The peer to peer lending industry is now close to five years old. Both Lending Club and Prosper.com made it past severe growing pains in 2008 when the SEC forced the two companies to register their loans to comply with the Securities act. Both companies are now accelerating the amount of loans they are providing and innovating in the arena of peer to peer lending. Here’s our Prosper.com review for 2011.
How it Works:
Prosper, Lending Club and other firms sidestep the banking industry by creating an alternative means for borrowers to get loans. On Prosper, customers hoping to get a loan make a request to borrow a certain amount of money with a one, three or five year loan term. Prosper.com reviews and verifies information about its borrowers, such as their credit history and personal information and lets the borrower know what interest rate that they can qualify for a loan at. If the borrower is happy with the rate, they can continue to the origination process where other members of Prosper.com can fund part of the borrower’s loan. After the loan is fully funded, the borrower receives their money. The loans on Prosper.com have no prepayment penalty. Prosper.com generates its revenue by collecting a one-time fee from borrowers and by charging its lenders a loan servicing fee.
Borrowers on Prosper.com are paying slightly lower interest rates than those of Prosper.com competitor, Lending Club. The interest rates that borrowers pay are much lower than what they would get by registering for a personal loan at a bank or putting a loan on a credit card. Borrowers can borrow money for any number of reasons and the interest rate that they pay will vary from 5.9-20% depending on their credit score. Borrowers interested in getting a loan from prosper can do so at http://www.prosper.com/loans/. Prosper.com is now offering unsecured loans with one, three and five year terms to borrowers.
Investing with Prosper:
Many investors that funded loans when the company first launched in 2006 and 2007 have had a very bitter taste in their money from Prosper. Prosper.com did not place any limits on who could apply for a loan and what interest rates investors could agree to pay when first launching their service. As a result, many investors lost money by choosing to invest in loans that weren’t profitable. The company has since revamped their credit risk policies to only loan to qualified borrowers. The company also now sets the interest rates that borrowers pay to lenders to make sure that lenders do not bid too low on a loan.
The experience for an investor on Prosper.com is now very similar to that of Lending Club. Lenders can simply choose the loans they would like to fund and put a set dollar amount toward that fund. The service previously used an auction model, but has since scrapped the process in favor of a more streamlined method.
Investing in Prosper loans is still very much an alternative investment. Peer to peer loans are a relatively new financial product and do not have a long track record. Essentially, an investor is creating their own collateralized debt obligation (CDO). Investing in peer to peer loans should not take the place of your retirement plan. Like any investment, there is risk involved.
Investors looking to lend through Prosper.com can do so at http://www.prosper.com/invest/
