Prosper.com Review: Borrow and Lend with Prosper Loans
Prosper.com introduced the United States to the concept of peer-to-peer lending when it launched its service in 2005. Since then, the company has faced a number of trials including a bout with the SEC and a significant change to its lending model as the result of poor returns from early investors, but the company now has its legal ducks in a row and is facilitating several million dollars in peer-to-peer loans each month. Here is P2P Lending news’ Prosper.com Review.
About the Company
Prosper Loans Marketplace, Inc. is a San Francisco-based company that was founded in February, 2006. Chris Larsen is the company’s CEO, Kirk Inglis is the company’s CFO and COO, Sachin Adarkar is the company’s General Counsel, Jim Catlin is the company’s Executive Vice President of Acquisition and Risk Management and Roberto Arnetoli is the company’s Executive Vice President of Technology and Operations. Prosper has received four major rounds of venture capital, having received $57.5 million in total funding. The company partners with a number of companies which promote debt consolidation services and personal loans, including FreeCreditScore.com, CreditKarma, Freedom Financial Network, DebtGoal and Lending Tree. The company has facilitated $229.5 million in peer-to-peer loans across 38,939 notes as of April 26th, 2011.
How Prosper.com Works
Prosper.com is a company that provides unsecured loans to individuals. The company is unique in that the loans made by Prosper.com are funded by individual investors hoping to make a return on their money. Borrowers seeking loans create loan listings on Prosper’s website and investors pick and choose which loans they want to fund. Prosper aims to remove banks from the lending process so that borrowers can get better interest rates and savers get better rates of return on their money.
Borrowing Money on Prosper.com
Prosper.com offers very flexible unsecured loans to borrowers. Individuals can take out loans for any reason with a one, three or five-year amortization schedule. Interest rates for borrowers start as low as 5.93% with good credit and can reach as high as 35.64% for high-risk borrowers. It’s estimated that the average borrower pays between 9% and 11% on their loans. Borrowers can take out loans between $2,000 and $25,000 using the service. The company charges an origination fee to borrowers based on their credit score, which ranges between 0.50% and 4.50%. The company does not charge any hidden fees and loans from Prosper do not have a prepayment penalty.
Borrowers wishing to take out a loan on the service can complete Prosper.com’s loan application. After completing the short application, the borrower will be presented with an interest rate that Prosper will provide them a loan at. If the borrower is interested in taking out the loan, they can complete the process and their loan listing will show up on Prosper.com’s lenders area. After the loan is funded, Prosper will transfer the funds via direct deposit to the borrower.
Like its competitor Lending Club, borrowers often use the service to consolidate other debts. However, Prosper.com will provide a loan to a borrower for any reason, including automobile financing, home remodeling, education, medical expenses, wedding expenses and business expenses.
Investing with Peer-to-Peer Loans with Prosper.com
Investing in peer-to-peer loans from sites like Prosper.com is appealing to investors that are seeking alternatives to stocks, bonds and real estate. Peer-to-peer loans are essentially a new asset class that allows investors to increase their diversification. Essentially, Prosper.com and Lending Club allow investors to create their own collateralized debt obligations.
Investors that used Prosper.com in 2006, 2007 and 2008 did not have a positive experience investing in peer-to-peer loans on Prosper.com. At the time, Prosper.com used a system in which investors would bid on loans and the lenders that offered the lowest interest rates to borrowers would have the opportunity to fund part of the borrower’s loans. In addition, Prosper allowed very high risk borrowers to create loan listings on the service. Prosper.com was essentially operating a completely free-market lending marketplace. There was an unbalanced ratio of lenders to borrowers on the service and lenders bid interest rates down to unsustainably low interest rates. As a result, many lenders in Prosper.com’s early days earned much lower rates of return than they were expecting.
As an initial response, Prosper.com raised the minimum credit score requirement for borrowers and placed minimum interest rates on loans. In 2010, Prosper.com abandoned the bidding model all together and moved to a fixed interest rate model, similar to the system used by Lending Club. Investors are now reporting much better rates of return on Prosper.com, similar to the experiences had by Lending Club investors. Prosper.com states that investors are now receiving an average rate of return of 10.4%.
Investors can get started investing in peer-to-peer loans by creating an account on Prosper.com and adding funds to their account electronically. Investors can review loan listings made by borrowers that contain detailed credit information. Prosper also provides a number of filters that allow lenders to find loans that meet specific credit criteria. Investors then select loans they wish to help fund and can loans as little as $25.00 toward each loan. After selecting loans, Prosper will deduct the amount that the investor wishes to lend from his or her account. When the funding process is complete, Prosper will transfer the funds to the borrower and the investor will receive their share of the borrower’s first payment thirty days later. The lender will continue to receive monthly payments until the loan is paid off.
Prosper.com also offers automated plans that allow individuals to invest their funds without selecting specific loans. Investors simply select how much risk they are willing to take and Prosper.com automatically invests the funds in their account across appropriate loans.
Prosper.com’s lending model has improved significantly during the last three years, however, there is still risk involved in the world of peer-to-peer lending. There’s the possibility that a borrower will pay late or default on their loan, but those risks can be minimized by spreading funds across a large number of loans and by choosing loans of higher credit quality.
Currently individuals in Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming can make loans via Prosper.com. The company has to meet each state’s legal requirements in regards to lending. The company has other suitability loans, but like Lending Club’s suitability rules, they are generally not enforced by the company.
Prosper.com also has a secondary market for loans which is managed by FolioFN. Prosper’s secondary market allows investors to sell their loans to other investors if they want to cash out from the service.
Prosper and Lending Club remain a relatively new phenomenon in the world of lending. Investors should be cautious about putting a large amount of money into peer-to-peer loans, but many investors have had reported positive experiences, especially within the last two years.
Borrowers looking to get a loan on Prosper will find that their experience is very similar to that of applying for a loan from a bank on loan. The only difference is that borrowers can often get much lower interest rates than they would see from a personal loan from a bank or a credit card.
Borrowers and investors that wish to do their own Prosper.com Review can visit Prosper’s website.