Prosper Review – Should You Take the Social Lending Plunge?

Prosper is a peer-to-peer lender.  That means they match up people who need to borrow money with people willing to loan out their cash.

The loans are unsecured.  That means the people who borrow money promise to pay back the loans but they aren’t required to provide collateral.   It’s a personal loan.

Borrowers come to Prosper hoping to get money cheaper than they can get it anywhere else.

Lenders make loans hoping that at the end of the day, they’ll make more than they could with alternative investments.

That’s the theory behind Prosper.   Now let’s consider the reality.

My Bias

Before we go too deep, I need to share that I get a commission if, after you read this, you use Prosper.  That means I have a bias to make you think Prosper is great and everyone should use them.

But I don’t think that and I’m not going to say I do.  In fact, the income I receive from this blog is pretty small compared to my overall income.

What’s far more important to me is my professional standing.   That’s why I start this and all my reviews with a negative bias.

In other words, I look for and share problems I uncover.  I search for what might go wrong before you sign on the bottom line. I always assume the worst and look for landmines.

So what follows is my real opinion of Prosper. The good and the bad.  I’ll tell you who might benefit who should stay clear.

OK.  Let’s get started.

What is Prosper?

Prosper.com is a peer to peer lending company as I said. It isn’t a bank but more like a match maker.

Like I explained, they take individual people who want to invest and put them together with people who need to borrow money.

They have over funded over $13 billion in loans. The loans range from $2,000 to $40,000 for 3 or 5 years.

Prosper was actually the very first peer-to-peer lending company.  They had some regulatory problems in 2008 but I wasn’t able to discover any issues since.  ” Vamanos”.

How does Prosper work?  The Big Picture

It’s a three-step process:

1. Borrowers sign up for free at Prosper and list the amount they want to borrow.
2. Investors review loans that are available and select those that meet their own personal criteria.
3. Once loans are funded, borrowers make monthly payments to Prospect and Prospect deposits the net payment into the investors’ account.

Why would anyone borrow money this way?

There are two kinds of borrowers that come to Prosper to fund their loans. The first group wants to pay a lower interest rate than they currently pay.

For example, if you have a high-interest credit card debt you might use Prosper to find lenders who are willing to loan you the money at a much lower rate. That could save you a ton of money.

The second group of people simply need to fund a project like a home remodel and don’t want to put it on their credit card or other expensive source.

Who can borrow money?

Residents of Iowa and West Virginia are out of luck – Prosper won’t help you get a loan. All other residents of the United States are able to borrow with Prosper.

What is the process to get a loan?  Is it easy or difficult?

The process is very simple and easy.  You first go to the site and go through the “check your rate” process.  It’s straight forward and quick.

They simply ask you a few questions (name, address, date of birth, income) and you will find out what rate you can borrow the money for.

The good news is that this “check your rate” process doesn’t hurt your credit score.  However, by agreeing to the terms, you empower Prosper to check your credit.  Next.

Once you do that, Prosper will ask you to choose your loan:

In the example above, based on what I input, Prosper offers me a personal loan of $10,000 at 7.13% APR.

As you can see, if I take a 36 month loan, my payments will be $309.37 and if I take the loan for 60 months, my payments will be $198.63.

It’s nice to know early in the process what I’m looking at.  And if you notice, I haven’t paid a nickel in fees or costs to this point.  “Tres Bien”.

What happens next?   You’ll be asked to submit some documents for underwriting and verification.

But during this underwriting period, investors see your loan and can commit to funding the amount you requested.

Of course, that funding will only go through if the verification process is completed with a positive outcome.

This verification period could take up to 7 days and it’s easy to check the status of your loan by logging in to Prosper and checking your overview page.

This lists the status of your loan, what, if any documents you still need to provide and the percentage of the loan already funded by investors.

What is the best way for a borrower to get fully funded and funded quickly?

There are a number of things borrowers can do.

• Amount – Prosper reports that smaller loans get funded faster than larger loans.
• Help Prosper during the verification process – Once you begin the process your loan will be listed and made available to investors. But during the funding phase there is a parallel verification phase where Prosper will ask you for supporting documents to prove your identity, income and employment status. The sooner you return those documents to Prosper the better. That’s because Lenders like to commit funds to loans that are going to happen. They don’t want to tie up their money for a few weeks only to learn that the loan isn’t going to be funded. This verification process is shown real-time on the site so make sure to help Prosper advance your process as much as possible.
• Advertise – Prosper has Facebook and Twitter buttons on their site. Use them to advertise your loan to your Facebook and Twitter followers. While you’re at it, tell your friends and family about what you are doing. They may want a piece of the action. The faster you get a high percentage of your loan funded the more likely it will be that you’ll get all the funding you asked for.

Make sure to check your spelling and grammar on your listing. If you demonstrate sloppiness in your application lenders will assume you’ll be sloppy about repaying them as well. Don’t open that door.

What happens if your loan isn’t approved?

If you are denied by Prosper, they will explain why.  At that point, you can (and probably should) consider applying elsewhere for a private or personal loan.

What happens if your loan is approved but not funded?

Your loan will be listed for 14 days.  If it’s not fully funded by then, the listing drops off the list.  You can create a new listing and try again.

Is it tough to qualify for a Prosper loan?

In order to qualify for a good loan with a good rate, you’ll want a credit score above 640 (the average borrower’s score is 710).

You also need good income (the average income of a Prosper borrower is $89,000).

Also, your debt to income ratio is important.  The highest it should be (after mortgage expense) is 50% but the lower the better.

You might qualify for a Prosper loan with weaker numbers but the rate would be higher.

How much interest will you pay?

Currently, Prosper charges from 6% to 36% depending on the financial situation of the borrower (outlined above).

I could write an entire post explaining more about their algorithm but do you really care?  The proof is in the pudding.

So the best way to determine your rate is to go through the “check your rate” process.

How much can you borrow?

Prosper loans range from $2,000 to $40,000.

How long can you borrow the money for?

Prosper makes personal loans for 3 or 5 years.  The loans are fully amortized.

That means your payments will include principal and interest such that by the time the loan matures, you’ll have paid it off completely.

Can you pay the loan off early?

Yes.  Prosper doesn’t charge any pre-payment penalties.  Happy days!

What happens if you make your payments late?

If you don’t make your payments within 15 days of the due date you will be charged the greater of $15 or 5% of the unpaid monthly amount.

If you try to make a payment and it fails because of insufficient funds or no access, you’ll be charged $15.

In addition, if you don’t make the payment on time, you’ll also pay a late fee (explained above).

How much does it cost?

Prosper doesn’t charge you anything up front for personal loans.

There is a one-time fee (called “origination fee”) if and only if your loan is approved, funded and the money is transferred to you.

The fee is a percentage of the loan.  It’s 2.4% to 5% depending on how Prosper rates you during the verification process.

You’ll know what that fee is prior to completing the loan agreement.

My suggestion is to add this amount to the total you are borrowing other wise you may get the loan but not have enough to fund your project.

How long does it take?

The site says it takes 7 days.  I’d count on 14 to 21 just to be conservative.

How do you make your loan payments?

The easiest way to handle payments is to set up auto-pay as explained above.  This is simple and free.

If you pay by check, they’ll charge you the lesser of $5 or 5% of the payment amount.

You can also pay online or by phone.   The site didn’t detail if either of these options include fees.

What happens if you change your mind after you apply but before you get funded?

You can cancel your loan up to the “loan origination date” by calling them.  This is the day that Prosper initiates the transfer of money to your bank.

Keep in mind that it may take a few days for that money to show up in your account.

Will Prosper rip you off?

I looked and didn’t see any real issues.  I read complaints about other peer-to-peer lenders.  One or two people said the companies mistakenly took the payment amount out of the borrowers bank even after the loan was paid.

I didn’t find that problem reported when it comes to Prosper.

Still, I think the key with any transaction like this is to keep on your toes and watch the inflows and outflows in your bank account on a daily basis.  Trust but verify Pilgrim.  Trust but verify.

Will Prosper hold on to information after you close your account?

Yes.  By law, they are required to hold on to your information for 7 years.

I am not certain if this pertains to loans that are unfunded or applications which are withdrawn but I would assume that it does.

So that covers Prosper from a borrower’s standpoint.  Now, lets consider this from the investors’ standpoint.

Why would anyone invest this way?

Some people consider Prosper because they are looking for higher rates than they can earn elsewhere.

Lenders can invest a very small amount in many loans or concentrate more capital in a small number of loans.

The choice is up to each investor.  But I don’t like this investment for several reasons.

My main problem is that you take the risk that the borrower may default.

If they do, you are pretty much out to lunch because the loans are unsecured. That means you have no collateral whatsoever.

Prosper suggests that you can reduce your risk by making many small loans (minimum $25 per) and focusing on higher-rated borrowers.

I still don’t like it.  Call me crazy, but I just can’t sleep at night if I know that someone has my money without putting up some collateral.

Other issues I have include considering what happens to your money if something happens to Prosper?  You don’t want to get into the personal loan collection business I am sure.

Of course they have work arounds for this but quite frankly, the issue of the loans being unsecured should be enough to keep your money in your wallet.  That’s my take anyway.

What are the risks for borrowers?

I can’t think of any. If you are already paying a high interest rate, what harm can there be in trying to get a lower rate?

It only takes a few minutes to set up your request. The worst case is that no lenders will fund you.

In that case, you are no worse off than you were before you started the procedure.

I suppose the one down side could be that you might borrow money that you really shouldn’t.

In other words, if all the banks have turned you down, maybe they know something you don’t. It might be the universe’s way of telling you to walk away and do something else.

Prosper might facilitate you getting a loan that you really should not take. While I don’t believe this is a huge problem, it is certainly a question borrowers should ask themselves before they take the money.

What does Prosper get out of this?

Prosper isn’t doing this for their health. They charge investors 1% of the loan balance every year.

In other words, the borrower might be paying 8% but the investor will get 7%.

There are also loan origination fees the borrower must pay if the loan is actually funded and other collection fees (explained above).

 

Bottom Line – What I like About Prosper

As a borrower, I have no concerns what-so-ever. If you need money and can get it cheaper from Prosper there is no reason why you wouldn’t do so.

For investors, I say – pass.   The company seems to operate with integrity and high standards.  I just don’t like the value proposition.

*Before investing with Prosper, be sure to read their prospectus.

** Disclaimer Please be advised that I am an affiliate of Prosper and will make money if you open an account with them. That means Prosper pays me when people borrow or invest using their system who came from my site.

The information and opinions contained in this presentation are provided by Neal Frankle and Wealth Pilgrim are for informational purposes only and are subject to change without notice. The information contained herein is qualified in its entirety by the more detailed information contained in the offering prospectus (the Prospectus) available from the issuer. Neal Frankle and/or Wealth Pilgrim are not soliciting any action based upon it. The content of this presentation is based upon information that we consider reliable, but neither Neal Frankle, Wealth Pilgrim nor any of its managers or employees represents that it is accurate or complete, and it should not be relied upon as such. An investment in the Borrower Dependent Notes involves significant investment considerations and risks which are described in the Prospectus. Nothing contained herein constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment decision.