Now entering its 10th year, Prosper looks like it is here to stay. America’s most recognizable name in peer to peer lending (with Lending Club in close second), Prosper offers financial methods to borrowers and investors alike. With a lot of guides geared towards borrowers, it’s time to give a little more focus to the investor side of things. For those who want the TL;DR, Prosper remains an excellent peer to peer lending investment, offering 5-10% returns, even after defaults and fees are considered. Here’s how they do it.
Prosper Investment Basics
For those unfamiliar with the P2P model, it is basically this: a pool of investor/lenders use Propser’s lending platform to look at a bunch of loan applications. These applications are submitted by Prosper’s registered users, all of whom have a credit score of at least 640, and all of whom are applying for sums of $2,000 to $35,000 over 36 and 60 month terms. These applicants are graded according to their creditworthiness, and the cost of their loans (in terms of APR) is clearly listed. Lender/investors inspect these criteria for personal loans and decide which loans to fund, in increments of $25. By lending to many borrowers in such small chunks, Prosper lenders are well diversified within the platform.
What are the Risks of Investing With Prosper?
As with all investments, there are measured risks that Prosper investors take on. However, because Prosper has improved their borrower approval process by leaps and bounds over the years, there is a lot lower risk of borrower default for investors risking their money. This translates into higher returns, which often exceed the 5-10% return average advertised by the company.
But defaults still happen. Prosper borrowers have frequently been denied a loan in the traditional lending sphere. These users sometimes default. Those defaults most often occur at the lowest rating levels (HR, or “High Risk”, are the most likely to default). Another good way to avoid default in social lending is one that Prosper makes available. You can communicate with your borrowers through the Prosper platform, making things run even more smoothly, especially if you’re a good communicator and you pick your borrowers well.
Though not a risk, Prosper is not available in every state. They have a history of excellence in the states which have approved them, but some would-be investors are out of luck if they don’t live in the right part of the country. Still, Prosper is a lending company with momentum, averaging 350% company growth in 2015. If you wish to invest with Prosper but it is not currently available where you live, continue to review its use and it may be available soon.
In conclusion, Prosper is a simple idea that provides real returns for a diverse class of investors. Diversified from within, it can be a great addition to any portfolio, and in many years has outperformed more traditional investment types, like index funds. You can read questions and comments from real investment users all around the web, but the general consensus seems to be that Prosper is great for investors who are willing to spend a little time with Prosper’s easy interface.