Meet one of the pioneers of the peer-to-peer lending industry
Prosper offers what most P2P lenders do; it gets borrowers and lenders in contact with each other to facilitate the lending process.
Its original vision was to create "an eBay for loans." From 2006–2009, it used a variable rate model and acted like an eBay-style online loan auction marketplace.
In 2010, Prosper changed its business model to use pre-set rates that are determined using a formula that takes a borrower's credit risk and other factors into account.
What is Peer-to-Peer Lending?
Peer-to-Peer (P2P) lending began to spring up as an industry after the financial crisis of 2008 when banks started to tighten their lending policies.
The banking crisis meant that potential borrowers were given far fewer options to choose from than in the past.
At the same time, low-interest rates impacted potential investors. This meant people couldn't earn the same rate of return they'd come to expect from their CD's or savings accounts.
P2P lending sites came about by seeking to fill this burgeoning gap in the market.
Several companies noticed the issues consumers were facing and launched online platforms to conveniently connect potential investors and borrowers with each other.
Since then, the peer-to-peer lending industry has grown in excess of $25 billion.
P2P loan categories differ depending on the service you use, but some of the major ones are:
- Home and auto
How Proper Works
As with most peer-to-peer lending sites, Prosper acts as an underwriter but doesn't loan out any actual money itself.
Instead, it matches potential investors with borrowers, and makes money by charging a fee for providing the service.
The loans you can get through Prosper are personal loans.
Borrowers generally have the freedom to use it for anything they want.
There's no need to pledge collateral against your loan amount; you get approved based on your income and credit rating alone.
Loans can be repaid over 3–5 years.
Borrowing from Prosper is typically less expensive than using credit cards.
This makes it an excellent solution for the consolidation of multiple debts that currently have a high combined interest rate.
When you borrow money through Prosper, you pay interest as you would with any other loan.
It also charges an origination fee which it refers to as a "closing fee."
All rates and fees are determined by your credit score, so the better your credit, the less you'll end up paying.
Prosper's minimum credit score requirement is 640.
Interest rates on the platform can range from 5.99% to 35.99% APR (annual percentage rate).
Your rate has fees included in it, but the majority of it is made up of interest.
Your closing fee will come out of your loan, so it's important to keep this in mind when figuring out the amount you need to borrow.
Closing fees start at just 0.50% if you have great credit, but can be as high as 4.95% if you have poor credit.
There are additional fees for missed payments, but no prepayment penalty, so you are free to pay your off debt as soon as you want.
Prosper is open to most US residents. However, residents of the following three states are currently not permitted to borrow through the lending platform:
- North Dakota
Prosper will check your credit through Experian to ensure you have a score of 640 or higher.
Borrowers with excellent credit are preferred and the average credit score of a Prosper borrower is a little over 700.
Investors will also carefully examine your debt-to-income ratio when deciding whether to lend to you.
This shows them how much of your monthly income you have available to repay loans.
Prosper generally looks for a debt-to-income ratio below 50% on new loans.
You need to have an income to borrow through Prosper, but it doesn't necessarily need to be employment income.
In fact, Prosper specifically states that retirees can borrow.
Self-employed people with proof of their earnings (such as tax returns) are able to borrow as well.
To qualify for Prosper, your credit report needs to be free of excessive inquiries or recent bankruptcies.
You'll also need to build up your credit before applying to Prosper, in case you've never borrowed before. This is sometimes referred to as having "thin credit."
If you've defaulted on a loan before, you're obviously unlikely to get approved.
Prosper's Borrowing Process
Gather all the information you'll need to provide before getting started
Your Prosper application requires basic information about yourself like your address, social security number, and proof of income.
You'll need to provide Prosper with your bank account information as well, including account and routing numbers.
This way Prosper can transfer funds directly to your checking account as soon as the loan has been processed and approved.
The full process from applying to receiving funds in your account takes an average of about three days.
There were 4 Key Factors behind Prosper's explosive growth
Prosper's massive growth and success can be attributed to four key areas where it dominated the competition.
These have to do with the following lending criteria:
Let's take a closer look at how Prosper approached each of these areas to offer a solution that was unlike any other.
For lenders and investors, peer-to-peer lending offers higher interest rates and returns than what banks can offer.
With average returns in the 6–10% range, savvy investors can achieve a lower level of risk than with traditional investments. Risky investments offer the possibility of earning more than 10%.
Prosper investors are typically earning more than what they would from traditional fixed-income investments. That's even if you take into account the fact that they're directly taking on the risk of loan defaults.
At this point you might be wondering if investing or borrowing through Prosper is as safe as using a traditional bank.
Loans originated by Prosper are made through WebBank, an FDIC regulated industrial bank.
It is subject to examination and potential regulatory investigations. Enforcement agencies still work to ensure legal compliance.
The peer-to-peer industry hasn't always been the most credible. It has suffered from security issues and heightened regulatory oversight in the past.
Prosper has been working hard to change that impression over the years and has made significant changes and improvements to beef up its own security.
Recently, institutional investors have started placing serious amounts of money into Prosper.
Long-time Goldman Sachs executive Eric Schwartz joined the board of Prosper in 2012.
The following year, father-son team of Stephan and Aaron Vermut joined Prosper. They left the prime brokerage services division of Wells Fargo to join the company.
This meant that people could no longer write off P2P lending as just a fad or passing trend.
Goldman Sachs even announced that it would be the first bank to enter the P2P market in 2015, which they did so in that year.
It now offers both unsecured personal loans and also loans for small businesses.
All of these moves have helped to legitimize Prosper and the peer-to-peer lending industry as a whole.
You might think that because you already have a line of credit, a car loan, or some other form of debt that you can't benefit from a P2P loan.
That isn't the case!
Online P2P lenders can be used to refinance your existing loans at a reduced interest rate.
This is one way to lower your monthly payment amount and take 5% or more off your total balance owing.
You can use P2P lending to consolidate high-interest debts you may have.
This gives you the opportunity to pay off your loan faster and improve your cash flow. It can help reduce credit card debt and other high-interest amounts owing.
The option to apply for a loan without having to complete pages of paperwork or go through a lengthy approval process certainly doesn't hurt either.
The bottom line is: people are looking for cheaper alternative forms of financing.
Peer-to-peer companies like Prosper give them that opportunity.
From a borrower's perspective, the basic P2P lending process goes something like this:
You choose the P2P lending platform of your choice, and they do an initial soft credit pull to assess your initial eligibility.
P2P lenders may be an option available to those who can't get a loan through regular banks.
However, they still have relatively strict credit history criteria to ensure you'll be able to pay back what you borrow.
If your credit score is good enough to qualify, the lender then conducts a hard credit pull.
This is used to assign a "loan grade" to you, which helps investors consider how much of a risk it might be to lend to you.
Once you have been assigned a loan grade, you're able to make a listing for your loan.
This will include details such as the interest rate you're willing to pay.
You can also include an introduction and make a case as to why you need the loan.
The more creative and heartfelt the listing, the more likely you are to grab the trust and attention of a potential investor.
Investors are then free to bid on open listings by offering their own interest rates and the amount they'd be willing to lend.
One significant advantage of P2P lending for investors is that they don't need to put all their eggs in one basket.
There's no need for them to fulfill your entire loan and are free to spread out their risk by investing a few hundred dollars between many different borrowers.
Once your listing has ended, all of the qualifying bids from investors are combined into a single loan. It is then deposited into your bank account as a borrower.
It's an entirely different experience than what you'd receive from traditional banks.
Borrowers can apply for a loan with only a few pieces of information.
Requests can be approved within hours, which optimizes and improves the lending experience.
Once approved, loan funds can be deposited directly into your account in a few hours.
In the early days of Prosper, there was no loan management system.
Employees had to review each loan manually before approving it, which was a tedious and time-consuming process.
Now it has built a custom and upgraded solution. It's incorporated automation to manage all loan-related activities.
The entire process became a lot more streamlined.
Prosper's technology now facilitates billions in loans. It does this by making use of simplified application processes and quick lending decisions.
Have you used Prosper or another P2P lending solution? If so, feel free to share with us your experience in the comments section below!