Prosper Raises Interest Rates by 2.5 Percent

Personal Loans, Investment, LendingAs an investor in both Lending Club and Prosper loans, I keep an eye on the interest rates that both p2p lenders charge. Interest rates for p2p lending present a bit of catch-22 for the industry. High rates attract investors, but turn away borrowers. Low rates do the opposite. So I was a bit surprised when Prosper emailed me to say it had increased rates on some of its best borrowers by a whopping 2.5%.

Prosper uses a letter grade scale to assess the credit worthiness of its borrowers. The highest grade is AA, followed by A, B, C, D, E, and finally HR (“high risk”). Prosper left rates for AA borrowers alone, but raised the rate it charges A and B rated borrowers for 3-year loans by up to 2.5%. Here are the details of the changes:

Prosper Rating
Previous Rate
New Rate
New Estimated Return
A11.40%13.90%9.05%
B15.99%17.99%10.74%

Why did Prosper raise rates?

Prosper isn’t saying much about why it raised rates. In the email I received, all Prosper would say is that it “made these changes to ensure that our lower-risk loans remain competitive within the marketplace.” Competitive within the marketplace likely means competitive with Lending Club. Regardless, my guess is that Prosper has more A and B rated borrowers for 3-year loans than they do lenders. By increasing rates, they encourage more lenders to invest in these notes.

Comparing Prosper interest rates with Lending Club rates is like comparing Magic Johnson and Larry Bird. They were both great basketball players, to be sure, but their approach to the game was dramatically different. The same is true with how Prosper and Lending Club determine interest rates.

Both p2p lenders use a credit grading system, but the systems are different and difficult to compare. How they calculate default rates also varies. The terms of a loan further complicates the comparison. Prosper offers loan terms of one, three and five years; Lending Club offers just three and five-year loan terms.  All of that said, the rates between the two are generally consistent, with one exception. For its riskiest loans, Prosper rates go as high as 35.64%. Because Lending Club tends to be more picky when it comes to borrowers, its top rate is much lower – 26.15%.

But if you are looking for lower risk loans, Prosper’s increase of up to 2.5% certainly sweetens the pot. You can get more details about its rates directly at Prosper.com.

Personal loan, debt consolidation, refinancing

Published or Updated: August 18, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Glenn Mako says:

    The raising rates wasn’t what ticked me off. My major complaint is about the cancellation of Automatic Investment plans (AIP). Now with their quick invest I can not “set it and forget it.” AIP allowed me to pick the notes criteria (Say D-E rated), set the amount to invest per note and per month and then check in a month what happened. With my strategy, whenever $25-$30 was accumulated (due to daily payoffs from previously purchased notes) a bid was placed. Then at the end of the month I had $100-$120 invested with no effort and no wasted time as my funds were promply put into new notes. Once the month had ended, I had to restart the plan and the cycle would repeat. Now, with Quick Invest (QI) I have to manually check daily or weekly how much is out there and pick notes to buy, otherwise the funds would just idle in the account. I called Prosper and they didn’t give me a reason why the AIP was cancelled. Then I asked Lending Club why Prosper might have cancelled it and they told me it was a new SEC ruling that now forces people to take more responsibility about their investments. Who is it more responsible if it was me to begin with who set the debt tolerance?!
    Looks like SEC screwed us royally again!

  2. Ginger says:

    Thank you very much for this interesting insight! I will take this into consideration for future investments!

    Ginger

  3. SK says:

    As a prosper borrower with a 720+ credit rating, this definitely rubbed me the wrong way. The current interest rate on a CD is *under 2 percent*! Is the spread between a bank and a low-risk borrower really 7 percent? Isn’t someone making more money here than they really should?

    Here is the problem, from my POV: I have great credit lines from the good old days before the economy crashed. I can borrow 50K tomorrow at 11% interest without Prosper.

    As a responsible borrower, all I want is a reasonable rate that allows me to pay back some unfortunate debt. P2P *should* set up a system where I pay significantly less interest than I would normally but you make a good profit because we have (almost) cut out the middle man.

    If you can make 10-15% returns in the current market, that’s great for you, but it’s also a sign that something is very wrong with the system. Deals that are too good to be true fall apart.

    Prosper should be beating the market on both sides — for lenders and for borrowers. I should get a significant discount off the cost of a unsecured loan in the marketplace and you should be making 1-2% less than that.

    And until that is true, I have no intention of moving more debt to Prosper. If more and more high-risk borrowers are turning to Prosper, now that more traditional loans have gotten strict, mark your calendars for a string of defaults 36 months from now. We got into this problem because lenders were loose with their criteria.

    Prosper has plenty of space to make money while also providing some solutions on both sides. We already know what happens when banks get greedy and the economy tanks. In my opinion, Prosper should take a lesson from recent history and think about what they want to achieve.

  4. Kyle says:

    I wonder how much pressure there is on Prosper to keep pace with Lending Club on its loan originations. I’m sure Prosper wants its lenders to keep lending, but I hope that these higher rate loans aren’t being pushed just to keep lenders happy return wise. Any sort of relaxing of standards or indifference to actual risk could spell disaster.

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