June 28, 2018

Prosper Review: Is It Good?

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If you can't find the money you need at a traditional bank, you may turn to peer-to-peer lending. This social aspect of lending money has helped thousands of borrowers get the funds they need. Is this type of borrowing right for you?

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Prosper was one of the first social lending marketplaces to enter the lending industry. After some ups and downs, they've mastered the process and now successfully help investors and borrowers come together.

Prosper helps bring together low-risk borrowers with willing investors. None of the money you receive comes directly from Prosper. Instead, the money comes directly from investors lending 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 this method is right for you.

How Does It Work?

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

Prosper 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). They have a total of 8 grades with coinciding interest rates charged. The higher the risk, the more interest you pay.

You can apply for loans of up to $35,000. But you have to borrow a minimum of $2,000 at one time. You can choose terms of 3 or 5 years. You are able to prepay the loans at any time without a penalty and you must make full payments each month (principal and interest).

Qualifying for a Prosper Loan

Prosper has some tougher guidelines than other peer-to-peer lenders. For starters, you'll need at least a 2-year credit history. There's no exception to this rule. This is unlike bank loans, which sometimes allow you to use alternative credit sources, such as rent or utility payments to show that you are a creditworthy borrower.

Speaking of credit, you'll need at least a 640 credit score for Prosper to match you with an investor. Prosper doesn't specify the amount of income you must make or what debt-to-income ratio you may have, but they generally don't approve borrowers with more than a 50% debt ratio.

What's a debt ratio? Your debt ratio is a comparison of your current debts to your gross monthly income. The higher the debt ratio, the higher risk you pose to a lender. Prosper tends to cap the DTI at 50%, but individual investors may look for borrowers with an even lower ratio to lower the risk of default.


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. The fees start at 1% and go up to 5% with higher risk borrowers.

Prosper also charges other fees:

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

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

Reasons We Like Prosper

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

  • You may find a willing lender even if traditional banks turn you down. Because of the many investors looking for borrowers, you may be matched with an investor quicker than a bank. Even if you have the lowest rating of HR, there may be willing investors out there who can take the risk.

  • You can borrow money for just three years. If you can afford the 3-year payment, it pays to take the shorter term because you might be rewarded with a lower interest rate. The quicker investors get their money back, the less interest Prosper charges.

  • The payments are automatically deducted from your designated account. Prosper requires you to set up automatic payments. 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 then sort through the requests for loans and decide which loan(s) are right for their money.

  • You can 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, this could mean that you save a little money on interest.

  • You can get pre-approved without damaging your credit. If you are just curious about the rates Prosper would charge you if you took out a loan, you can enter your information for a pre-approval. It takes a matter of minutes and you'll have your answer instantly. If you don't take the loan, it just shows up as a "soft inquiry"on your credit report.

  • Your loan goes into an "auction type" environment. Once Prosper quotes you a rate, you request the loan amount you need 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. When you plead your case, you can explain any bad past credit or explain why you need the funds. It puts a human spin on an almost automated process.

Reasons You May Want to Look Elsewhere

  • Unless you have great credit, you could face rather high interest rates. The interest rates continually go up from the highest "AA" grade all the way to the "HR" grade. The rates may make the loan unaffordable for you no matter how bad you need the money. Don't get desperate and take a loan that you can't afford.

  • The longest term is 5 years. If you are borrowing the maximum $35,000 and have 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.

  • If you don't have straightforward income, it can be hard to get qualified. While this is the case with many lenders, some do 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. They have many similarities to Prosper, but they also offer small business and auto loans. Lending Club's fees do 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

Once you are on your feet and looking for a way to invest rather than borrow, Prosper can help you in that aspect as well. As an investor, you receive information about the potential borrowers, including their "grade," credit history, and any information the borrower wants to share regarding the way they will use the funds or an explanation for a poor credit history.

Investing at Prosper allows you to diversify your funds. All they require is a minimum $25 investment in each loan. You can invest just $25 on one loan or you can take a lump sum and distribute it across several loans. 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 any loans you fund.

If you decide investing at Prosper isn't right for you, they give you the option to sell the note on the secondary market via Folio Investing. You'll pay a fee for the service and are at the mercy of the market at the time you sell the note, but it does provide a way out.

Prosper can be a good way for beginners who don't understand the stock market or ETFs to start investing. It's also a great way to invest even when you only have a little money, because all you need is $25 to get started.

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 borrow or invest with Prosper, it's one of the leading social media lending platforms today. As with any loan or investment, do your research and make sure the terms meet your needs. Read the fine print and compare your options with other platforms to make sure you take the deal that provides you with the best outcome.

Disclaimer: Opinions expressed here are those of the author's alone. Please support CreditDonkey on our mission to help you make savvy financial 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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