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 lending company in the United States, though they got a 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.
It left Prosper with a proverbial black eye, and casted 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 why I stayed away from using their service and instead choose to invest with Lending Club.
Now that I have under my belt three years with Lending Club and am still getting decent returns, I thought about revisiting Prosper.
How Has Prosper Changed?
In July 2009, Prosper understood these problems and completely changed their underwriting process. Do keep this in mind when reading older reviews of Prosper. I’m only reviewing their service from this point forward. Three years later these newer loans are starting to mature and have gone through a full pay down.
The results are looking pretty good. From the data, the returns with Prosper from this period forward are inline with the returns seen with Lending Club. This puts them in a much similar risk category to Lending Club notes. All of this makes me much more confient in trying out Prosper this time around.
Prosper loans are just like traditional bank loans. It’s no mystery 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 alternative 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 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 1,3 or 5 years are an option, and people can borrow from $2,000 to $25,000. When applying for a loan, borrowers get a rating from AA, A – E, to HR (otherwise known a high risk). The higher the letter, the higher the risk and therefore a higher interest rate you must pay. Rates currently range from 6.59% – 35.80%. 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 how to diversificate and the possible investing risks. These items I discussed in my Lending Club review but also apply to Prosper.
Opening An Account
Just like how I started 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?
Prosper eligible states are: Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming.
Prosper Investment Strategy
I used the web site 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 someone differences. Past performance of course 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 historically (and via stats) are poor performing investments.
- Employment – I only choose individuals who are employed. Sorry 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. Though from my research, anyone sub $50,000 annually are more at risk to default.
- Loan Term – I prefer to invest in only 36 months 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 zero to one 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 only have their word they will keep paying the loan.
- Debt To Income Ratio – Less than 40% has been shown to less likely default. In addition, Lending Club rejects member who have ratios higher than 35%, so this must be an important metric.
- Previous Prosper Loans – While I don’t exclude new Proper borrowers, statistically Prosper members who’ve shown to make timely payments are a much better credit risk.
Prosper Features I Like
- 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 only do this method 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. Any one with a previous Prosper history in good standing is statistically much less likely to default.
- Smaller Amount for Diversification – At least according to Prosper, you need only 100 notes (or $2,500) to 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.
Even though Lending Club attracts double the amount of loan applications, Prosper is still a formable 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 out loans.
View my Prosper Investments archive.
This review is real world long-term test, and I like to put my money where my mouth is. I plan on giving quarterly updates, similar to Lending Club, for next three years. 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 $1,000 invested with Prosper, and $9,000 with Lending Club.