The Bottom Line: Prosper makes personal loans easy. Whether you're consolidating debt or remodeling your home, we have a solution for you. It is a marketplace where individuals can either invest in personal loans or request to borrow money.
Prosper allows individuals to diversify their portfolios with consumer credit investments. What can you expect when you invest with Prosper?
Read this guide to find out.
Minimum Investment: $25
Promotion: No current promotions
What is Prosper Loans?
Prosper is a peer-to-peer lending company based in the United States and founded in 2005. They were the first peer-to-peer lending company to enter the U.S. market and have since helped over 940,000 borrowers obtain over $15 billion in loans.
With peer-to-peer loans, a borrower doesn’t seek out a traditional lending source, such as a financial institution or bank.
Instead, individual investors can choose to fund the loan. Interest paid by the borrower is then passed on to the investors.
Prosper is a platform that brings investors and borrowers to the same place, facilitating loan transactions. Borrowers can apply for loans and investors can review and invest in those loans all within Prosper.
As an investor, you can hand-pick individual loans to fund. Prosper opens up the ability to invest in consumer credit, which has historically only been available to financial and lending institutions.
Expected Returns on Investment Categories
Each loan is assigned a rating based on the borrower’s credit rating and other factors on their application.
Ratings range in categories from AA, the lowest risk and lowest return, to HR, the highest risk and higher return.
Here’s the full list of all loan ratings:
- HR (High Risk)
Historically, Prosper investments have averaged 5.3% across the entire platform.
Here are the average returns that Prosper lists for their loan categories:
Types of Investment Accounts
Prosper offers options for individual investment accounts. Joint accounts are not currently offered.
You can open the following account types on Prosper: taxable, institutional, trust, Roth IRA, traditional IRA, SEP IRA, and 401k rollover.
Choosing the Right Investments on Prosper
In order to properly diversify your Prosper portfolio, it is recommended that you maintain $2,500 in investments. This way, you’re able to have a variety of investments in your portfolio.
Diversifying your portfolio allows you to choose loans with higher returns and hedge the risk against loans that offer less risk, but lower average returns.
When you choose investments, you should be evaluating the credit worthiness of the borrower. You are acting as a lending institution and should be asking yourself some of the same questions that they would.
- Will this person be able to pay back the loan?
- Are they a good credit risk?
- Do the benefits of lending to this person outweigh the risks of doing so?
Investors can use the Auto Invest feature in Prosper to automate investing, which we’ll talk about later.
Otherwise, investors are able to search for available loans using the following filters:
The years of established credit history can indicate whether a borrower has enough experience handling lines of credit.
This factor should be weighed against the payment amount for the loan. But you can avoid some risk by sorting out borrowers with lower income levels.
Debt to Income Ratio
This is the ratio of gross income that the borrower uses to pay debt on a monthly basis. In general, it’s best to see a lower DTI ratio. As an example, qualified mortgages typically require a DTI ratio of 43% or less to be approved.
A shorter term may be less risky; that’s less time that a borrower needs to manage their payments.
Choose to filter loans based on whether the borrower is employed. Remember that small business owners may be considered unemployed.
Recent inquiries indicate how many times the borrower has applied for credit in the past 6 months. More inquiries generally mean a higher credit risk.
Ratings from Prosper range from AA to HR. The higher the letter and closer to HR rating, the more risky the investment.
If a borrower has defaulted on previous loans, they may be at risk of doing the same for this loan.
Previous Prosper Loans
If the borrower has had a Prosper loan in the past, you can see how successful they were at fulfilling payment obligations.
Notes should be bought with the intention of holding onto the investment for the entire life of the loan. But if you need to liquify your investment, there is a secondary market through a third-party called Folio Investing.
You can try to sell off your notes to other investors. Or, you can search the secondary market for other note options that investors are looking to sell.
Auto Invest Feature
Prosper has a feature called Auto Invest. It’s perfect for investors with large balances or those who want a hands-off approach to investing.
You can choose your investment parameters and how you’d like your portfolio to be diversified. Then, Prosper will automatically invest in notes for you, based on your guidance.
There are no additional fees for using the Auto Invest tool. Plus, there are no minimum account balance requirements.
If you’d like to manually select notes in addition to using Auto Invest, you’re free to do that. But your portfolio may diverge from the criteria you’ve set for Auto Invest if you do.
Features and Requirements of Prosper Investments
Prosper offers a great option for diversifying your investment portfolio while helping a borrower reach their personal goals.
Keep reading to learn details behind investing and borrowing with Prosper.
According to Prosper, investors with 100 or more notes have positive returns. At $25 per note, a Prosper investment portfolio can be fully diversified with as little as $2,500.
Investors must contribute at least $25 to a note that they wish to purchase.
But they can contribute any dollar amount above and beyond the $25; there are no incremental value requirements.
Loan Amounts and Terms
Borrowers can be approved for loans ranging between $2,000 and $40,000. The loans are a form of unsecured debt.
That means no assets are tied to the debt, unlike a traditional mortgage or auto loan that carry the asset as collateral. If a borrower defaults on a loan, there is nothing to sell in attempts to recover the loan amount.
Unsecured debts carry a higher risk for lenders. Prosper notes require that borrowers have a FICO score of at least 640 in order to be approved.
Loan applications are evaluated using algorithms based on information provided on the application and credit information from TransUnion.
If a borrower is denied, they must wait 120 days before applying again.
Notes can range from three to five years in length. While a note that has longer terms can generate a longer stream of income, it can also come with more risk.
You’re taking a chance that the borrower will be able to afford and make payments consistently for a greater amount of time.
If a borrower decides to pay extra on the loan or pay it off in-full before the term ends, they won’t incur any additional fees or penalties.
Borrowers can request to take out a loan for almost any purpose. But they will have to declare the loan purpose on the application.
Here are some common reasons that borrowers seek Prosper loans:
Big purchase (engagement ring, first home down payment, etc.)
Vacation or special occasion
Adoption or child-related expenses
Fees for Borrowers
Borrowers can expect to pay an origination fee when they initiate loan with Prosper. An origination fee is like a closing fee. Generally, those origination fees are about 2.4% - 5% of the amount of the loan.
Origination fees aren’t paid out of pocket when a borrower takes out a loan with Prosper. Instead, the fees are taken from the loan when it is paid out to the borrower.
For example, if a borrower is granted a $10,000 loan and the origination fees are 5%, then the borrower owes $500. Instead of the borrower paying the $500 out of pocket, the amount is just subtracted from the loan payout amount. So, the borrower will receive $9,500.
If a borrower makes a payment late, they can expect to pay either 5% of the unpaid amount or $15, whichever is greater.
Prosper charges an insufficient fund fee of $15 to borrowers who do not have enough money in their account at the time payment is withdrawn.
Fees for Investors
Investors pay a servicing fee on each loan payment they receive. It is automatically deducted from the amount that the investor receives at the time of the borrower’s payment.
The annual fees are equal to 1% of the remaining balance of the loan.
Investors from the following states can use Prosper:
District of Columbia
Free Downloadable App
Prosper has an investment app available for free on the App Store and Google Play. Investors can manage their portfolios from the app and adjust targets in real time.
Plus, the app can show investors information about the people that their investments have helped.
Why Borrowers Like Prosper
Most borrowers look to Prosper for better rates than they can get with traditional lending solutions.
Perhaps other financial institutions are unwilling to grant them an unsecured loan. Or, maybe borrowers do not want to turn to banks and lending institutions for personal reasons.
Loans through Prosper have a flat interest rate and equal payments. Credit cards, on the other hand, may have a variable interest rate.
Plus, credit card payments may change based on your usage. The minimum payment on a credit card may not end up making a dent in your overall debt.
That means borrowers know exactly how much interest they’ll be paying on loans from Prosper. They will even know how much their payment will be each month and how long it will take to pay off the entire debt.
Borrowers are evaluated on their creditworthiness based on information that they provide on the application as well as information from TransUnion. Cosigners are not accepted on Prosper loans.
Prosper assigns a rating to borrowers. The ratings are AA, a scale from A to E, or HR (high risk). The higher the rating letter, the higher the interest rate. Current rates are 6.95% to 35.99%.
Upon acceptance, borrowers will have their funds directly deposited into their account within 5 days.
Eligibility Requirements for Borrowers
Here are some of the requirements for borrowers:
- DTI ratio must be below 50%
- Stated income must be greater than $0
- No bankruptcies within the last 12 months
- Fewer than 5 credit bureau inquiries in the last 6 months
- Minimum of 3 open trades reported on the credit report
- No previous loans on Prosper that have been charged off
- Must not have been declined for a loan through Prosper within the last 4 months due to delinquency or returned payments
Pros & Cons
- Gives people the ability to invest in consumer credit
- Auto Invest allows a hand-off investing option
- Search filters allow investors to find notes that fit within their preferred criteria
- Loan history with Prosper is visible for evaluating future behavior
- Only $2,500 required to fully diversify (100 notes)
- Invest in individual notes at any amount over the minimum of $25
- Prosper is not available to investors in every state
- Loans are unsecured and may be uncollectible if borrowers default
- Credit evaluations on borrower’s may not include all information
Prosper makes personal loans easy. Whether you're consolidating debt or remodeling your home, we have a solution for you. It is a marketplace where individuals can either invest in personal loans or request to borrow money.
How to Start Investing with Prosper
New notes are added to the Prosper platform every weekday at 9AM and 12PM PT and on Saturdays and Sundays at 12 PM PT.
Investors are allowed up to 14 days to fund a borrower’s loan. If the loan amount is funded at least 70% at the end of the 14 days, the borrower may still receive the funds. But they will only receive the amount that has been funded.
Individual investors can only invest up to 10% of the loan value within the first 24 hours that the loan is live on Prosper. After the loan has been active on Prosper for 24 hours, any investor can invest in the remaining balance of the loan.
You can invest up to 10% of your net worth with Prosper. Investors can manually select the individual notes they would like to invest in. Or, they can use the Auto Invest tool.
With Auto Invest, you can specify the types of notes that you’d like to invest in and let Prosper handle the buying for you. Investors start by setting up target allocations.
Once the account is funded, Prosper will invest in notes that match your criteria.
Should You Invest or Borrow a Personal Loan with Prosper?
Prosper offers a way for individuals to invest in lines of consumer credit. Borrowers can seek loans through Prosper, and investors can hand pick which borrowers to fund.
This gives investors a way to help fund specific loans that they believe in, whether it’s a first time home down-payment or a refinancing initiative.
Investors can diversify their Prosper portfolio with as little as $2,500. Adding Prosper investments to an already existing retirement or investing plan provides a nice way to further diversify the investment strategy.
As always, getting input from a trusted financial advisor is a great way to start. If Prosper is the right move for you, you can sign up in just a few minutes online.
Then, either hand-select your investments or use the Auto Invest feature to get started!
Kim Shackleton is a former accountant, bridging the GAAP between numbers and words. She takes the complexity of the financial world and breaks it down into digestible pieces to guide people down a path toward financial freedom.