Want to know how to avoid your bank? If so, read on…..
Founded in 2005, Prosper is the first peer-to-peer (P2P) marketplace in the US.
Since it began, it has funded loans totaling more than $3 billion to more than 250,000 members.
As a P2P platform, Prosper brings borrowers and investors together, in a lending arrangement that eliminates the middleman from the transaction entirely.
That “middleman” is the banker.
By taking that function out of process, Prosper allows both borrower and lender to come together to create a mutually beneficial financial arrangement.
Borrowers can take loans ranging from $2,000 to $35,000, and for terms of either three years or five years. Individual investors can invest as little as $25 in any one loan, which enables them to diversify their holdings over many different loans.
Prosper acts as the servicing agent on the loans, handling the technical details of each loan, collecting payments, and remitting repayments to investors. Legally known as Prosper Funding LLC, Prosper is a wholly owned subsidiary of Prosper Marketplace, Inc.
Is Prosper Legit?
In one word YES! Prosper has been around for ten years now. In the world of the Internet that is an eternity. As we cover the reviews of Prosper for borrowers and lenders you will see that this is a well maintained and viable way to invest and borrow money. Prosper is subject to state and federal regulations, just like any loan producing organization is. To put an even more legitimate light on the company, all loans that are originated through Prosper.com are made by WebBank. This is an industrial bank that is chartered in Utah and a member of the FDIC.
On a more personal level, I have personally been investing in Prosper for several years now. A couple of years ago I started a comparison of Prosper vs. Lending Club and had very good results from both companies on my investments. Lending Club is the number one competitor to prosper in the peer to peer loan market. I have had very good luck with them and you can use my Lending Club review to do a full comparison of the two.
Investing Through Prosper
Borrowers come to the platform and choose a loan amount and a loan purpose, and then post their loan listing on the site. This gives investors an opportunity to review the loan listings to determine if it meets their criteria. Once a lender (or more likely, a group of lenders) agrees to fund a loan, the loan is formally created.
As an investor, your participation is very simple. You determine your investment criteria, choose the loans that you want to invest in, and borrower payments are then direct deposited into your Prosper account. You will have an opportunity to earn returns on fixed income type investments that are much higher than what you can find on fixed income investments like certificates of deposit or Treasury bills.
Open an Investment Account with Prosper
Investor Requirements
Prosper requires you to be a US resident, at least 18 years of age, and to have a valid Social Security number.
There are also various state requirements, that vary depending upon which state you live in. Typical requirements include a minimum income of $70,000 per year and/or a minimum net worth of $250,000. It’s also typical for states to require that you need to purchase notes in an amount that is no greater than 10% of your investment net worth.
Prosper IRA
You can use your Prosper investment account for an IRA, just as you would any other type of investment vehicle. You can either fund the account directly, or you can transfer money from another IRA into your Prosper IRA. You can accomplish either simply by completing the Prosper IRA input page.
Choosing Notes to Invest In
This process is made easier with Prosper’s Quick Invest feature. Using this tool, you can establish your specific investment criteria and in which you define what type of loans are acceptable to you. Quick Invest will sift through the list of potential loans, and identify those loans that most closely approximate your criteria.
Once the narrow list of loans appears, you will have the opportunity to either confirm the entire set of loans to invest in immediately, or you can do a deeper review of each individual loan and choose them one by one. This gives you complete control over which loans you will invest in.
To give you a good idea as to the types of loans that are available, you can check out the Browse Listings page and see what’s available.
Collecting Investment Returns
There’s one important aspect in which P2P loans are different from traditional fixed income investments, and that is that they are self-amortizing. While you will receive monthly payments on each loan that you hold in your Prosper portfolio, it’s important to understand that each payment comprises both interest and principal, and will pay off the loan completely in either three or five years.
What this means is that if you invest $1,000 into a single five year note, at the end of five years, the loan will be completely paid off. Unlike a certificate of deposit, the payments are not exclusively interest, and you will not receive your original investment back at the end of the term. Since it is paid off, the loan no longer exists.
This will also affect your rate of return. Unless you reinvest your loan repayments into new notes, your interest income gradually decline as the loan portfolio you’re invested in slowly amortizes. Reinvestment will be a priority if you want to keep your rate of return high.
Loan Types and Loan Grading
Loans are graded based on credit grading and loan term. AA is the highest grade, while HR is the lowest. Loan pricing is also based on the term of the loan, which is either three years or five years. A five-year loan will be considered to be higher risk than a three-year, and will require a slightly higher price.
Rates charged can vary from a low of 5.32% for a AA grade for a three year loan, to 35.97% for an HR grade on a three year loan. But just keep in mind that these rate ranges are the extremes, and not the averages.
Trading Notes Before they Mature
Prosper does offer you an opportunity to trade your notes before their respective maturity dates. You can do this through Folio Investing. For a fee of 1% of the face amount of each note, Folio Investing will handle the purchase and sale of existing notes.
In order to take advantage of this function, you’ll have to open up a brokerage account with FOLIO Investing through which you will handle your transactions. Folio Investing will return any money or notes that result from transactions, to your Prosper account.
This feature will enable you to adjust your portfolio position at any time you like, even after investing in a given set of loans.
Risks
When you invest in loans through Prosper, or any P2P platform, there is the constant risk of loan defaults. At virtually all loan grades, at least some loans will not perform. There is no FDIC insurance to cover loan losses at Prosper either. But nowhere is the correlation between risk and reward more apparent.
You can get a solid idea as to the performance of each loan grade level by checking out Prosper’s Marketplace Performance page. As you will see, the returns vary widely from one credit grade to another, in order to make a generous allowance for loan defaults.
As you can see from the first chart on the page:
- Seasoned Returns as of September 30, 2014 – For Loans Originated July 2009 – November 2013
- Actual Effective Yield (center column) averages 15.94%, with a range of between 7.09% and 26.81%.
But see also that the Actual Loss Rate in the next column averages 6.62% across all loan grades, with a range of between 1.61% for the highest loan grade (AA), to 16.04% for the lowest loan grade (HR).
The actual return that you will get on your investment is found in the Actual Return column – that’s actual effective yield, less the actual loss rate. This represents your true return. The average across all loan grades is 9.33%, but there’s a big spread between the highest credit grades and the lowest – and it favors the lower credit grades.
Notice that while the actual return on AA rated loans is 5.48%, the actual return on E rated loans is 11.35% – the highest net return of all credit grades, and more than twice the return on AA loans.
The moral of the story is that it f you plan to maximize your investment return, you will need to invest generously in the lower grade loans. Yes, there’s a greater risk of loan default, but rates are much higher to compensate, and will provide a much higher net yield to you.
Minimizing Investment Risks
Risk grades aside, there are ways that you can reduce your overall investment risk in a portfolio of Prosper loans. The first most obvious way to do this is through diversification. Since the minimum investment per loan is just $25, you could spread a $5,000 investment across as many as 200 different notes. That will minimize the fallout of any single loan going into default.
You can also set more conservative criteria in your loan selection. One way to do this is by favoring notes that represent the refinance of existing debt, rather than new loans taken for acquisition purposes. You can also establish criteria for employment that requires that a borrower has more time on the job. Debt-to-income (DTI) ratio is still another possibility. By setting it below 30% or even 25% of stable monthly income, you can greatly reduce the chances of loan default.
The lower than your default rate is on your loan portfolio, the higher your net return on investment will be.
Investor Fees
Prosper charges no upfront fees in order to join the platform as an investor. They do charge an annual loan servicing fee equal to 1% of the outstanding loan principal balance of the loan prior to the applying the current payment.
In addition, in the event any of your loans becomes past-due, and a collection agency must be brought into the picture, the investor will be charged for the collection fee, but only in the event that the past-due loan proceeds have been recovered.
Overall, Prosper offers investors an opportunity to earn fairly stable rates of return that are much higher than what you can get with other fixed income investments, such as money market funds, certificates of deposit, or Treasury securities.
Borrowing Through Prosper
Just as you can lend on Prosper, you can also borrow. You may find that the rate and fees that you pay on a P2P loan is less than what you will pay with a traditional loan.
How the Loan Process Works
Applying for a loan is a simple multi-step process, that looks something like this:
- Create your loan listing – you provide basic information, then Prosper will obtain your credit score and determine your rate and terms.
- Based on your credit score and other information Prosper will obtain, you will be assigned a credit grade, from AA to HR.
- You then create a loan listing which is your request for a loan. You will add a description of your loan purpose and financial situation. It will appear on the platform to be reviewed by investors.
- Once the loan listing is fully funded and your information has passed Prosper’s verification process, you will receive your loan.
- The listing will stay active for 14 days, or until the loan funds.
- Loan funds are deposited directly into your bank account within days.
- You begin making your monthly payments.
Open a Personal Loan Account with Prosper
Loan Terms and Rates
As mentioned earlier, loan amounts range from $2,000 to $35,000, with terms of three or five years. All loans are fixed rate, fixed monthly payment, and no prepayment penalties. That part’s pretty simple. More complicated are loan rates, since they are based on your credit grade.
Credit grades can run anywhere from AA – the highest – to NR – the lowest. There are 26 levels within the range, and there is a rate associated with each level. Pricing can also be determined based on the term of the loan, as well as the number of previous Prosper loans that you have had in the past.
At present, the lowest rate on a AA loan grade with a three-year term is 5.32%. The highest rate on an HR loan grade with a three-year term is 35.97%. You can check out the rates for each credit grade on the Personal Loan Rates and Fees page.
Origination fee. When you borrow through Prosper, you will be subject to an origination fee. The fee is based on your risk grade, as well as the term of your loan, and look something like this:
- Risk grade AA – 1% to 2% for a three year term, 3% for a five year term
- Risk grade A – 4% for a three-year term, 5% for a five-year term
- Risk grade B – 5% for either a three-year or five-year term
- Risk grades C through HR – 5% for either a three-year or five-year term
Prosper Loan Types
Prosper offers loans for the following purposes:
- Debt consolidation loans – combine credit card debts into one, single fixed rate loan
- Get a home improvement loan – loan is not secured by your home
- Short-term and bridge loans – short term funds for any purpose
- Auto and vehicle loans – unsecured, and with no vehicle eligibility requirements
- Small business loans – these can even be used to start a new business
- Baby and adoption loans – borrow up to $25,000, unsecured, to cover expenses
- Engagement ring financing – get loan funds without using the ring as collateral
- Special occasion loans – for weddings, graduations, or even a birthday party
- Friends and family loans – use Prosper to set up a loan between you and a friend
- Green loans – use to install solar panels for heating, hot water, or electricity
- Military loans – use the proceeds for any purpose, and you don’t need to apply in person
While these are specific purposes for loans, the basic loan set up remains the same. Each loan is fixed rate, unsecured, payable over three or five years, and has no prepayment penalties.
If you’ve been having difficulty getting a loan from banks or other traditional sources, check out Prosper, and see if you can’t do better. I’m betting that you can.
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