Prosper.com Review: A Review of the Prosper Marketplace
Prosper.com, also called Prosper Marketplace, is a service that is part of the emerging peer-to-peer lending industry which facilitates the lending and borrowing of money between its users.
How it Works:
Prosper, Lending Club, Zopa and other firms around the world are sidestepping the banking industry by creating an alternative way for borrowers to get loans. Using Prosper’s service, customers that want to get a loan make a request to borrow a specified amount of money and set a maximum interest rate that they are willing to borrow money at. Individual lenders bid on loans and commit to funding a portion of the principal balance and set the minimum interest rate that they are willing to take on a particular loan. Prosper.com manages the whole process, known as a reverse Dutch auction, and assembles the best bids to provide the borrower with the lowest interest rates that lenders are willing to pay on the loan.
The company also reviews and verifies information about its borrowers, such as their credit history and personal information. Both Prosper and Lending Club have done a reasonably good job of preventing fraudulent loans from being placed on the site.
The loans that Prosper originates are unsecured and amortize fully over 3 years. These loans have no prepayment penalty. Prosper.com generates its revenue by collecting a one-time fee from borrowers and by charging its lenders a loan servicing fee.
Prosper.com ran into legal trouble when the Securities and Exchange Commission sent the company a cease and desist order after it had deemed Prosper.com to be in violation of the Securities Act of 1933 in November 2008. Eventually, Prosper Marketplace reached a settlement with the SEC and has filed completed its SEC registration to bring it within the bounds of the law. Prosper.com re-opened in July of 2009 and is now creating loans again. The financial reform legislation, which is going through congress, will likely place Prosper and Lending Club under the realm of a different regulator.
Borrowing From Prosper:
Prosper.com borrowers benefit over other peer-to-peer lending websites, because the interest rates that they pay are solely based on whatever the lenders are willing to receive as an interest rate. Since many lenders on the Prosper Marketplace are not seasoned investors, they often bid interest rates lower than what other financial institutions would be willing to take, allowing borrowers to get much lower interest rates.
Borrowers can borrow money for any number of reasons and the interest rate that they pay will vary from 7-25% depending on their credit score. Borrowers interested in getting a loan from prosper can do so at http://www.prosper.com/loans/. The loans amortize fully over a period of 3 years and the interest rate is fixed.
Investing with Prosper:
Some investors that funded loans when the company first launched in 2006 and 2007 have had a very bitter taste in their money from Prosper. According to Prosper’s own website, nearly 20% of the loans that it has originated since the company was founded have gone delinquent. Prosper’s collections techniques so far have been very minimal and the company does not allow its individual lenders to attempt to collect their debts. Many investors have received much lower rates of returns than they were expecting and some have even lost money.
Unlike its major competitor, Lending Club, Prosper has far fewer requirements for borrowers than Lending Club does in terms of credit risk, so borrowers that are likely to not pay their loans have had a much easier time getting a loan from Prosper than they have from with Lending Club.
To the company’s credit only 13 of the 1,194 loans originated since the company’s re-launch have gone delinquent. It will take several months to determine if Prosper has turned their act around for investors or whether or not their interest rates will continue to be lower than that of its competitor, Lending Club. Investors looking to lend through Prosper.com can do so at http://www.prosper.com/invest/