Prosper (Prosper Loans Marketplace, Inc. is their formal moniker) is similar to Lending Club (see my review of Lending Club). Prosper.com was in fact the first to peer-to-peer (P2P) lending company in the United States, although they got an initially bad reputation from investors.
When they first started in 2006, their risk model was awful. Prosper allowed anyone with a pulse to get a loan. Mainly because of this and partly due to the economic crisis, most investors got negative returns.
This left Prosper with a proverbial black eye and cast some doubts on the whole P2P lending space. If you want some insight into how bad the old underwriting model was, I suggest reading a post on Bad Money Advice.
These were the reasons I stayed away from using their service and instead chose to invest with Lending Club.
After I had under my belt more than five years with Lending Club and still getting decent returns, I thought about revisiting Prosper in 2012. At that time I opened an account with Prosper as an investor.
How Has Prosper Changed?
In July 2009, Prosper understood the problems with their service and completely changed their underwriting process. Do keep this in mind when reading older reviews of Prosper. I’m reviewing their service only from that point forward.
The results are looking pretty good. From the data, the returns with Prosper from this period forward are in line with the returns seen with Lending Club. This puts them in a much similar risk category to Lending Club’s notes. All of this makes me much more confident in trying out Prosper this time around.
Prosper loans are just like traditional bank loans. It’s no mystery how much rates on credit cards have increased since 2009. Debtors are looking for ways to get a better rate than their local bank. Perhaps because many blame the economic crisis on the banks, they are also looking for non-bank alternatives for loans. Peer-to-peer loans (Prosper included) are usually at much lower rates than credit cards.
Prosper loans are unsecured notes like credit cards and not tied to any asset. If you are looking for a loan, but are a subprime borrower, you will no longer qualify with Prosper. You need a FICO score of 640 or higher. Loans can be used for any purpose, but the purpose must be stated in the loan application.
Loan terms of three or five years are an option, and people can borrow from $2,000 to $35,000. When applying for a loan, borrowers get a rating of AA, A to E, or HR (otherwise known as “high risk”). The higher the letter, the higher the risk and therefore a higher interest rate you must pay. Rates currently range from 5.99 percent to 36 percent. If you’ve been a previous Prosper borrower, it’s possible your new loan will be at a lower APR.
You’ll see other Prosper reviews that focus on borrowing money from the peer-to-peer lender. Since this site is about investing, this review of Prosper will only give tips and recommendations on how to… ahem… “prosper.”
I also won’t go into details about diversification and the possible investing risks. These items I discussed in my Lending Club review but also apply to Prosper.
- Account Types — Taxable accounts and IRA accounts. IRA accounts can be new or rolled over from an existing IRA or 401(k). Prosper supports traditional and Roth IRA accounts through a third-party custodian.
- $25 Minimum — To start investing you need $25, though most recommend at least $2,500 to be properly diversified.
- $25 Minimum per Note — Each note must be at least $25 in size but unlike Lending Club can be any dollar amount after the minimum.
- Search Filter — Find only the notes you want to invest in, save the options and use for automated investing.
- Automated Investing — From a saved search automatically invest in Prosper notes.
- Secondary Market — If you need to unwind your investments it is possible via the third-party service from Folio Investing. It is possible to purchase notes as well.
Opening An Account
Prosper supports either traditional taxable accounts or IRA retirement accounts. If you have an existing 401(k) or IRA it is possible to transfer it to Prosper. As with my Lending Club investing, I opened my account by depositing $1,000. The signup process was quick and easy. From there I started doing my investment research.
I picked out some notes I liked and within minutes made my first investment.
I noticed from their website that the pool of available loans is smaller, and the notes are slightly risker with a higher APR. From my research, it appears the rate of loss is slightly higher than Lending Club.
This doesn’t mean Prosper is a bad investment. It means you must be more selective in the loans you choose. I suspect their credit review process is slightly different and will comment on this in later posts. I also see possible investment strategies in which Prosper could yield better returns.
Which States Are Open to Prosper Investors?
Investors in the District of Columbia and all states except Iowa, Maine, North Dakota, Pennsylvania and Vermont are eligible to use Prosper.
Prosper Investment Strategy
I used the website LendStats.com to formulate my quantitative investing strategy. Both peer-to-peer lending sites allow access to historical lending data. It appears Prosper.com releases much more loan history data.
From my findings: Results are similar to my Lending Club data analysis but with some differences. Of course, past performance does not guarantee future returns, but it’s a starting point. My risk model filtering is based upon:
- Loan Purpose — I stick to the categories Debt Consolidation, Home Improvement, Personal, Auto and Other. Some of the categories were recently created or are historically (and via stats) poor-performing investments.
- Employment — I choose only individuals who are employed. Sorry fellow small business owners, but statistically you are more risky. In addition, I’m trying to mitigate some of my own personal risk.
- Income — I currently start filtering out the $0, Not Employed and Not Available. However, from my research, anyone sub $50,000 annually is more at risk to default.
- Loan Term — I prefer to invest only in 36-month loans or shorter. While 60-month notes are available and show a slight increase in returns, I prefer to avoid longer-term loans.
- Inquiries — How many times in the past six months has the borrower requested credit checks? I select 0 to 1 requests. Statistically, anyone who’s requested more than one has a much great risk to default.
- Prosper Rating — I select B notes or lower, mainly because I want a higher return and will accept the slightly higher default risk. You might want to adjust this accordingly.
- Credit History — Individuals with a credit history of more than six years have shown to be a better risk. It’s assumed they know how to better manage their money and also have been able to somewhat get themselves on their feet.
- Public Records — None. I don’t want individuals who have defaulted on previous loans. This is especially true since Prosper loans are unsecured debt. As an investor I have only their word they will keep paying the loan.
- Debt to Income Ratio — Less than 40 percent has been shown to less likely default. In addition, Prosper rejects members who have ratios higher than 50 percent, so this must be an important metric.
- Previous Prosper Loans — While I don’t exclude new Proper borrowers, Prosper members who’ve shown to make timely payments are statistically a much better credit risk.
- Quick Invest — Their automated Quick Invest is a nice feature, though personally I don't think I'll invest via this method. In my opinion, you should do this method only if you have six figures to invest and don't have the time to manually check every note. It certainly keeps your money fully invested.
- Great Loan Profile — The borrower profile is very detailed. In fact, it has much more information than Lending Club.
- Better Search Filters — The additional search criteria allow you to find loans that meet your exact criteria. This is much better than Lending Club's search, which still has a limited amount of filtering options.
- Previous Prosper Loan History — If the borrower previously used Prosper, their loan history will show up. Anyone with a previous Prosper history in good standing is statistically much less likely to default.
- Smaller Amount for Diversification — According to Prosper, you need only 100 notes (or $2,500) to be properly diversified.
- No Fixed Increments to Invest — Notes require at least $25 to invest but can be any amount past this minimum, unlike Lending Club in which you invest in $25 increments.
- Slightly Riskier — The notes you can invest in through Prosper carry slightly higher risk and with a higher APR than those you'll find at Lending Club.
- Smaller Pool of Loans — If you're looking for more options when it comes to the available loans, Lending Club has more to chose from than Prosper.
- Not Everyone Can Invest — Unfortunately, Prosper is not available in every state, or you must have specific income and net worth in order to participate.
Even though Lending Club attracts twice the number of loan applications, Prosper is still a formidable alternative. It appears even with the new underwriting process, Prosper loans are slightly risker than Lending Club. This is based upon doing the number crunching I did on LendStats.com. This isn’t necessarily a bad thing; it’s something to be aware of when picking loans.
This review is based on a real-world long-term test, and I like to put my money where my mouth is. If I like my results over the next few quarters, I will begin increasing my investment to $10,000. Live long and “Prosper” as an investor.
Disclosure: I have over $7,000 invested with Prosper and over $15,000 with Lending Club.