Prosper Review: Peer to Peer Lending Done Right…or Wrong?
Launched in 2006, Prosper where the first company in the USA and it has lent up to $3 billion in loans. The company as paid over $140 million in interest to investors with many people earning as much as an average of 9% per year.
Prosper Marketplace Review (a how it compares to The Lending Club)
We give our opinion about this new peer to peer lending scheme, an alternative to The Lending Club (another peer to peer lending company — see our review of The Lending Club) and we also compare it to The Lending Club to help you decide which one you should choose if you decide to dip into the new world of peer to peer lending.
How Does Prosper.com Lending Work?
It connects people who want to borrow money with people who want to lend money in return for their initial investment back plus interest. You invest your money into loans along with other people, and the interest is shared out when it is repaid according to how much you invested in the first palace.
You open an account and fund it. You will need to place at least $25 in your account. Every $25 is called a note, and that note is invested into loans. Your account overview will show you how much money you have in your account that you may invest or withdraw. It will also show you how much money you have invested at the moment that you are waiting to mature (these are your notes). Also, it will show you any pending amounts which is money you have invested but that hasn’t been matched (given) to the borrower yet.
One of the most interesting elements is that you can invest into a loan that is already underway. There are lists of loans and some of them have been going for years. This means you may pick investments where the borrower has already shown that he or she can make the payments repeatedly. Or, you can take a risk and put your money into a new borrower, though you should know that most defaults happen within the first year.
Just like with the Lending Club, you are able to tell your account to re-invest your money automatically. You can set how much of your available funds you want re-invested automatically, you can set the size of your notes (which have to be $25 or more), and you can choose which Prosper ratings to include. Each loan has a Prosper rating based on its risk, so if you want your money investing in riskier loans, you may choose lower Prosper ratings such as D and E. If you want a slightly safer investment, you can have the system invest in higher ratings loans (such as A, B and C) that have lower interest rates but less risk.
As A Borrower You Can Borrow Up To $35,000
You can get a rate as low as 6.7% with Prosper, which is a very low rate for a borrower. You may only apply online, and debt consolidation is the most commonly taken loan. Your loan is funded whilst you confirm your identity and such, and once you have your loan you have to make the monthly repayments online. You can repay your loan early and make one-off payments to save on interest payments.
As A Lender You Can Earn Up To 9%
You can invest in riskier loans and make more interest; it really depends on your level of risk tolerance. The page that is full of loans also has a section based on how much they think you may get back and the likelihood of you making the entire interest amount.
They calculate how much interest they “think” you will get back based on a few factors. Firstly, if all the payments are made on time and on schedule, then the amount of interest you get is quoted. However, if people pay early, then you lose a bit of the interest, and they use the likelihood of this to calculate how much they think you will get back. They also factor in numbers about default rates, which will lower the amount of interest you may receive and may cost you your investment.
You May Not Be Able To Invest
Just like with the Lending Club, Prosper investments are known as securities and so the company has had to gain approval from state regulators one by one. As a result, there are still a few states that will not allow you to invest with Prosper. This may change over time.
Why You May Choose The Prosper Marketplace (over The Lending Club)
The best reason is because if they go bankrupt, then in theory your investments will not be lost. The company also has a lot of people applying to them for loans because their rates are around 14% on average, which means there is often a wide range of choices for investors, which means plenty of diversification choices. You can choose interest rates of between 5% and 10% depending on how much risk you are prepared to take on.
The interest rates are currently far better than what a bank can offer. If you were to invest $1000 into a typical bank savings account for a year, you would get $6 in interest, if you were to use the Prosper Marketplace, you would average a return of $74, which is a sizable difference.
The default rate for Prosper users is around 0.5%. As they put it, only one out of every 200 borrowers defaults, and complete defaults with no repayments at all are increasingly rare. Prosper only lends to people who have a good credit rating of over 700, which explains their low default rate.
Just like the Lending Club and most peer-to-peer lending and investing companies, your return and risk of loss is not related to the stock market directly. Obviously, if there was a big crash, then people would lose their jobs and people on mass may not be able to afford their debts. Still, the risk of mass defaults is (seemingly) unlikely.
Peer-to-peer lending allows short-term investments, which may suit some people more than tying their money up for years. For example, people who start saving from July for Christmas money may appreciate the quick and easy interest payments and money withdrawals.
Are There Any Risks?
Most of the risks are the same as the Lending Club as they are the same as with any peer-to-peer lending and investing company. Bankruptcy is not a big issue for Prosper because firstly they have a backup service that will ensure that no new loans will be issued, but also that all current loans are resolved. Secondly, they have a bankruptcy vehicle that will separate the loans within their business from the main business, meaning that the business may be dissolved without the loans being touched.
1 – Defaulting loans
The loans are unsecured, so if you put all your eggs in one basket, then you may lose your entire investment. However, at the moment the default rate is 0.5%, which is very low. Borrowers need a credit rating of 700 before Prosper will consider them.
2 – Rising interest rates
Just like with all peer-to-peer lending and investing companies, if the banks offer more attractive rates then the pool of investors will dry up.
3 – Poor underwriting
The company has grown slowly because they are very careful about whom they lend to, but there is still a small risk that they may lend to people that may default.
4 – Unforeseen risk
Even though the company is the oldest peer-to-peer company in the USA, it is still a baby and relatively untested, so we cannot predict what the future will hold.
Why Don’t Peer-To-Peer Companies Lend Mortgages?
You’ll note (as of about the start of 2016 which is the time of writing this), both The Lending Club and Prosper.com do Not lend mortgage products out.
Why? Well the first and most obvious reason is that it exposes the lending companies to a great deal of risk. A mortgage is a very big investment and if it defaults, then the company and its investors take a large hit upon which they may not be able to recover (even if the house is repossessed). The second reason is that most peer-to-peer investors are ordinary citizens with a limited amount of investing knowledge and/or no qualifications, and most will not opt for investments that last over five years, and a mortgage may last thirty or more years.