Prosper.com offers a platform for peer-to-peer lending that anyone can use, and an easy option for borrowing that doesn’t include bank approval. Think it might be the site for you? I’ve been on the site since 2007; read on for my experiences.
Once you confirm your identity with Prosper, you can get started as either a borrower or lender in the marketplace. Lenders transfer money to their accounts using a card or bank account, then can lend the money out in any amount from $25 up to the entire account balance. You get to see basic information about the borrower, including a basic credit history and Prosper grade. Each listing has a set interest rate, which you will receive less Prosper’s cut (about 1%) every month as long as the borrower continues to make payments. Loans are for either three years or five years, though borrowers can pay off early. Lend on a case-by-case basis, or sign up for automatic portfolio management and let the system lend for you based on your investment goals.
Borrowers must be able to prove their identity to Prosper (the information is kept confidential) and must provide some kind of documentation substantiating income and employment claims. In order to be a borrower, you do have to have a FICO score of 520 or better. That said, Prosper lets you “state your case” regarding any negative history, allowing lenders to decide whether or not they want to take a risk with you.
For investors who want to diversify, Prosper offers note trading and stock investment opportunities. Any of your loans that are current can be sold in the marketplace at a price you choose, providing better liquidity for your account than just loans. Money from the account can also be used with Prosper’s partner to buy stocks and bonds, but make sure to review the applicable fees first.
The main Prosper site has a nice intuitive layout that’s easy to use. Tutorials help you learn the ins and outs of using the site. An informative browse function lets you see a borrower’s Prosper grade, the interest rate, and how much of a loan is funded before you ever click on the listing. Each listing has information such as the borrower’s income bracket, number of credit lines, percent of credit usage and if there have been any delinquencies in the past several years.
For lenders, the primary benefit of using the Prosper Marketplace is that you have an option for investment apart from traditional bank accounts and financial markets. Returns can range as high as 25% (that may be limited by legal limits in your state) for high-risk loans, down to about 8% for reliable borrowers with a solid credit profile. It’s easy to get started, and you can lend as little as $25 per loan. Earn additional money by referring friends and family to the site, or even apply for the affiliate program if you have a substantial finance-related audience.
Borrowers receive the benefit of being able to get a loan as small as $1,000 up to $20,000 based on the merits of their individual cases. Banks often refuse borrowers with a poor credit history regardless of circumstances. As long as your credit score is over 520, Prosper offers you the opportunity to tell your story and let those with the money decide. If your credit took a hit because of a divorce, medical issue, act of God, whatever the case may be, it gives you a chance to rebuild. Prosper does report to the credit bureaus, so it could be a way to get your foot back in the door after credit challenges.
As mentioned, Prosper loans are a high-risk investment. There are no guaranteed returns, and it is possible to lose everything. While Prosper does try to collect delinquent loans, there’s never any certainty that they will be able to get your money. If a borrower files for bankruptcy, you’re dead in the water – no collections action, no nothing.
Prosper does have a class action lawsuit against it for its early structure. The original business activities on the site were potentially conducted without the necessary securities licensing, and without the right types of disclosure. As a result a lot of people lost a lot of money, especially since it was through the time of the big real estate collapse. Rest assured that the problem is past; Prosper has since partnered with Wells Fargo and significantly overhauled their platform, bringing it in line with SEC guidelines.
Borrowers are limited in the amount that can be borrowed. You may also pay more in interest for bad credit than you would in a bank. Bear in mind that these are unsecured loans, so expect to pay collateral-free interest rates. It still beats the fee structure in most credit card companies, so it’s still valuable for debt consolidation and getting back on track.
I found Prosper through a mailing from the Wyoming Small Business Bureau. Without that recommendation, I may have never even trusted the then-new site enough to try it out. After a fruitless 18-month search for $10,000 worth of financing for the purchase of a pet store, the idea of being able to lend money directly to people sounded intriguing. By then it was too late for me to get my pet store, but I hoped that I might be able to be part of the gap-filler between reliable borrowers and bank regulations. I wasn’t disappointed.
When I first started in 2007, Prosper was still on an auction-style format for interest rates and didn’t have any note sales or stock purchase options. After the real estate bubble burst, I lost about $300 of my approximately $800 portfolio. It hurt, but I kept the numbers low so it wouldn’t hurt too much. I’m now a claimant in the aforementioned class action because of that loss, but it wasn’t enough to deter me from participating.
After the initial hiccups, Prosper changed how they did business and significantly improved the experience for both lenders and borrowers. Any time I see a site willing to put that much work into improving their business, I feel the desire to support their efforts. It paid off. Since the changes, I’ve averaged about a 12% gain. I love that I can sell the notes when needed, but mostly just let them sit and collect interest. There are no fees for lending except for the small percentage Prosper takes on actual payments, so it’s easy to spread even small amounts of money around for better stability.
Yes, 12% isn’t much for the big investment gurus or people who can invest thousands in the stock market, and either have a gifted broker or understand the market well enough to invest wisely. That said, it’s pretty decent in today’s depressed economy for the “average Joe” who doesn’t have much to invest. Overall, it’s my favorite investment tool so far. I don’t make enough money to make broker fees worthwhile, and I can barely keep from accruing inactivity fees on my passbook savings account. I can, however, invest in Prosper with what little I do have, adding only when I have the means to do so. Definitely worth checking out.
Disclosure statement: I have no affiliation with Prosper except as a lender account holder. I have not been paid for this review by Prosper or any of its affiliates, and I do not collect compensation directly from Prosper. The opinions expressed here are entirely my own.