Prosper.com is one of those peer to peer lenders that connects people that are looking for money with people that have money to lend. For years, Prosper functioned as an online auction website. It was like an eBay for loans. The company is based in California and has grown in size over the past few years. Prosper is a lender that I am very familiar with as I have personally used the company’s services and have years of experience with the company. So, is Prosper the right company for you?
I first started using Prosper back in 2006 when the company was first launching its services. I had heard about Prosper via its online advertisements so I decided to give the company a try. Prosper was marketed as company where people could lend out money to borrowers looking to pay off credit cards, start a business, buy a home, or help with the bills. My experiment with Prosper was to lend out a small amount of money and see what type of returns that I could earn on my money.
Prosper lets you lend out money to one single person or a number of different people. You get to see the credit ranking of each borrower, the purpose for the loan, and the dollar amount sought. This helps you to determine whether or not you want to fund the loan. I decided to lend out $1,000 and break the loans up among a number of different people.
Here is the loan breakdown that I chose:
- $500 to individuals with good credit
- $250 to individuals with average credit
- $250 to individuals with below average credit
I chose this breakdown because I was concerned about the level of default of borrowers. I did not select any borrowers that were considered extremely high risk. Even the below average credit individuals were slightly below average credit. Prosper used a rating system that ran from AA, A, B, C, D, E, and HR AA credit ratings are the best and HR credit ratings are the worst. Making a loan to a person with an E or HR credit rating is like throwing your money away. The loans that I selected to bid on were to borrowers with credit ratings from AA credit to C credit.
I then proceeded to bid for the loans by entering the interest rate that I was prepared to bid. The bidding process involves entering an interest rate lower than other borrowers to win the bid. Borrowers always select the lenders with the lowest interest rates.
My Prosper Experience
The good thing about Prosper is that you are given the option of helping to partially fund a loan so you are not on the hook for the full amount. I chose to fund 12 different loans with no single loan receiving more than $100. My experience with Prosper was great as all of my loans were repaid on time with no problem. The return on my $1,000 investment was over 14%. Keep in mind that interest rates were much higher back in 2006. There was a small 1% servicing fee that Prosper charged for my loan.
I wanted to continue to use Prosper but the company lost the ability to make loans in every state but California. Prosper has since regained approval from the SEC to make loans in 28 states. The company is currently applying for approval to service loans in my home state.
Prosper’s New Business Model
Prosper operates a little bit differently today. Over the past few months, Prosper has adopted a new business model that uses pre-set interest rates. Instead of allowing lenders to set interest rates, Prosper now gives the lender pre-selected rates based on the borrower’s credit history and the riskiness of the loan. Prosper still uses letters to evaluate borrowers credit but now the company uses credit scores as well.
Prosper now uses Experian credit scores and requires borrowers to have higher credit scores. Prosper was having a problem with rising defaults from borrowers. In order to address this problem, Prosper is requiring new borrowers to have a score of 640 or above. Existing Prosper customers only need a credit score of 600.
I am a fan of the services that Prosper offers. I have used the company’s services and have had good results. My experience however is not the same as everyone’s. If you make a bunch of risky loans and chase the highest interest rates possible then you can be burned. I have found that if you diversify your risk, and make smart loans then you can make some cash on Prosper.
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