Prosper Review (for Borrowers): Better Than a Traditional Loan?
If you carry any sort of debt month to month–like credit cards, student loans, or even an auto loan–you likely receive prescreened loan offers in the mail on a regular basis. And if your mailbox looks anything like mine, you’ve probably gotten a piece or two from a company named Prosper. Read on for our complete Prosper review (for borrowers).
- Avoid big bank fees
- High Yield Average Returns
- Checking rates doesn't affect credit score
As is the case with all P2P lending platforms, Prosper eliminates the middleman–the bank. This allows investors to get more return for their money. And it usually lets borrowers get a better interest rate.
Prosper, officially known as Prosper Funding LLC, is a wholly-owned subsidiary of Prosper Marketplace, Inc, and is headquartered in San Francisco, California.
Loans are actually originated through WebBank, an FDIC insured, Utah chartered industrial bank. Once the loan has been originated, WebBank sells and assigns the loan to Prosper.
What Makes Prosper Different?
If you need cash for a home improvement project, medical expenses, or to consolidate high-interest credit card debt, your first thought might be to consider a personal loan from the bank. Prosper is not that.
The biggest difference with a loan through Prosper is that, as I mentioned, the company is not a bank. It does no actual lending of its own. Instead, the platform allows various investor-lenders to pool their money together. They then loan funds of up to $40,000 to those who need them. Loans range from a minimum of $2,000 to a maximum of $40,000. So borrowers can fund a wide range of financial needs with a Prosper loan.
By taking the banks out of the process, Prosper is able to offer lower interest rates than many would be able to find elsewhere.
Prosper for Borrowers
Prosper offers what are commonly known as personal loans. That means they’re not secured, and borrowers can use the money for nearly any purposes. This can include any of the following:
- Debt Consolidation
- Home Improvement
- Short-term and Bridge Loans
- Auto and Vehicle Loans (for purchase or refinance)
- Small Business Loans
- Baby and Adoption Loans
- Engagement Ring Financing
- Special Occasion Loans
- “Green” Loans (financing for installing renewable energy systems)
- Military Loans
In short, you can use a Prosper personal loan for just about any purpose you can imagine.
There is one exception, however. You cannot use loan proceeds for post-secondary educational expenses. That’s because some of the rules in federal law aren’t compatible with P2P lending. More specifically, with education loans, the borrower must have at least 30 days to accept or reject a loan offer. Since Prosper doesn’t provide that 30-day window, the loans are ineligible for post-secondary education purposes.
The small business loan purpose is especially interesting. That’s because business owners can have a difficult time securing financing, particularly for a new or recently established venture. A Prosper loan of up to $40,000 could go a long way in a small business.
Prosper Healthcare Loans (PHL) are another specialized option. This is a specialized loan program offered to customers looking to finance a medical procedure. They are primarily for the financing of medical procedures that are not typically covered by health insurance.
Medical procedures available for financing under the PHL program include:
- Cosmetic dentistry
- Bariatric surgery
- Cosmetic and plastic surgery
- Fertility and reproductive procedures
You can borrow up to $40,000 on a five-year loan under this program. You can apply for the loan online or by phone, and get a preapproval in as little as two minutes. This is a soft inquiry, and will not affect your credit score.
In order to obtain a PHL loan, you must work with a doctor or healthcare provider who participates in the PHL program. You can determine this by emailing Prosper Healthcare Support from the website.
Prosper Personal Loan Terms
All Prosper loans have a term of either three or five years. And they all come with a fixed interest rate and a fixed monthly payment. The loans are also self-amortizing and will be completely repaid at the end of the term.
This can be a welcome relief for people who are looking to get out of credit card debt. Since credit cards are revolving debt, a single debt obligation can continue for many years. A Prosper fixed term loan can give you the ability to finally pay off those credit cards. In fact, debt consolidation is one of the main purposes for Prosper loans.
As noted earlier, Prosper loans have a minimum amount of $2,000, up to a maximum of $40,000. You can make loan payments by check, by phone, online, or by AutoPay. You can choose an automatic payment when you apply for the loan.
Prosper targets prime and “super-prime” consumers, which means that it is not a subprime loan source. According to published statistics, the average Prosper borrower has a credit score of 703 and an average annual income of $80,000.
Prosper Minimum Criteria
You must be at least 18 years old to apply for a loan with Prosper. When you apply, Prosper will obtain a credit report from TransUnion, one of the three major credit repositories.
The minimum requirements are:
- A minimum FICO score of 640, based on a TransUnion FICO 08 score
- A Debt-to-Income (DTI) ratio below 50%
- Stated income greater than $0 (you must have an income)
- No bankruptcies filed within the previous 12 months
- Fewer than seven credit bureau inquiries within the last six months
- A minimum of three open trades reported on your credit report
If you have borrowed through Prosper in the past, there are two additional requirements:
- You must not have had any previous Prosper loans charged off, and
- You must not have been declined for a previous application with Prosper within the last four months, due to delinquency or return payments on a previous Prosper loan
The Loan Application Process
The entire loan application process takes place online. You complete an online application, and will be asked to upload supporting documentation (bank statements, recent paystubs, W2’s, etc.). Prosper may contact your bank and/or your employer to get more information.
Prosper will complete the underwriting and verification process before actually originating your loan. They generally expect to complete that process in seven business days or less.
Your loan will be listed on the platform in order to obtain funding from investors (investors have up to 14 days to commit funds to your loan). It can be listed during the underwriting and verification phase. If your listing ends without being funded, Prosper will not make the loan. However, you can create a new listing by clicking Create New Loan Listing.
Prosper uses this proprietary system for to evaluate applicants consistently. Investors also use it to decide whether to commit to invest in a given loan.
Prosper assigns you a rating. It determines the interest rate that you will pay for your loan. Ratings range from AA, for the highest grade, then A, B, C, D, E, and HR for the lowest.
Prosper Loan Pricing
You aren’t required to pay any fees when you apply for a Prosper loan. Prosper loans have just two charges: your loan interest rate, and an origination fee.
Your interest rate depends on your Prosper Rating. Depending upon what letter grade you are given, your interest rate can fall between a minimum and maximum range, that could vary by as much as 17 percentage points within a single letter grade.
Interest rates are between a minimum of 6.95% for the best AA rated borrowers to a maximum of 35.99% for the lowest rated HR borrower grades.
Prosper charges a one-time, nonrefundable fee to process your loan. It ranges between 2.4% and 5% of your loan amount, depending upon your Prosper Rating. Prosper deducts the origination fee from the new loan amount. So they don’t require you to pay it out of pocket. For example, if you take a $10,000 loan and the origination fee is 5%, your net loan proceeds will be $9,500.
Prosper does not charge a prepayment penalty on any of their loans.
Prosper charges a fee of the lesser of 5% of your payment amount or $5 if you make your monthly payment by check. They prefer that you pay by AutoPay (automatic debit), which does not require a fee of any type.
Late Payment Fee
Prosper considers your payment late if they do not receive it on or before the calendar date that it is due. If the payment has not been received within 15 calendar days of the due date, they charge a late fee that is the greater of $15 or 5% of the unpaid monthly payment amount.
Prosper Loans: How Much Does It Cost?
With a Prosper loan, you’ll only have two expenses: your APR over the life of the loan and an origination fee.
Prosper bases the APR on the factors mentioned above–your credit report and Prosper Rating. But it also uses the response of investors funding your loan. If you seem like a solid investment, they’ll bid your APR down until the loan is “won.” (Think of it as eBay for loans.)
Prosper loans are given on either a three-year or five-year basis, with varying interest rates depending on the length you choose. If you end up with more flexibility in your budget than planned and don’t want to wait out the full term, you can pay off the debt early and save yourself even more interest. There are no prepayment penalties with Prosper loans.
As for the origination fee, Prosper will take it out of your loan at the very beginning. After the process is complete and Prosper has verified your identity, the company will deposit the funded loan, minus the origination fee, right into your bank account.
The cost of this fee is a percentage of the total loan awarded, based on the rating Prosper assigned you at the beginning of the process. Origination fees can be anywhere between 2.4% and 5%
Why Not Borrow from a Bank?
There are a number of reasons that someone would choose Prosper over borrowing from a bank, whether online or brick and mortar.
First, depending on your creditworthiness (and ability to write a compelling loan profile), you may be able to snag a significantly lower APR than you would going with a big bank. Prosper loan interest rates start at 5.99 percent for borrowers with great credit. Unless you have exceptional credit, this is likely a lower rate than you could find elsewhere.
Second, Prosper is a great place for those with less-than-perfect credit to not only qualify for loans, but get fair rates. This is particularly true when you consider than many people are getting these types of loans in order to consolidate credit card debt (with 25%+ APRs!). Getting approved for a personal loan is tough when you have a high debt-to-credit ratio. But you have a better chance of getting a moderate-range APR loan from Prosper.
Prosper allows these types of people the opportunity to personally appeal to individual investors, increasing their chances of success. A traditional bank often approves or denies based on credit formulas alone. But Prosper lets you explain yourself and your situation. This can increase your odds of approval.
Prosper Loans Pros and Cons
As with any financial product, there are both advantages and disadvantages to taking out a loan through Prosper. Let’s take a look at each.
- As mentioned, the bidding platform allows for borrowers to make a personal appeal to investors, increasing their chances of approval. But also because of the bidding process, borrowers can often get lower rates with Prosper loans.
- Loans can range from $2,000 to $40,000. This covers a wide range of needs at an interest rate that’s often better than a credit card advance or bank personal loan.
- Checking rates on a Prosper loan through their website doesn’t affect your credit score. This means that you can find out whether or not you would be approved without dinging your score. (If you do move forward with the loan, a hard inquiry will appear on your credit after it’s all final.)
- Loan terms are either three or five years long. There are no penalties for paying off your loan early.
- If your credit is less-than-stellar, there’s still a chance that you could be offered a high interest rate. However, if you are absolutely unable to get a much-needed loan elsewhere, Prosper still offers you an option. Also, for many borrowers, Prosper’s interest rate will still be lower than that of a credit card.
- Your origination fee is based on the proprietary Prosper Rating, which you can’t control (or really even predict!).
- Loan amounts are limited to $40,000. If you’re planning an extensive home remodel or have high medical bills, this may not be enough for you.
- Terms are either three or five years; if you’ve been paying the minimum on those credit cards until this point, your monthly payment is likely to jump. Be sure you’re able to budget accordingly.
Prosper for Investors
For all the people who borrow money on Prosper, there are investors who fund those loans. That’s P2P in a nutshell–one person comes to borrow, the other comes to invest. Investing in a P2P platform like Prosper can produce much higher rates of return on fixed investments than what you can get at a bank. In fact, Prosper advertises that the average rate of return by investors on the platform is 7.41% per year.
How Investing through Prosper Works
Investing in P2P platforms is different than other types of investing, such as mutual funds or investment brokerages. Prosper also has some investment processes that are unique to its platform. Here’s a quick rundown of how the platform works for investors:
You can open either a General Investment Account or an IRA. Available IRAs include traditional, Roth, SIMPLE, SEP and rollover IRAs (IRA accounts are held with Millennium Trust Company). At this time, Prosper has made only individual accounts available. You cannot hold an account jointly with someone else.
Minimum Investment Required
For regular investment accounts, the minimum is $25. For IRA accounts, the minimum is $5,000.
Investors must be US residents and at least 18 years of age. You must also have a valid Social Security Number, and provide a state driver’s license or state identification card number.
You must also meet suitability requirements established by your state of residence. Since those requirements will be determined by your individual state, it’s impossible to list those for each state here. But for example, if you live in California, the requirements are:
- The total amount of notes purchased by the investor must not exceed 10% of the investor’s net worth, and
- For investors who purchase more than $2,500 in notes, the investor must either have had a minimum gross income of $85,000 during the last tax year and will earn at least as much during the current tax year, OR the investor must have a minimum net worth of $200,000 individually, or $300,000 jointly with the investor’s spouse (not including the value of homes and personal possessions).
Prosper is available in 31 states, including Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, North Dakota, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming.
Investing in Notes
Similar to other P2P platforms, when you invest with Prosper, you don’t actually invest in whole loans. Instead, you invest in small slivers of those loans, referred to as “notes.” The notes are in denominations of $25. This means that you can spread an investment of $1,000 across as many as 40 different loans.
You purchase notes by searching through loan listings awaiting funding. You can do this either manually, or through one of the automatic services outlined below.
When you open a Prosper investment account, you will need to search for suitable loan notes to invest in. You can do this manually by browsing through the list of available loans. But you can also use the Auto Invest feature to do this automatically. You can set your target allocation and other investment criteria, and the tool places orders for notes that meet that criteria.
There are no additional fees in order to use Auto Invest, and there is no account minimum requirement.
This is another investment tool that you can use to place orders for notes. You set search criteria for the types of notes that you want to invest in and then submit the order. The tool will compile a basket of notes that meet your criteria. It will then invest the funds that you have committed to your order.
Prosper claims an average return of 7.41% per year. However, how much you will earn will largely depend upon the Prosper Rating loan grades that you invest in. For example, AA rated loans are considered to be the safest, but they have the lowest average annual return, at just 4.12%.
Loans rated HR have a much higher average return, at 11.73%. But these loans come with a much higher default rate, which could become even higher during a recession.
Generally speaking, the best way to invest in P2P loans to spread your investments across several, or even all, of the different grade levels. This will provide you with the diversification that will offer you a mix of high returns on lower grade loans, but the greater safety of principal on the higher grade loans.
Prosper’s average investment returns by grade is as follows:
Prosper Fees for Investors
Prosper charges two fees: a servicing fee and a collections fee. The servicing fee is 1% of the outstanding balance of a loan. That means that if the loan pays 8%, your net return will be 7%. This fee is typical for P2P platforms.
Prosper only charges the collections fee when a loan goes into collection. Prosper may require investors to pay collection agency fees of up to 17% of the recovered funds from the past due amount. If an account is more than 120 days past due, investors may pay agency fees up to 35% of recovered funds.
Prosper Investment Risks
Prosper can be a good investing option. But it is a riskier option than bank investments. Here’s what you should know:
Investments Fully Amortize
As you receive monthly payments on your loan investments, you’re also receiving principal. That means each loan will be fully paid after the three or five year term ends. If you have been using the payments received on your investments for income, your account can conceivably be drained down to zero. This is an inherent risk with all P2P lending platforms.
In order to continue investing in P2P loans, you must reinvest the payments that you receive on a continuous basis. That will make sure that you’re constantly replenishing the loans that are being repaid.
Loan default rates for P2P loans are high, particularly on lower-grade loans. When a loan defaults, you will lose the your remaining investment in that loan. And if Prosper recovers any of that money as a result of collection efforts, part of that return will be used to pay collection fees. These can run between 17% and 35% of the collected balance. It’s also worth remembering that P2P loans are unsecured, so lenders cannot seize any assets to satisfy the loan.
Lack of Liquidity
When you invest in P2P loan notes, you’re expected to hold them until they mature. That means that if you want to liquidate your investments, you will not be able to sell your notes to other investors. The only way to fully recover your investment is to hold on to the investments until they are all paid off within three or five years.
Should You Invest with Prosper?
P2P investment platforms like Prosper offer much higher rates of return than what you can get on traditional fixed income investments at your local bank. However, those investments are not as liquid as bank investments, nor do they have FDIC insurance.
For that reason, Prosper is best used as a diversification for the fixed income portion of your investment portfolio. You can use these investments to increase the overall rate of return on your fixed rate investments. By maintaining a relatively small slice of your fixed income portfolio in Prosper loans, you can increase your overall rate of return without substantially increasing the risk to your total portfolio.
P2P investing is generally best done with money that you can afford to lose. This is why states that allow P2P investing have suitability requirements. Those requirements are meant to ensure that the people who invest in P2P loans have the wherewithal to absorb losses to their investments. They are not meant for small investors.
If you’d like more information on Prosper, either for borrowing or for investing, or if you’d like to open up a Prosper account, visit the Prosper website via the links below and see all that they have to offer.