Prosper’s $70M Funding Challenges Lending Club in Online Lending Market

Prosper’s loan originations have not caught up with those of its main competitor, Lending Club, but since 2013 the company has seen rapid growth in the value of the loans it arranges.

Prosper

Competition has gotten a little tougher between companies arranging peer-to-peer lending, with Prosper raises $70 million new funds to finance the expansion.

This decision, announced on Sunday, puts further pressure on loan club, the leader in connecting people who need to borrow money with those who want to lend it. Both companies take a percentage of the loan repayments, but the interest rates are still generally more favorable than savings accounts for lenders and credit cards for borrowers.

Francisco Partners led the new round and David Golob, a partner at the venture capital firm, joined Prosper’s board. Other investors include Institutional venture capital partners and Phenomenal Companies.

Prosper said he issued more than $100 million in loans in April, up from $9 million in January 2013. brings his total to $1 billion so far, with expectations of reaching $2 billion this year.

That’s substantial growth, but Lending Club topped the $4 billion total in April.

Peer-to-peer (P2P) lending also has room to grow, with lending products in new areas like auto finance, home loans and student loans.

Peer-to-peer lending has expanded beyond ordinary borrowers and now to lenders as well. Institutional investors, eager to inflate pensions and mutual funds with better returns than cash accounts and less volatility than stocks, have joined the game. And the types of loans are multiplying: Lending Club has started offering small business loans, too much.

Prosper Logo

An intriguing aspect of peer-to-peer lending is that, unlike banks, the companies that facilitate lending do not turn a certain amount of deposits into a much larger amount of loans. This means companies like Lending Club don’t suffer disproportionately if individual borrowers default. The traditional financial services industry stands to lose at the hands of P2P lending: even though far more debt is offered through previous channels, more than three-quarters of Lending Club loans are debt consolidations and credit card refinances , which means that people withdraw their debt from banks and into P2P loans.

In the P2P industry, lenders typically invest small amounts of money in many loans at once, often $25, which dilutes the risk of individual default. It can mean a lot of hassle, however, when it comes time to assess which borrowers are worth the risk. Lenders can see credit score, debt-to-income ratio, monthly income, and many other metrics.

It is therefore not surprising that new intermediaries are multiplying in the market for loans between individuals. One is ReadyRobot, a startup that lends people’s money to Lending Club and Prosper based on detailed criteria. LendingRobot, of course, also takes its own percentage of loan repayments.

Priscilla C. Carnegie