The borrower asks for a loan amount, and investors can invest in a borrower and offer to pay part of the requested loan. Several investors typically make up one loan. When the borrower makes payments, investors earn returns on that loan.
Because marketplace lending is facilitated by an online platform, lenders have lower overhead than traditional companies, and can, therefore, provide less expensive services. Ideally, this means lower rates for borrowers and greater returns for lenders.
Prosper was the very first marketplace lender in the United States. Founded in 2006, it had a few shaky years before working out the kinks. Originally, the company had low underwriting standards, and many investors saw low or even negative returns.
Since 2009, Prosper has improved its underwriting standards — now borrowers need a credit score of 640 to apply — and investor returns have been more solid. According to investor reviews, Prosper loans now have returns ranging between 5.4% and 10.78%.
Let’s take a closer look at the company to see if it’s right for you.
The process of investing in Prosper
You can get started investing in Prosper’s consumer loans by visiting the homepage and creating an online account. There is no fee to sign up. After an authorization process, you can link an established bank to your Prosper account so that you can transfer funds.
Once the funds have been transferred, you are ready to place your bids on borrower loan requests, also called “loan listings.” You can do this manually or through the company’s auto invest tool, which will automatically invest your available cash based on criteria that you specify.
A bid on a loan listing is your commitment to purchase a note in the principal amount of your bid. As an investor, you do not make loans directly to borrowers. Instead, Prosper issues you a “borrower payment dependent note” in the amount of your bid, and pays you as it receives payments on the corresponding borrower loan.
Your monthly returns are deposited directly into your Prosper account.
Fees and requirements
To get started investing on Prosper, you need a minimum of $25. However, Sarah Cain, vice president of communications, says that like any investment, it’s important to be properly diversified.
“For example, investors may find it desirable to purchase 100 $25 notes to help reduce their exposure to any single default.” You also need to be 18 and have a social security card and a bank account to invest in Prosper.
There are no credit requirements to become an investor.
- Initial investment = $25
- Recommended initial investment = $2,500 spread across 100 notes ( or portions of different loans)
- Loan servicing fee = 1.0% annually of the outstanding principal balance of the borrower loan
There are no credit requirements to start investing in the Prosper platform. However, Prosper is not available in every state, and some states have restrictions.
In California, for example, you are not able to invest more than $2,500 in Prosper unless you have an annual gross income of at least $85,000 during the last tax year or a net worth of at least $200,000 (or $300,000 together with your spouse).
Other states, including Alaska, Idaho, and Washington, require an annual gross income of at least $70,000 and a net worth of at least $70,000, or a net worth of $250,000 or more.
These are restrictions required by the state, not Prosper, but they are important to know and take into consideration.
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Prosper for investors – Benefits of investing through Prosper
Cain lists several benefits to investing in Prosper versus more traditional vehicles. “In addition to solid returns, marketplace lending makes it easy to diversify across many loans to help reduce risk. Investing is also relatively simple. You can invest manually in loans that match the desired risk tolerance, or through an automated tool, which runs a search for specific types of loans.”
- Easy to diversify: Since the minimum investment amount is $25, it’s easy to put that relatively small amount into several different loans.
- Simple to invest: Can be done manually online, or via an automated tool.
- Detailed borrower profiles: You get to see credit scores, length of credit history, and more before you select a borrower’s loan.
Prosper for investors – Potential downsides
Like any investment, you need to be aware of the risks associated with making investing decisions. Borrowers can default on their loans, in spite of good credit scores and history. You’re basically taking a chance on individual borrowers. Also, Prosper isn’t available in every state, and some states have severe restrictions.
- Risk of borrowers defaulting
- Not available in every state
- Strict requirements in some states
The application process
Visit the website and then click on “Invest” in the top right-hand corner.
Click on “Open Your Account.”
On this page, you choose the type of account you want. We chose “General Investment Account” for this example.
Create a login and password for your investment account.
Next, you are asked for your social security number and date of birth.
Review your information, agree to the terms by checking the box, then click on “Create My Account.”
Add funds ($25 minimum to start) and you can make your first investment.
After clicking “Add Funds,” you have to add your bank account. It may take three to five days before funds can be put into your Prosper account.
Once your account is confirmed, you can transfer money from your bank account to your Prosper account and get started investing.
Do your research!
If you’re new to the world of investing and aren’t yet sure if Prosper or marketplace lending is where you want to start, take a look at SuperMoney’s Investment comparison page first. Learn about several different types of investment vehicles and read about a variety of companies, along with reviews.