The peer-to-peer lending concept is based on individuals conducting financial transactions without a middleman. The main advantage of peer to peer lending is that costs are lower since no payments need to be made to an intermediary. This is where Prosper comes into play.
Prosper is an online auction website where individuals can engage in peer-to-peer lending. Borrowers come to Prosper seeking funds for a number of different reasons. Lenders use Prosper to earn interest by lending money to borrowers. I’ve personally made $1,000 in loans through Prosper (none of which were defaulted on) and have had an overall good experience with the site. I’ll discuss a little more of my personal experiences with the product and share some advice for you in my “Final Thoughts” section below.
How Prosper Works For Borrowers
Borrowers can create an account and watch lenders bid for funding of their loan. The best terms and lowest interest rate wins. Creating a Prosper loan listing is quick and easy. You will need to state the purpose of your loan, loan amount, and your credit score. Of course, you will need to enter your personal information (driver’s license number, bank account information) as well. Prosper will run the borrower’s credit and verify that the information listed is accurate.
- Sign up for Prosper as a borrower
- Create a loan listing.
- Put your loan listing up for auction allowing lenders to bid for your loan.
- Accept the winning bid
After the bid is accepted, the borrower will receive their funds and will pay back the loan monthly.
How Prosper Works For Lenders
Prosper lenders earn interest on their money by funding the requests of borrowers. Loans are a fixed-rate and unsecured by any asset. Loans have a 3 year term, but they can be paid off early by the borrowers. All loans are personal obligations of individual borrowers. Lenders receive a portion of their principal and interest earned monthly. This money is credited to their Prosper account and can be easily transferred to the lender’s bank account.
- Sign up for Prosper as an investor
- Search loan listings
- Bid on existing loan requests.
- Fund winning bids.
Ways To Lend Money
Lending Purposes: Prosper loans can be used for a number of different purposes including business use, debt consolidation, educational expenses, home improvement, and auto repairs.
Create A Portfolio Plans: Portfolio plans make lending money easier. You can automatically bid on loans that meet your funding criteria. Just enter the type of loans that you are seeking to fund and Prosper will match your funding request with the loan automatically.
Trade Existing Notes: Use the Folio platform to buy notes from other lenders looking to sell their loans. You can also sell your existing loans to other lenders.
Buy Individual Notes: You can search the Prosper.com site and bid on individual notes one at a time.
Advantages of Prosper
Potential for High Returns
Lenders have the potential to generate high rates of return depending upon the bidding process and credit rating. Loan rates can vary from the low single digits to double digits. The maximum interest rate on any loan is 36 percent.
Rating System
Prosper makes it easy to rate a potential borrower’s creditworthiness based on its alphabetical rating system. Credit is rated AA, A, B, C, D, E, and HR. AA being the best with the least likelihood of default and HR being the worst with the greatest likelihood of default. Prosper has taken steps in recent years to remove bad credit risks. The lowest credit rating allowed for new borrowers is 640.
Auction Style
An auction style forum is a great concept. Lenders with extra cash can lend it to borrowers that are in need of it. Borrowers and lenders both have to agree on the terms of the loan. This can help borrowers get loans that they are able to repay and that are suitable for their needs. It also allows lenders to seek out the maximum rate of return on their money.
Low Minimums
The minimum amount needed to bid on a loan is just $25. If a lender has $250 to invest, this money could be divided amongst 10 different loans thereby diversifying risk.
Disadvantages of Prosper
Limited Availability
Prosper is not available to lenders and borrowers in every state. Lenders must be from one of the following states: California, Colorado, Connecticut, Delaware, 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. Prosper is not available to borrowers in Iowa, Maine or North Dakota.
Risk of Loss
There is a risk that borrowers may choose to default on their loans. While non-payment will affect the borrower’s credit, the lender could lose their money.
Final Thoughts
I am very familiar with Prosper having used the company’s website in the past. My personal experience with Prosper was very good. I loaned out $1,000 on Prosper and received every dime back, plus interest. I spread the money out among eight different loans. Some of the loans were to individuals with AA credit ratings and some were to individuals with higher risk C credit ratings. My payments were posted to my account every month and none of the borrowers defaulted on the loans.
However, I am quite sure that this is not the experience of every Prosper user. Always remember to be careful when lending money because the risk of default does exist. You can get burned by lending to someone with a low credit score in hopes of getting a 20% return on your money. It’s better to be prudent and play it safe than to end up being sorry later.
Have you used Prosper to lend or borrow money? What have your experiences been like?
Give Prosper a try (free registration):
Also, if you’re interested in other peer-to-peer lending options, be sure to check out our Lending Club review.
