June 28, 2018

Prosper Review: Is It Good?

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Prosper is a peer-to-peer lending platform for people who might not qualify for bank loans. But is it a legit choice for you? We cover the benefits and problems you might face.

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Prosper bring together low-risk borrowers with willing investors. None of the money you receive as a borrower comes directly from Prosper. Those funds come from investors, who lend you their money.

You may receive all of the funds from one investor, or it may be pooled funds from several investors.

It all sounds simple, but there are risks and rewards for this type of borrowing. Keep reading to learn if Prosper is right for you.

How Does It Work?

Borrowers come to Prosper to obtain a loan. Prosper handles the underwriting. Based on their findings, they match you, the borrower, with one or more investors.

The platform uses traditional credit scores as well as information about your income, assets, and liabilities to determine your "grade."

The grade is how investors decide if they want to take a risk on a specific borrower. Prosper grades borrowers on a scale of "AA" (the lowest risk) to "HR" (high risk).

FYI: Prosper has a total of 7 grades with coinciding interest rates charged. The higher the risk, the more interest you pay.

You can apply for loans from $2,000 and up to $40,000. Choose from 3- or 5-year terms.

You must make full payments each month (principal and interest). There's no penalty for prepaying your loan.

Qualifying for a Prosper Loan

Prosper has some tougher guidelines than other peer-to-peer lenders. These criteria include:

  • A debt to income ratio lower than 50%
  • No filed bankruptcies in the past 12 months
  • Income greater than $0
  • Fewer than 5 credit bureau inquiries in the past 6 months
  • A minimum of three open trades on the credit report.
  • Credit score of 640 or higher

These standards are tougher than many bank loans, which sometimes allow for alternative credit sources, such as rent or utility payments, to show that you are a creditworthy borrower.

What's a debt ratio? Your debt ratio is a comparison of your current debts to your gross income. The higher the debt ratio, the greater the risk you pose to a lender.

Your debt to income ratio cannot exceed 50% to borrow on Prosper.

What Are the Fees?

Like a bank, Prosper charges an origination fee based on your risk level. The higher your grade (AA is the best), the lower your origination fee. These fees range from 2.4% - 5% (in the case of higher risk borrowers.)

Prosper also charges other fees:

  • Late fee: You'll pay the greater of $15 or 5% of the amount for every late payment.

  • Unsuccessful payment fee: If Prosper is unable to withdraw your payment from your designated account, they will charge you $15.

Reasons We Like Prosper

  • Lower interest rates.
    If you have good credit and are looking to consolidate credit card debt, you may find lower interest rates with Prosper. This helps you get out of debt faster and for less money.

  • Willing lender even if traditional banks reject you.
    Since there are many investors looking for borrowers, you may get a loan from Prosper more quickly than you would from a bank. Even with the lowest rating of HR, you may find investors who can take the risk.

  • Borrow money for just three years.
    If you can afford the 3-year payment, you might be rewarded with a lower interest rate. The quicker investors get their money back, the less interest Prosper charges.

    FYI: Prosper requires you to set up automatic payments from a designated account. This reduces the risk of making late payments and paying more fees for the loan.

  • Your "listing" goes out to all potential investors at once.
    When you apply for a loan with Prosper, you get a "listing," which is a call for a loan. Potential investors can sort through the requests and decide which loan(s) are right for their money.

  • Pay off the loan at any time.
    Prosper does not charge a prepayment penalty. This means you can pay the loan off earlier than its maturity date. Depending on how early you pay it off, you may save money on interest.

  • Your loan goes into an "auction type" environment.
    Once Prosper quotes you a rate, you request the loan amount along with the interest rate. If there's a lot of competition at the time you apply, you may have investors bidding for your loan.

    In other words, they may quote you slightly lower interest rates than what you thought you might get. Of course, you also run the risk of no investors showing interest in your loan request.

  • You can explain why you need the funds.
    If at first glance, your request for a loan looks risky, you have the chance to explain yourself to potential investors.

TIP: Get pre-approved without damaging your credit.

If you are curious about Prosper's rates, enter your information for a pre-approval. It takes only minutes and you'll get an answer instantly.

If you don't take the loan, it just shows up as a "soft inquiry" on your credit report.

Reasons You May Want to Look Elsewhere

  • High interest rates for poor credit.
    The interest rates go up from the highest "AA" grade all the way to the "HR" grade. This might a loan unaffordable for you no matter how badly you need the money.

  • The longest term is 5 years.
    If you are borrowing the maximum $40,000 with a high interest rate, you could end up with a hefty payment. Prosper charges higher rates for longer terms. If you must borrow the money for 5 years, make sure it's a payment that you can afford.

  • Harder to qualify without straightforward income.
    Some lenders offer alternative documentation loans, especially for the self-employed. If you don't make a steady salary, finding a loan with Prosper could be difficult, forcing you to go elsewhere.

How It Compares

Prosper vs Lending Club: Lending Club is another peer-to-peer lending organization, gathering funds from individual investors.

Similar to Prosper, the platform also offers small business and auto loans. Lending Club's origination fees go up to 6%, versus Proper's 5%.

Prosper vs SoFi: SoFi funds their own loans and offers personal loans up to $100,000. They don't charge late payment fees and they allow you to change your payment date as needed.

SoFi puts a lot of emphasis on your monthly disposable income, rather than your credit score, for qualifying purposes.

Prosper vs Upstart: Upstart offers loans between $1,000 and $50,000. They also offer 3- and 5-year terms and don't charge a prepayment penalty.

Upstart uses your educational background and employment history to help determine your ability to secure a loan.

Investing in Prosper

Looking to invest rather than borrow? Prosper can help you with that, too.

As an investor, you receive information about the potential borrowers, including their "grade" and credit history.

FYI: Borrowers may also share additional information about the way they'll use the funds or why their credit is poor.

Investing at Prosper allows you to diversify your funds. They require a minimum $25 investment in each loan.

You can invest $25 on one loan or take a lump sum and distribute it across several. For example, if you have $2,000, you can invest in as many as 80 loans at one time.

This can help you reduce the risk of default that may occur if you invested the entire amount in one loan. You will pay a 1% annual fee on the outstanding principal balance of any loan you fund.

FYI: Prosper used to offer the option to sell a note on the secondary market via Folio Investing. This service was shut down in 2016. There was a fee for the service. You were also at the mercy of the market at the time you sell the note, but it did provide a way out.

Prosper is a good option for people with a balanced portfolio who want to diversify their investments in a socially impactful way. It's also a great way to invest when you only have a little money.

In the end, investing in Prosper may help others who may not secure the funds they need elsewhere. It puts a human component on lending while helping you increase your portfolio at the same time.

Bottom Line

Whether you're a low-risk borrower looking for a loan or a willing investor, the peer-to-peer lending platform Prosper can help.

As with any loan or investment, raad the fine print and compare options with other platforms to find the best deal for you.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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