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Prosper Review – The Online Auction Loan Marketplace (Peer-to-Peer Lending)

By Mark Riddix

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.

  1. Sign up for Prosper as a borrower
  2. Create a loan listing.
  3. Put your loan listing up for auction allowing lenders to bid for your loan.
  4. 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.

  1. Sign up for Prosper as an investor
  2. Search loan listings
  3. Bid on existing loan requests.
  4. 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?

Also, if you’re interested in other peer-to-peer lending options, be sure to check out our Lending Club review.

Mark Riddix
Mark Riddix is the founder and president of an independent investment advisory firm that provides personalized investing and asset management consulting. Mark has written financial columns for Baltimore and Washington, D.C. area newspapers and is the author of the book, Your Financial Playbook.

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  • Em D.

    This is a really interesting idea. I’m not sure how I would feel about loaning money to strangers but it seems like they’ve put in some safeguards to verify the information. Although loaning to people you know is probably even more risky what with the personal relationships involved :)

  • http://madsaver.com Mac

    I love these new lending/borrowing web services. Cuts out the middleman and makes more money for investors and saves money for borrowers. Sounds awfully like LendingClub, but with the added auction element. Even with some defaults, the return will probably be better than most other traditional forms of investing. Yet another place to diversify my investments.

  • Winston

    These micro-loaning services have been quite popular these days. The one that I am most familiar with are those peer to peer lending to the people in poor countries, like Kiva.com. This is the first time I have heard about Prosper. Looks like is a great place for someone to make a little more money than their bank interests with little money. I am very tempted to join in. I also like the feature where you can sell your loans to others. Thanks for the review.

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  • Kim

    I’m finding every site that promotes prosper to warn you…..Don’t Do it. I chose to loan $ to what they consider lower risk people and so far 9/14 of my loans defaulted. I can’t believe what a fool I was to trust something like this. It is VERY risky despite what prosper tells you.

    • Mark Riddix

      Kim, I had exactly the opposite experience! All of my loans were repaid with interest.

      • NoImagination

        Of course it’s extremely risky. Just look at the default rates by credit grade — even the highest credit worthiness grade has defaults.

  • AdamE

    My findings are similar to Kim’s. I have loaned out approximately 37 small loans ($25-50 each, to spread any possible risk) in the past 3 years, and out of those 37 loans, 9 have defaulted and were written off. The ones that defaulted were mostly the ones I loaned $50 to. :(

    The credit crisis over the last couple of years probably had something to do with this, but these are definitely risky types of loans to make.

  • Kevin

    The ultimate decision on loan funding is made by the underwriter – WebBank. In the end, its just another bank using your money as capital accept, they also pass the risk to you.

    It looked like a great idea and probably was in the beginning. I expect it got hijacked by the banking industry.

    In my personal experience, I feel for the sales pitch and figured this would be a great alternative funding source. I am currently at war with the IRS and awaiting the results of an appeals hearing. While this is going on, the IRS has filed liens which have adversely affected my credit score. No late payments, charge offs, repos, foreclosures…just the lien. My loan fully funded in a few days at a ridiculous interest rate. I figured, what the heck, I’ll prove myself by paying the loan off quickly and work towards improving my Prosper score.

    Outcome – email from Prosper – your listing has been canceled because of information we obtained from Experian. It would have been nice if they would have done this prior to requiring me send them all sorts of private financial information.

  • http://lizloans.com/ Liz Loaning

    I might be applying through prosper then since they have a lot of benefits plus their extreme factor is a 100% possibility of ingenuity. Don’t want to get scammed on loaning though.

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