Prosper was the first peer-to-peer lending company that began operations in 2006. Lending Club, initially launched by Facebook, was launched in 2007. Because of this, they entered into an unknown territory and hit some bumps initially, but they have recovered and are now a major P2P force.
In an article written by Larry Ludwig on investorjunkie.com he reported, “Prosper.com was in fact the first to peer to peer lending company in the United States, though they got a bad reputation from investors. When they first started in 2006, their risk model was awful. Prosper allowed anyone with a pulse to get a loan. Mainly because of this and partly due to the economic crisis, most investors got negative returns. In July 2009, Prosper understood these problems and completely changed their underwriting process. Do keep this in mind when reading older reviews of Prosper. I’m only reviewing their service from this point forward. Three years later these newer loans are starting to mature and have gone through a full pay down. The results are looking pretty good. From the data, the returns with Prosper from this period forward are in line with the returns seen with Lending Club. This puts them in a much similar risk category to Lending Club notes. All of this makes me much more confident in trying out Prosper this time around.”
Ludwig continues, “Peer-to-peer loans (Prosper included) are usually at much lower rates than credit cards. Prosper loans are unsecured notes like credit cards and not tied to any asset. If you are looking for a loan, but a subprime borrower, you will no longer qualify with Prosper. You need a FICO score of 640 or higher. Loans can be used for any purpose, but the purpose must be stated in the loan application. Loan terms of 1, 3 or 5 years are an option, and people can borrow from $2,000 to $25,000. When applying for a loan, borrowers get a rating from AA, A – E, to HR (otherwise known a high risk). The higher the letter, the higher the risk and therefore a higher interest rate you must pay. Rates currently range from 6.59% – 35.80%. If you’ve been a previous Prosper borrower, it’s possible your new loan will be at a lower APR.”
How good is Prosper as a peer to peer lending service?
On wealthpilgrim.com Neal Frankle chimes in, “Prosper has also taken steps to help investors reduce losses and they’ve taken great strides to improve investors’ performance. When they first opened their doors, they didn’t scrutinize borrowers as well as they should have. But Prosper regrouped and really tightened up their underwriting since 2009. Defaults are still there but nothing like they used to be. In fact, every single loan rating class was profitable even after the defaults. That is fantastic. It looks Prosper is doing a great job at underwriting loans. That means they are finding borrowers that repay their loans for the most part. I loved the fact that the Prosper site had all the data – good or bad – and it was easy to find. I like that they clearly point out the risks with respect to defaults. Improvement – In 2008 the SEC shut down all the peer to peer lending companies. They decided that these loans were securities and as such the companies selling the securities had to register as such. Only two such companies did so – Lending Club and Prosper.
Prosper came out of the process very strong. They vastly enhanced their ability to screen out dead-beat borrowers (but they couldn’t eliminate that of course.) You can see that before the SEC took action, the only people making money were those making the highest quality loans. But since they emerged and registered with the SEC, almost all the loan categories are performing. That means Prosper is experiencing far fewer defaults. In December of 2012 investors brought them $10 million in new assets. That shows solid growth. Prosper has really done an amazing job of tightening up their underwriting. Their loan losses seem acceptable now. While they used to make loans to people with lower credit scores, they no longer extend any loans to those without at least a 640 credit score. This alone has really helped them.”
How Prosper works and what people like about it.
Frankle puts it well when he says: “My favorite part of Prosper is the way interest rates are set and agreed upon. Instead of saying ‘you have this credit score, you get this interest, Prosper works on a bidding system.” Borrowers list the amount of interest they’re willing to pay while investors list the bottom line interest they will accept. The deal is made when the borrower and the lender agree on a rate. This is one of the reasons I say Prosper offers real ‘social lending’. This unique lending system ensures that all parties are happy. By cutting out the corporate banks, or the middleman, investors can get a greater return and borrowers can get better rates at the same time.”
Ultimately, the true radar is with the Better Business Bureau. BBB has rated Prosper as an A+ and lists the factors that have bumped the company into a solid reputation:
– Length of time business has been operating.
– Complaint volume filed with BBB for business of this size.
– Response to 79 complaint(s) filed against business.
– Resolution of complaint(s) filed against business.
– BBB has sufficient background information on them.
Prosper is on a roll!
For those not able to get loans through traditional means, Prosper is the ticket.