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Prosper's $70M funding challenges Lending Club in online loan market

The San Francisco startup, which connects borrowers and lenders, plans to use its new funds to expand -- just like its main rival.

Prosper's loan originations haven't been rising as those of its top competitor, Lending Club, but since 2013 the company has seen fast growth in the value of loans it arranges..
Prosper's loan originations haven't caught up with those of its top competitor, Lending Club, but since 2013 the company has seen fast growth in the value of loans it arranges. Prosper

The competition just got a bit stiffer among companies that arrange peer-to-peer loans, with Prosper raising $70 million in new funding to fund expansion.

The move, announced Sunday, puts new pressure on Lending Club, the leader in the business of connecting people who need to borrow money with those who want to lend it. Both companies take a percentage of the loan payments, but the interest rates still are 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 firm, has joined Prosper's board of directors. Other investors include Institutional Venture Partners and Phenomen Ventures.

Prosper said it originated more than $100 million in loans in April, up from $9 million in January 2013. That brings its total to $1 billion so far, with expectations to hit $2 billion this year.

That's substantial growth, but Lending Club surpassed $4 billion total in April.

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

Peer-to-peer lending has expanded beyond ordinary borrowers and now lenders, too. Institutional investors, eager to plump up pensions and mutual funds with returns better than money-market accounts and less volatile than stocks, have joined the game. And loan types are expanding: Lending Club has begun offering loans to small businesses, too.

Prosper logo

One intriguing aspect of peer-to-peer lending is that, unlike banks, the companies facilitating the loans aren't leveraging a certain amount of deposits into a much larger amount of loans. That means that companies like Lending Club don't suffer disproportionately if individual borrowers default. The traditional financial services industry stands to lose at P2P lending's hands: Even though vastly more debt is offered through the earlier channels, more than three-quarters of Lending Club's loans are debt consolidation and credit card refinancing, which means people moving their debt out of banks and into P2P loans.

In the P2P industry, lenders typically invest small amounts of money at a time across many loans, often $25, which dilutes the risk of individual loan defaults. That can mean a lot of hassle, though, when it's time to evaluate which borrowers are worth the risk. Lenders can see credit rating, debt-to-income ratio, monthly income, and many other parameters.

That's why it's no surprise that new middlemen are sprouting up in the peer-to-peer lending market. One is LendingRobot, a startup that loans out people's money at Lending Club and Prosper based on detailed criteria. LendingRobot, of course, takes its own percentage of the loan payments, too.