Social lending, also called Person-to-Person and Peer-to-Peer (P2P) lending, started a few years ago as a way for people to borrow and lend money without going through traditional banks. The two biggest players in the industry are Prosper and Lending Club.
Prosper came first, but entered a long dark period to allow for registration with the SEC. It’s back now, and open for business to borrowers and lenders in certain states.
How Prosper Works
Borrowers apply for loans through Prosper, stating a total amount and a desired interest rate. Prosper approves the loans and lists each as an individual “note.” All loans are for a period of 36 months, with no prepayment penalty.
Borrowers can fund the note in increments of $25, and “bid” on the interest rate they are willing to pay – the lowest interest rates win. So if borrower requests a loan at 10%, investors can decide that loan is a good investment and instead be willing to loan at 8.5% just to get in on that loan. If a note is not fully funded in the requested amount, the borrower does not receive any funds. Completed loans are disbursed to the borrower, who then makes monthly payments to Prosper. Lenders can also trade existing loans through Folio Investing.
- Eligibility: Lender accounts are only available to residents of the following states: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Minnesota, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming. Lenders in the following states may be subject to suitability requirements: California, Idaho, New Hampshire, Oregon and Virginia.
- Minimum Investment: $25
- Fees: Loan servicing fee is 1% annually on the balance of each loan. Collection fees for late loans are 17% of collected amount. These fees are taken from payments before payments are disbursed to you.
- Risk: Prosper investments are not secured. If a borrower defaults on a loan, you will lose the amount invested in that loan.
- Returns: Prosper boasts annual returns that average 7-13%, depending on the credit risk of the borrowers you invest in. Higher interest rates equate with more default risk – if the borrowers come through on payments, you’ll be rewarded, but if they default you’ll lose the full investment in that loan.
- Liquidity: You receive a payment each time a borrower makes a payment to Prosper. The only way to get your outstanding investment back is to sell existing loans through the trading platform, possibly requiring you to provide a small discount.
- Diversification: You can invest in as many notes as you want, up to $5,000,000 total. Since each loan requires minimum funding of only $25, you can spread even a small amount of money through multiple lenders, thus decreasing your exposure to individual defaults.
- Interaction: You can ask questions of individual lenders and see responses to all questions.
- Requirements: Resident of any US state except Iowa, Maine, or North Dakota, with a minimum FICO score of 640, with bank account and a Drivers License Number
- Loan Amounts: $1,000-$25,000
- Interest Rates: Start at 7.5% with a cap of 36%. You can request a certain interest rate and lenders will “bid” on your listing, possibly lowering your rate. Lower interest rates are usually awarded to those with a good credit history and sufficient income to make loan payments.
- Fees: 3% closing fee with a minimum of $50 for most loans. The highest rated borrowers pay a .5% closing fee. All borrowers are subject to a $15 failed payment fee and the greater of $15 or 5% of the outstanding balance for late payments.
Like other social lending sites, Prosper is a great option for borrowers looking to get financing from non-traditional sources. Lenders can often earn higher rates than savings accounts and spread their investment risk by investing in multiple notes. The trading platform means that you can get at least some of your money back if you have a quick need for cash. I made about 15 loans through Prosper before it entered its dark period, but haven’t made any since.
Prosper Sign Up Bonus
If you’re interested in checking it out, don’t forget about the $50 sign up bonus going on now!
Stop back tomorrow for a comparison of Prosper and Lending Club!