I am Prosper pioneer and I feel fortunate to have only lost $250 out of $3,000 invested in Prosper loans. Now both Prosper and Lending Club are better place for investor now than they were for me in 2006 and 2007.. Still I'd highly recommend reading Nords blog posts.. I think they are the best I've read on the web on the subject.
In particularly in order to make money with either Lending Club or Prosper, you need to be right about three things.
- The Credit score and other info is an accurate predictor of default rates
- You do a good job a picking loans to make
- The companies stay in business.
Most of the discussion about Prosper and to a less extent Lending Club is around the 2nd point, which frankly is the least important IMO.
In the early days of Prosper the Experian credit scores turned to a pretty crappy indicator of default rates, things like did you have a job that paid well were the real important ones. It sounds like Lending Club has been having similar issues.
I really want to emphasis the 3rd point. Nords and I are involved in Angel investing group which invests money in startup companies. As we have found out the hard way even companies with really good new idea, smart managers, generally go broke. Both Prosper and Lending Club are still in the start up phase, Prosper has burn through a hundred million or so venture capital money and has never made a profit. Lending Club last year got $150 million investment from Google capital which is very promising. But in the 6 year Lending Club has lost $50 million, before finally eeking out $.01/share profit in 2013. I am cynically but reading the 10K (financial statements) it looks like to me that the $.01 profit is mostly some accounting tricks so the company can go public this year.
If either company go bankrupt,then lenders will almost certainly suffer a loss of principal on the loans. For the simple reason, that nobody else is in a position to collect payments and then distribute the payments to hundreds of lenders.