Prosper Review – Online Loan Marketplace for Peer-to-Peer Lending

Prosper, a popular peer-to-peer (P2P) lending network that offers unsecured personal loans with terms of 3 or 5 years, 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.

Prosper offers unsecured personal loans with principals ranging from $2,000 to $40,000. You can expect to pay an interest rate of about 6.95% APR to about 35.99% 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, these rates are subject to change with prevailing market conditions and Prosper’s internal policies.

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.

Expected Returns

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 Prosper touts a Bloomberg analysis showing that a diversified $10,000 investment made in 2011 produced returns commensurate with the S&P 500 stock index through 2016.

Borrower Vetting

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.

Evaluating Loan Options
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.

Funding Procedure & Cost
If a loan that you’ve chosen to invest in 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 comparable to fees charged by competing P2P lending platforms.

Automatic Investing

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. Known as Quick Invest, this tool 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.

Receiving Funds

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 $25 minimum cash-out or investment threshold.

Eligibility

Prosper is available to lenders most U.S. states plus the District of Columbia. State law partially restricts lending in some places. These restrictions generally manifest in minimum income or net worth requirements for lenders, below which individuals may be ineligible to invest their own funds. These restrictions are subject to change, so check with Prosper for up-to-date information.

Application

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 3 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 attempted investments.

How It Works for Borrowers

Here’s what you need to know before you borrow from Prosper.

Eligibility

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 640. Having a higher credit score, lower debt-to-income ratio, and steady employment and income all increase your likelihood of approval. Standards may be more lenient for borrowers who successfully pay off their first Prosper loan.

Prosper is available to borrowers in most U.S. states, but you’ll want to double-check with your local banking regulator to confirm that P2P lending is permitted in your jurisdiction. These rules are subject to change (and have in the past).

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 at the lower 8% to 10% of that scale. This rate range is 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 origination fee is subtracted from the loan’s principal, so a $10,000, 36-month loan for an A-rated borrower would result in a $9,500 net disbursement.

Your loan’s principal amount is usually the amount you request, less the origination fee. However, it could be lower if your Prosper Rating doesn’t qualify you for a higher principal amount. Upper borrowing limits generally decline as borrower quality declines, but actual borrowing maximums are subject to change. Check 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.

Next, 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 and applicants with regular, full-time employment trending toward the shorter 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. 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 agreed to fund your Notes will keep their money.

Repayment

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.

On the bright side, Prosper never charges prepayment fees. If you choose to pay off your loan early for any reason, you won’t be on the hook for any additional payments.

Application

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” (FICO score below 640) to “excellent” (FICO score 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%).

Key Features

Prosper has some additional features worth noting:

Retirement Accounts

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.

Customer Support

Prosper’s borrower support team is available from 8am to 9pm Eastern, Monday through Friday. Its investor support team is available from 8am to 7pm 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.

Advantages

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 $40,000
Depending on your Prosper Rating and loan term, Prosper allows you to borrow up to $40,000 in a single loan. By contrast, some smaller competitors limit borrowing to $20,000 or less.

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.

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. If you’re trying to maximize your investing power, it’s nice not to have to worry about artificial caps.

Disadvantages

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.

2. Geographical Restrictions for Participants
Due to legal restrictions, Prosper isn’t available to everyone. These restrictions vary by state law and are subject to change, but it’s worth noting that investors’ participation is partly or fully restricted in several states where P2P lending is heavily regulated. Borrower eligibility is generally broader, but some P2P-skeptical states may restrict their activity as well. When in doubt, check with your state banking regulator.

3. Higher Origination Fees for Some Loans
Prosper may have higher origination fees than some competitors – up to 5%, on the most expensive loans. Origination rates at Lending Club, Prosper’s main competitor, are generally lower, though it’s difficult to predict with certainty what the underwriting process will turn up.

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 main 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% APR, plus niche products for medical providers and car owners. Avant offers personal lines of credit as well as unsecured personal loans. Prosper may venture into other lending areas as time goes on, but thus far it appears to be sticking to its comfort zone.

Final Word

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.

Have you used Prosper to borrow funds or diversify your investments?