Prosper is a peer-to-peer lending service that can be attractive to both borrowers and lenders. Started in 2006, Prosper.com is currently the largest peer-to-peer lending service with over 1 million members and 262,000,000 in funded loans. Prosper offers borrowers loan rates as low as 6.59% depending on credit-worthiness and return rates as high as 10.59%. Both borrowers and lenders eliminate the need to get a loan through a bank by working directly with one another.
Application Process and Benefits to Buyers
Borrowers can apply for loans for a variety of purposes including debt consolidation, home improvement, business, auto and other. They are able to request a loan for as little as $2,000 to as much as $25,000. As part of the application process, borrowers’ credit scores are checked and rated; they also share their current income, expenses, and previous payment history. (For instance, those with a credit score of 760 or above earn an AA rating and the best interest rate available, which can range from 6.59% for a one year loan to 11.76% for a 5 year loan.) The lower your credit score and rating, the higher the annual percentage rate (APR).
Borrowers also pay a closing fee as low as 0.5% for AA rated borrowers to as high as 4.5% for those with a lower credit score and rating. This amount is taken from the loan before the borrower even receives the loan money. A bonus for borrowers is that there is no prepayment penalty, so they can pay down the balance early with no penalty. In addition, these loans are unsecured, so the borrow does not have to offer up any collateral.
Investing Process and Benefits to Lenders
Lenders are able to manually choose who they want to invest in or to utilize quick invest. Quick invest helps a lender lower their risk by allowing them to set a list of criteria and allowing Prosper to find the loans that best fit within the criteria. Then, instead of investing all of your money in one person, you can spread your investment over a variety of borrowers, thereby lowering your overall risk. You can begin to lend with as little as $25.
For lenders, Prosper offers higher returns than many current market investments, averaging an actual return of 10.6%. If you choose to invest in an AA rated borrower, your return may be lower (averaging 6.1%), but of course, that type of loan has a much lower risk. If you invest in an E rated borrower, who typically has a credit score of 680, you could earn as much as a 15% return, but your risk rate is much higher. Lenders do have the option to buy or sell notes at any time. Once a loan is accepted, lenders will pay a 1% fee yearly.
Prosper allows both borrowers and lenders to mutually benefit by linking them together and eliminating the middle man. Borrowers can obtain a loan at a reasonable interest rate, and for some borrowers, Prosper may offer loans that traditional banks would not. Lenders can earn a higher interest rate than what may be found in traditional markets. While peer-to-peer lending is not without risk, Prosper tries to limit the risk while providing a system that benefits both borrower and lender.