Prosper is one of the internet’s most popular peer to peer lending (P2P Lending) websites. For those of you who are not familiar with P2P lending, it is a place where the website’s members can skip the bank and become their own lenders. Borrowers can also request a loan directly from individuals instead of through a bank for things like debt consolidation, small businesses, cars, college loan repayments, and many more reasons. You can also check out my complete review of Peer-to-Peer Lending.
Prosper lets you assume the role of a bank while loaning money to anyone who submits a loan application online through the site. It is a very convenient way to borrow money, especially for those who have been rejected by banks for loan applications in today’s tough credit market. I joined this site so that I could invest in something a little different and providing an excellent diversification in a small portion of my portfolio. I am also earning an excellent rate of return. I have written extensively about earning over 15% through loans I have been making for the past year on Lending Club, another peer to peer lending site, but I am also earning 19.8% on loans that I have been making through Prosper. I have only four loans with Prosper though and have only been investing on the site for two months.
The process that Prosper uses to issue loans is a little different than Lending Club’s process. Potential borrowers submit a loan application on the website, and then lenders bid on the application. Borrowers with good credit (640+) post a loan listing and lenders invest $25 or more each towards your loan. Unlike Lending Club which sets the interest rate that the borrower must pay based on his or her credit score, Prosper sets a starting interest rate and then investors bid on what rate they will loan at. When a borrower and the loan are more attractive, there will often be more lenders than needed. Supply and demand then takes effect. Bidding starts and interest rates start to drop. So far though, I have still found the interest rates on Prosper have a slightly broader range than Lending Club’s interest rate with higher highs and lower lows.
Where there are enough investors, Prosper then makes the amount to the borrower and then sells pieces of the loan to the lenders. That way the lenders can diversify their investments since they are not responsible for the whole loan. Lenders are allowed to invest a minimum of $25 for a piece of the loan that makes investing a whole lot easier and safer for them. Prosper currently has over 900,000 members, and the site has loaned over $187 million dollars to individuals for a wide variety of reasons.
Prosper estimates a 6% to 14% return on portfolios for its investors. For borrowers, the fixed rates offered are as low as 7.5% APR. The borrower’s credit information is available on the website for the use of the lenders. This way there is more transparency in the dealings between the individuals on the website.