri, Ohio, Virginia and Washington	Available to borrowers in all states except Iowa, Maine and North Dakota
Borrower eligibility	U.S. citizen or permanent resident and at least 18 years old with a bank account and a Social Security number	U.S. citizen or permanent resident and at least 18 years old with a bank account and a Social Security number	U.S. citizen or permanent resident and at least 18 years old with a bank account and a Social Security number
Minimum credit score	660	660	640 (600 for repeat borrowers who meet criteria)
Loan amount and term options	$1,000 to $35,000 with 3- and 5-year terms (loans of $15,975 or less only available with a 3-year term)	$1,000 to $25,000 with 3-year term on all loans	$2,000 to $25,000 with 1-, 3- and 5-year terms (term options depend on Prosper grade and loan amount)
Interest rate range	6.03% for A1 rating (6.78% APR on 3-year loan) to 24.89% for G5 rating (27.99% APR on 3-year loan)	6.33% (6.54% APR) for AAA rating to 25.51 (29.83% APR) for G rating	5.65% (6.59% APR) for AA rating (1-year term and one or more previous Prosper loans) to 33.04% (35.84% APR) for E rating (5-year term and no previous Prosper loans)
Origination/closing fee	Ranges from 1.11% of loan amount for A1-rated loans with 3-year term to 5% for B- through G-rated loans with 5-year term	Lowest is .31% of loan amount for AAA-rated loans; highest is 5.50% for loans rated E or below (F and G)	Ranges from .5% of loan amount for AA-rated loans with 1-year term to 4.95% for all 5-year terms and also for B- through HR-rated loans with 3-year terms
Check processing fee	$15 for payments made by check; no charge for automatic account withdrawal (ACH)	$15 for payments made by check; no charge for automatic account withdrawal (ACH)	$15 for payments made by check; no charge for automatic account withdrawal (ACH)
Late payment fee	5.00% of the unpaid installment amount or $15, whichever is greater (may be charged only once per late payment); when payment is late after 15-day grace period, fee is charged on 16th day; fee is passed on to investors	5.00% of the unpaid installment amount or $15, whichever is greater (may be charged only once per late payment); when payment is late after 15-day grace period, fee is charged on 16th day; fee is passed on to investors	5.00% of the unpaid installment amount or $15, whichever is greater (may be charged only once per late payment); when payment is late after 15-day grace period, fee is charged on 16th day; fee is passed on to investors
Unsuccessful payment fee	$15. A separate fee may be assessed for each failed attempt to collect the monthly payment.	$15. A separate fee may be assessed for each failed attempt to collect the monthly payment.	$15. Only one failed payment fee will be charged per payment period.
Reports to	Equifax, Experian, TransUnion	TransUnion	Experian, TransUnion

You can find Lending Club and Prosper’s prospectuses, annual reports and SEC filings at the companies’ websites.