Prosper.com (see current interest rates) is a meeting point for borrowers and lenders. The borrowers can find an alternative to bank loans or credit cards. The lenders have the opportunity to make something more than a minuscule interest paid on bank deposits. Nowadays it is absolutely impossible to get a personal loan from a bank, instead they suggest applying for a credit card. Credit card interest in prohibitive and those with bad credit don’t qualify for cards anyways. Websites such as Prosper.com connect those who look for a cheaper solution to borrow money and those who look for an alternative investment that can produce something substantial. The website is very clear and easy to navigate, providing all the information you need in a simple way.
Let’s start with the borrowers. This service can come especially handy when trying to pay off high interest on a credit card or need quick funding for some common categories that include: home improvement, loans for business use, auto & vehicle, green loans, or short term or bridge loans. Individuals borrow for many reasons and explaining those reasons is one of the steps in setting up your account. After filling up some general information in your application process, you will have to describe the reasons for the loan. Its purpose is to create a sense of personality, have people help you in your situation, or support your goals or business objectives.
After providing all necessary documentation, your credit history is verified and together with rating assigned to you by Prosper.com your loan request will be placed into one of the risk categories. This category will determine the cost of the loan. It is important to know that your rates also depend on loan term, your history of using the service in the past, and current economic conditions. The least the borrowers can expect to pay is somewhere around 6% and those who have their credit history seriously tarnished 35%. That is a very steep rate, yet available. Your loan request is then displayed to public who can start investing in it. People will invest different amounts so it might take some time to completely fund your loan. For example, if you desire to borrow $1,000, that loan might be funded by many different individuals. Some might invest $25, others $100, or perhaps one person funds your entire loan. As the money is being collected, you can follow the progress and see how much has been dedicated to your loan up to date. Once the loan is funded, it is transferred to your bank account. Prior to receiving the loan, you are told what is the interest that the loan carries. That interest is fixed and will be subsequently deducted from your bank account.
Prosper.com offers many tips on how to create a successful listing, some of which include:
- The smaller the loan amount the higher the chances of getting funded; remember that many lenders invest as little as $25 so it takes many of them to fund higher loans.
- Provide answers to any questions asked by Prosper.com.
- Use the links to Facebook and Twitter to let your friends and family know about the loan.
- Agree to partial funding of your loan; once it reaches certain level, usually 70% of the requested amount, the loan gets funded.
- By providing the loan documents on time, you are verified faster and the higher verification level means the potential investors have more interest in your listing; there are 3 stages of verification and even though Stage 3 does not guarantee a loan, it has 63% better chances to originate comparing to loan applications in Stages 1 and 2.
- Convince your friends and family to invest in your loan and write you a recommendation.
- Write about the purpose of the loan and about your financial situation.
If you have some money under the mattress or sitting in a saving account and would like to make a little bit more, Proper.com lists borrowers looking for a loan and percentage you can make if you decide to invest in a particular loan. There are three ways to invest:
- Quick Invest – this is a quite automated version that requires you to specify your lending criteria; you can decide on the credit rating of the borrowers, term of the loan, how much you want to invest, maximum amount to invest per loan, and more; Prosper.com then finds all the loans that meet those criteria, lets you review them and make a decision; if several loans are found, you can split your investment among all of them.
- Individual Loans – a current list of all available investments; you can click on each individual listing to learn more about the loan and the borrower.
- Trade Notes or Prosper Notes – a type of investment that allows you to put money in the payments Prosper.com receives from borrowers; you will have to open an account with Folio Investing to purchase these investments
Although joining Posper.com is free, there are fees related to either borrowing money or receiving a payment for a loan. As a borrower you can expect a closing fee once your loan is originated and they vary from as low as 0.50% to 4.95%. There are also late payment and failed payment fees. Lenders can expect 1% loan servicing fee that is deducted from the payments received.
There is one very important aspect for lenders to consider when investing through Prosper.com and it is that investing there is not grocery shopping where you pick and choose products as you wish and enjoy them. It is certainly built that way, a very simple, worry free investing place with little information to study. It is crucial to keep in mind that a risk of borrowers’ default is directly proportional to the interest rate received on your investment. Even the borrowers with the highest Prosper Rating default and that information is provided on the website.
Prosper.com supplies estimates on potential annual loss rate tied to different type of loans. This section should not be omitted when analyzing investments. Just as the interest rates paid by borrowers are related to the economic conditions, so are potential returns. It is interesting to notice that those who invested in Prosper loan prior to the real estate bust and the ensuing financial crisis lost money. The average return in the period from November 2005 to June 2009 was negative. The situation seems to have improved based on the statistics of the periods form July 2009 to November 2010 and from December 2010 to September 2011. The improving economy might provide a sense of security and better odds of obtaining the expected returns.