Prosper, a popular peer-to-peer (P2P) lending network that offers unsecured personal loans with terms of 36 or 60 months, has embraced the sharing economy with gusto. By matching individual borrowers with individual or institutional investors willing to lend funds at competitive interest rates, Prosper cuts out the middle man (traditional banks or credit unions). Relative to those institutions, Prosper has more relaxed approval standards and faster funding times for borrowers.
The platform earns money through origination and servicing fees. Its top competitors include other P2P lenders, such as Lending Club and Peerform, and low-cost personal credit providers such as Avant, which doesn’t use the P2P model and thus isn’t available to prospective lenders.
If you’re looking for an unsecured personal loan on Prosper, you can find one as small as $2,000 or as large as $35,000. You can expect to pay an interest rate of about 5.99% to about 35.97% APR, depending on your credit score, credit history, and past borrowing record on Prosper. Though Prosper’s interest rates aren’t tied to Libor or another index, the company warns borrowers that its rates may rise or fall in accordance with prevailing market conditions.
How It Works for Investors
For investors, Prosper’s most popular offering is Notes, or shares of individual loans with a value of $25 and up – which is also Prosper’s minimum investment amount. Notes are shares in loans that haven’t yet originated, not already-funded loans. Some Prosper loans don’t receive enough funding to originate. But if you reserve Notes in a loan that doesn’t originate, you don’t lose the amount you put towards that loan. Instead, Prosper returns your funds and lets you allocate them to other loans’ Notes.
With a low investment threshold of $25 per loan, investors can create a diversified loan portfolio with a relatively modest initial investment. If you invest the minimum in each note, a $2,500 investment gives you access to 100 individual loans. Loan performance ranges widely, but diversified loan portfolios (100 or more loans) typically produce average annual returns of between 7% and 9%, though that figure is subject to change and past performance isn’t predictive of future results. Prosper also allows investors to fund loans in their entirety, a more common option for institutional and accredited investors.
Prosper isn’t perfect. Though the platform carefully vets its borrowers, some may default on their obligations. Borrowers’ origination fees and other expenses may add to the total cost of a loan as well. And since their funds aren’t FDIC-insured, Prosper investors risk loss of principal. As with any big financial decision, it’s important to understand all the risks associated with lending or borrowing through Prosper’s platform.
Selecting Loans and Investing
Prosper lets you browse its loan listings and manually invest $25 or more in individual loans that appeal to you. You can filter listings by the borrower’s Prosper Rating, loan purpose, principal amount, time left in listing, yield, amount funded, and other criteria. It’s important to note that loans with higher yields – issued to borrowers with lower credit scores and Prosper Ratings – present a greater risk of failure than loans with lower yields.
If a loan that you’ve placed a bid on is funded, the money will drop out of your account within one business day. Note that Prosper assesses an annual service fee of 1% of each loan’s current outstanding principal. It passes this cost on to investors, so your yield is always a percentage point lower than the rate paid by the borrower. Prosper’s service fee is identical to service fees charged by Lending Club and Peerform, its principal competitors.
Before investing in a loan, use Prosper’s information-dense listings to determine whether it meets your standards. Listings include high-level information about the loan, such as the principal size, term, borrower rating, yield for lender, and rate for borrower. It also shows the loan’s estimated default risk (based on the borrower’s Prosper Rating), which is important for your risk calculations. They also include information about the borrower’s credit profile (visible only to registered Prosper investors), a self-description of the borrower, and a summary of the loan’s purpose.
Prosper’s Quick Invest tool makes it less time-consuming to invest in loans that meet your standards, allowing you to quickly build a diversified portfolio. Quick Invest automatically screens loans using any listing criteria you desire, shows you the pool of all qualifying loans for approval, and bids a specified dollar amount in each once you confirm the order.
If you want more control over the process, you can manually screen each loan that meets your Quick Invest criteria. If you want less control, you can automate the Quick Invest process, allowing it to place bids without asking for confirmation.
All Prosper loans throw off monthly payments that can arrive in your Prosper account at any time of the month, typically on the numerical day of the loan’s initial funding. As a lender, you receive a slice of the borrower’s monthly payment proportional to your total ownership of his or her loan.
For instance, if you own Notes equivalent to 5% of a loan with a monthly payment (less the service fee) of $200, you’ll receive $10 each month. If a borrower is late on a payment, you receive a proportional slice of his or her late fee for that month. You can withdraw funds from your Prosper account to your bank account or reinvest them in new loans at any time, provided you’ve reached the minimum cash-out or investment threshold ($25).
Prosper is available to lenders most U.S. states plus the District of Columbia. Lending is partially restricted in some places: In Alaska, Idaho, Missouri, Nevada, New Hampshire, Virginia, and Washington State, lenders must have either a gross annual income of $70,000 and a net worth of $70,000, or a net worth of $250,000. Lenders who live in these states also can’t invest more than 10% of their net worth with Prosper. In California, the 10% net worth rule also applies, and lenders must have at least $85,000 in gross income or at least $200,000 in net worth. These restrictions are subject to change, so check with Prosper for up-to-date information.
To set up your Prosper account, you need to provide current contact information and your Social Security number. You also need to provide a bank account and routing number so that you can deposit and withdraw funds from your Prosper account.
It can take up to three business days for Prosper to verify your bank account. Once this occurs, you can make an initial deposit of $25 or more and begin investing. You must have enough money in your Prosper account to cover any bids you make.
How It Works for Borrowers
Here’s what you need to know before you borrow from Prosper.
Loan Characteristics and Restrictions
Using your Prosper Rating and requested term length, Prosper sets an interest rate and principal amount for the loan. 60-month loans tend to have higher rates. Borrower rates range from about 6.99% APR to about 36% APR, with rates for borrowers with good or excellent credit coming in between 7% and 15% APR – competitive with personal loan rates at traditional banks, which typically start in the 7% to 8% APR range. Rates for borrowers with mediocre credit may be equivalent to or even higher than credit card APRs available to candidates with similar scores.
Prosper also charges an origination fee of between 1% and 5%, depending on your Prosper Rating and loan term. For instance, a borrower with an A rating pays an origination fee of 4% on a 36-month loan. This amount is added to the principal, so a $10,000, 36-month loan would carry an origination fee of $400 for an A-rated borrower.
Your loan’s principal amount is usually the amount you request. However, it could be lower if your Prosper Rating doesn’t qualify you for a higher principal amount. Upper borrowing limits are $30,000 for borrowers rated C, $25,000 for borrowers rated D, $10,000 for borrowers rated E, and $4,000 for borrowers rated HR. And if you’re rated AA, you can’t get a 60-month loan of more than $20,000. A and B borrowers are eligible for all loan terms and sizes. These restrictions are subject to change, so check back with Prosper before applying.
Verification, Approval, and Funding
As soon as Prosper sets your Prosper Rating, interest rate, loan term, and principal amount, your listing appears in its database. This enables investors to bid on Notes to fund your loan. If you don’t receive bids equal to at least 70% of your requested loan amount (Prosper’s threshold for partial loan funding) within 14 days, your listing will expire.
Once your loan crosses the partial funding threshold, Prosper begins its pre-loan review. During this period, Prosper thoroughly assesses your risk profile, verifying additional information such as employment status, annual income, homeowner status, past judgments and liens, and ongoing obligations (such as child or spousal support). This process can take between two and eight business days, with self-employed applicants tending towards the longer end. You need to repeat this process, including the credit check, for each Prosper loan.
When the pre-loan review process is complete, your application is officially approved and you receive funding within two business days. Partially funded loans originate in the funding amount they receive – a $10,000 loan request that receives 80% funding originates as an $8,000 loan. If you don’t make it through the verification process for any reason (for instance, if Prosper can’t verify your income or employment), you won’t receive any funds, and any investors who bid on your Notes will keep their money.
For all disbursed loans, Prosper charges an origination fee between 1% and 5%, depending on Prosper Rating. This amount is deducted from your loan principal, so even a fully funded loan can be up to 5% smaller than the requested amount. The origination fee is part of the principal and accrues interest over the loan’s term.
Once issued, you repay your loan monthly via an automatic debit from your provided bank account. Your monthly payment, which depends on the loan’s size, rate, and origination fee, stays the same over the life of the loan. However, you can make manual, one-time payments in any amount or pay off your loan in full at any time before maturity.
If you’re more than 15 days late on a payment, you’re charged a late fee equivalent to the greater of $15 or 5% of the unpaid installment amount. If you’re more than 30 days late on a payment due to insufficient funds in your linked account, Prosper may refer you to a collection agency. Borrowers who become delinquent may find it harder to get future Prosper loans, though there’s no automatic disqualification.
Prosper doesn’t reveal all the details about how it approves loan applications, but first-time applicants generally need a credit score of at least 600. Having a higher credit score, lower debt-to-income ratio, and steady employment and income all increase your likelihood of approval. Standards are a little more lenient for borrowers who successfully pay off their first Prosper loan; second-time applicants may be approved with a score as low as 600. Prosper is available to borrowers in all U.S. states except Maine, Iowa, and North Dakota, each of which has laws prohibiting P2P lending.
To place your application, you need to provide some basic information about yourself and your loan: how much you want to borrow, what the loan is for, your credit quality on a scale from “poor” (below 640) to “excellent” (above 760), your current address, and your driver’s license number. You must also provide information for the bank account you’ll use to repay your loan.
Prosper then verifies your identity and pulls your credit score and report from one or more of the three major consumer credit reporting bureaus. Using this information, Prosper estimates the likelihood that you’ll default on your loan in a 12-month period. It translates this likelihood into your Prosper Rating, which ranges from high-quality AA (estimated annual default rate of less than 2%), through A, B, C, D, and E, to low-quality HR (estimated annual default rate above 15%).
Prosper has some additional features worth noting:
Prosper investors can set up a traditional or Roth IRA and use it to buy and sell Notes or fund loans in their entirety (though the second option may be impractical for larger loans due to annual contribution limits for IRAs).
Multiple Loans Outstanding for Borrowers
As a Prosper borrower, you can have up to two outstanding loans at once, provided you don’t exceed $35,000 in outstanding principal at any time. You must wait at least six months from your last loan origination and have at least six months of consecutive on-time payments to apply for a second loan.
Prosper’s borrower support team is available from 8am to 9pm Eastern, Monday through Friday. Its investor support team is available from 8am to 6pm Eastern, Monday through Friday. Saturday hours are shorter. There’s also an email support line that typically produces responses within one to two business days.
1. Low Minimum Investment Requirements
For investors, Prosper accounts require a minimum opening deposit of $25. That’s also the minimum amount you can invest in a loan. Some competing platforms require investors to be accredited, substantially impairing access. With a minimum annual income requirement of $200,000 ($300,000 for a married couple), accreditation is out of reach for most people.
2. Extremely Fast Funding
Prosper’s popularity with investors leads to very fast funding for most listings, even those with lower Prosper Ratings. Many listings are fully funded within minutes of appearing – well before the 14-day expiration date. This doesn’t impact Prosper’s verification and approval process, so fully funded listings don’t guarantee that a loan will actually be made. But fast funding definitely removes some uncertainty for borrowers.
By contrast, Peerform has fewer investors, meaning its loans may not be funded as quickly (or at all). Lending Club has a more onerous funding process that can stretch on for weeks.
3. You Can Borrow Up to $35,000
Depending on your Prosper Rating and loan term, Prosper allows you to borrow up to $35,000 in a single loan. By contrast, Avant, a noted competitor, limits individual loans to $20,000 for all borrowers.
4. Diversified Portfolios Have an Excellent Track Record on Prosper
While it’s important to note that past performance doesn’t predict future results, Prosper proudly touts its investors’ perfect track record of positive returns on diversified portfolios. Since Prosper relaunched its site in mid-2009 (after a closure in the wake of the financial crisis), every single portfolio with exposure to more than 100 individual loans has produced a positive annual return for its owner. With Notes starting at $25, this performance is achievable with an investment of $2,500 or more.
By contrast, Lending Club can’t tout a perfect track record on diversified portfolios. About 0.1% of Lending Club portfolios with exposure to more than 100 loans have produced negative annual returns at some point – not a huge number, but not negligible either.
5. No Need to Invest in Multiples of $25
Prosper allows you to make investments of any amount above $25 – $45, $74, $1,010, whatever. Lending Club is less flexible, requiring investments in increments of $25 – $50, $75, $1,000, and so on.
1. Strict Credit Requirements for Borrowers
Prosper doesn’t approve loan applications from first-time borrowers with credit scores below 640, regardless of other factors such as income, employment, homeownership status, and current credit utilization. This may arbitrarily shut out some borrowers who would be likely to stay current on their loan payments – impacting borrowers’ access to credit, as well as the range of choices available to investors willing to accept the risk of lending to people with lower credit scores.
By contrast, Peerform accepts borrowers with credit scores as low as 600, provided that they have steady incomes, low credit usage, and other indicators of financial stability.
2. Geographical Restrictions for Participants
Due to legal restrictions, Prosper isn’t available to everyone. The platform accepts borrower applications from all but a handful of states, but investor applications are dicier – just 31 states, plus the District of Columbia, participate at last check. Investors’ participation is further restricted in several of the states where P2P lending is legal.
Since it’s restricted to accredited investors only, Peerform’s row is less legally onerous to hoe. It’s available to investors in all 50 states, provided they meet the income and asset qualifications.
3. Higher Origination Fees for Some Loans
Prosper may have higher origination fees than some competitors. For instance, on loans to borrowers rated A, Prosper charges a 3.95% fee. At Lending Club, fees for borrowers with a similar risk profile range between 1% and 3%. Meanwhile, borrowers rated C and below pay 4.95% at Prosper.
4. Relatively High Default Rates
For investors, Prosper may pose a higher risk of principal loss. Since its relaunch in 2009, annual loss rates on its 36-month loans have been mostly higher than Lending Club’s. 2011 and 2012 were the worst years, with Prosper’s loss rates about 4% higher than Lending Club’s. The one exception is 2009, when its loss rates were about 0.5% lower than Lending Club’s. However, Prosper was offline for part of that year, making an apples to apples comparison tricky.
5. Unsecured Personal Loans Only
Prosper only offers one type of credit product: unsecured personal loans. In addition to unsecured personal loans, Lending Club offers business loans of up to $300,000 with rates starting around 5.9%, plus niche products for medical providers and car owners. Avant offers personal lines of credit as well as unsecured personal loans.
Like ridesharing apps and coworking spaces, Prosper and other P2P lending platforms are all about efficiency. Unlike traditional banks, Prosper doesn’t have to maintain physical branches or compensate skilled loan officers for their time. Since it doesn’t use its own money to make loans, it assumes less risk, allowing more borrowers to participate (while clearly conveying the risks to prospective investors). And because it may pool funds from dozens or hundreds of investors to make a single loan, it creates tangible benefits for more participants.
While it’s hard to imagine traditional banks disappearing altogether, the P2P lending model could influence how they do business – with potential benefits for members of the borrowing public. If ridesharing apps like Uber and Lyft can bring the century-old taxi industry to its knees, anything is possible.