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Very few fintech companies survive what Prosper went through back in ‘08.
Within three years of launching, Prosper was hit with a class action lawsuit, a cease-and-desist from the SEC, and oh — a global recession.
But more than a decade on, the battered and bruised peer-to-peer lender has finally found its stride, with decent offerings for borrowers and investors alike.
It’s still a mix of good and not-so-good, so let’s take a deeper dive and find out if investing (or borrowing) through Prosper is right for you.
Prosper Pros and Cons
- Pre-qualify with a soft credit check — Borrowers on Prosper can prequalify in minutes and see their rates and terms without risking their credit.
- No prepayment penalty on personal loans — With no prepayment penalty, you can pay off your loan early at any time and save tons on interest.
- Low credit requirement — New and returning borrowers need a credit score of just 640 and 600, respectively, to apply for a Prosper loan.
- Slick app for investors — While the borrower app seems perfectly solid, the investor app stands out with excellent data organization and visualization.
- Available in most states — Prosper is available to investors in 31 states and counting.
- Actual customer service hours — The P2P lender has live reps available M-F, 9am – 8pm EST and Saturday 9am – 5:30pm EST.
- Middling net returns — An average 5.8% net returns is just OK, and may leave some investors wondering where the rest of the high interest charged to borrowers is going.
- High borrower fees — Prosper charges between a 1% and 5% origination fee on every loan, even for the most qualified borrowers.
- Relatively slow funding time — Prosper funds loans as early as the next business day, while some competitors fund them in minutes.
- No late/missed payment forgiveness — The lender has a built-in 15-day grace period but beyond that there’s no missed payment forgiveness like some modern lenders offer
- Limited repayment term options — Borrowers can choose from just three- or five-year terms. Some of Prosper’s competitors offer a sliding scale between two and seven years.
How Does Prosper Work?
Since Prosper offers a totally different experience for borrowers and investors, I’ll break down each of them below.
Prosper For Borrowers
Borrowers on Prosper can take out two types of loans:
- Unsecured personal loans
Prosper also offers a credit card called the Prosper® Card, which frames itself as a solid option to help someone with Fair credit (640+) start building or repairing their credit score.
But it’s not one. With no rewards, high regular APR, and the audacity to charge a $39 annual fee after year one, the Prosper® Card has bafflingly little to offer credit-builders. Google “credit-building rewards cards” and you’ll instantly find at least 10 better options.
Back on the lending side, Prosper’s personal loans offer the following terms and fees:
- Loan amounts — $2,000 to $40,000
- Rates (10/22) –– 6.99% to 35.99%
- Credit required — 640 for new borrowers, 600 for returning borrowers
- Origination fees — 1% to 5% of the total loan amount
- Late fees — 5% of the payment amount or $15, whichever is greater
- Prepayment penalty — $0
While I commend Prosper for accepting borrowers with Fair credit, there’s very little here to attract more qualified borrowers. If you have Very Good or Excellent credit, you’ll find better rates, terms, and certainly lower fees elsewhere. The fact that Prosper charges a minimum 1% origination fee – even for its most qualified borrowers – is certainly a turnoff.
That being said, it wouldn’t hurt to at least get a quote from Prosper just to see if the 1% origination fee is worth it. For starters, Prosper only takes a soft pull of your credit to provide personalized rates, so you can see your offer risk-free. Second, Prosper charges no prepayment penalty, meaning if you pay off your loan early, you don’t have to pay any of your outstanding interest.
Zero prepayment penalty is a huge plus for borrowers with Fair credit who think their income may rise in the near future.
Prosper For Investors
As a peer-to-peer lender, Prosper also lets you play the role of investor, browsing funding borrower loans in exchange for a nice trickle of interest.
Prosper boasts that the average historical returns for their investors since 2009 have reached 5.8% APY, up from 5.1% a few years ago.
That’s not bad, but it’s honestly not as high as I was expecting. According to Prosper’s latest Performance Update, their weighted average (WA) borrower rate was 14.45% APR across all loans. And with a borrower default rate of just 3%, I can’t help but to wonder: Where is the rest of all that interest capital going, if not to the investors?
Or is there a high rate of borrowers taking advantage of that early prepayment option (and costing investors interest)?
Putting aside the head scratching return figures, Prosper’s other big offering to investors is a slick mobile app. Rated 3.9 and 4.7 stars on the Play and App Store, respectively, the Prosper: Invest app lets you browse loan options by credit rating and yield, get a clean view of your portfolio, and fund loans without the need for a laptop.
Heck, you can even add a widget to your smartphone’s homepage to view your investments at a glance.
Prosper’s Post-COVID Performance
Is now a good time to join the Prosper investing community?
To find out, let’s see how the P2P lender has been performing in a post-COVID financial landscape.
If we compare Prosper’s Performance Updates for August 2021 and August 2022, we can extract a few key trends:
- The percent of loan originations that were rated AA-B has remained relatively steady
- Average applicant FICO scores have remained steady
- Loan sizes are increasing
- Weighted average (WA) borrower rates (interest rates) are increasing
- Default rates have remained steady
In short, Prosper borrowers are borrowing more money at a higher rate than they were at the tail end of the pandemic. That’s good for investors, who in turn have seen their average returns rise from ~5.1% to 5.8%.
How to Open a Prosper Account
For starters, getting a quote from Prosper is a quick, easy, and painless process.
I say “painless” because thankfully, Prosper lets you see personalized rates without affecting your credit score — also known as a “soft pull.”
Using an exceptionally clean and simple quote wizard, Prosper will prompt you for your requested loan amount.
It will also ask you for the purpose for the loan, contact info, and more.
Once you enter your information, you’ll get a personalized quote offer via email within minutes.
Should you choose to accept it, Prosper will prompt you to complete a full application, ask your approval for a (required) hard credit check, and provided you’re approved, fund your account in as little as one business day.
Once you’re in, you’ll want to set up autopay so you don’t miss a payment and get hit by the 5% late fee. You can monitor your loan progress and make payments either online or via the Prosper: Personal Loans app:
Now let’s cover the investing side.
The process of opening a Prosper Invest account looks a lot like opening a regular brokerage account. You’ll enter contact info, tax info, choose from two account types (General Investing or IRA), and sign some legal forms. The usual.
Once your account is approved, you’ll be able to fund it using direct deposit and start browsing loan options.
Loans are ranked by credit rating (B, A, AA, etc.), Yield, and funding progress.
The Prosper Invest app does a remarkable job of displaying all of the essentials like Yield, Amount, and even Loan Category in a tighter window:
Finally, I like how Prosper visualizes your portfolio with bubbles based on risk:
Overall, Prosper’s account creation process and user experience are two of its strongest qualities. From dedicated apps for both borrowers and investors to clean data visualization, you can’t fault Prosper for usability.
Alternative & Comparison
|Fees||1%/year||Averages 2%/year; depends upon deal||1%/year|
Which States Are Open to Prosper Investors?
On the investing side, you should know that Prosper is only available to investors from the following states:
- District of Columbia
- New Hampshire
- New York
- Rhode Island
- South Carolina
- South Dakota
For the most up-to-date list and any income requirements that might apply in your state, check here on their compliance page.
What Are the Risks of Investing With Prosper?
Normally this is where I’d say that investors on P2P lending platforms generally face two risks:
- The risk that their borrower defaults, and
- The risk that the platform itself goes bust
After all, modern fintech companies tend to face their first true trial-by-fire around year three. That’s when the seed capital starts running out, early adopters trickle off, and in some cases, the SEC starts poking around.
In the case of Prosper, all three happened right on schedule in 2008, three years after the company’s founding in 2005. As if the unfolding Recession weren’t enough, Prosper was hit with a cease-and-desist order for selling unregistered securities and a related class action lawsuit from its borrowers.
Point being, Prosper has already survived a rather grisly trial-by-fire and outlasted countless competitors. As a result, there’s a rare level of stability to be found investing through Prosper.
Your chief risk, then, is borrower default. Although the average default rate sits at 3%, you’re better off doing your own due diligence on each prospectus.
Prosper also has an excellent blog on hedging your risk with consumer loans. In a word: Diversify — especially if you’re seeking double-digit returns from subprime borrowers.
But if you ask me, there’s a third hidden risk of investing with Prosper: The opportunity cost. 5.8% average net returns isn’t even high enough to hedge against inflation. Heck, even Series I Savings Bonds pay 9.62% through November 1st, 2022, and they’re Treasury-backed and risk-free. Some would also say that scooping up index funds during our current bear market would provide much higher returns, too.
Related >>> 6 Best Inflation Hedges To Protect Your Portfolio
But in the end, it comes down to your own risk tolerance and personal preferences. P2P loan investing is just another option, and Prosper is a well-built marketplace to get started.
The Takeaway: Prosper Is Tried, Tested and True — If You Can Forgive Tepid Returns
Prosper’s greatest strengths are its transparency, usability, and robustness. While you may have to accept that most loans will produce single digit returns, it’s still a safe and well-rounded place to invest in your first P2P loan.
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