Prosper – Peer-to-Peer Lending Since 2005
Not only is Prosper a great marketing title, it has the advantage of becoming the first of the peer-to-peer lending websites. The difference between a normal crowdfunding site and one of the funding websites is that giving is replaced by borrowing. Essentially, Prosper facilitates agreements between those who need funds, and those who want to invest by lending. This keeps borrowers out of the bank, and investors from having to become a fully accredited financial institution.
Though many have not heard of Prosper Funding LLC (let alone peer-to-peer lending sites), this company was the first to take advantage of a real need in the marketplace – online lending. With over 2 million members, Prosper is the servicer of over $690 million in small loans, ranging from $2,000 to $35,000, in 47 states. Investors can start at very small rates ($25) and work their way upwards. Prosper Funding is a subsidiary branch of Prosper Marketplace, a private company, whose CEO (Stephan Vermut) and President (Aaron Vermut) were also the founders of brokerage service Merlin Securities. Prosper Marketplace was named by the San Francisco Business Times in the top 15 of the 100 fastest-growing Bay Area companies, showing a 530% revenue growth rate between 2010 and 2012.
Prosper’s crowdfunding loans are made through WebBank, whose watchdogs are the FDIC and the Utah Department of Financial Institutions. This may be of great comfort to investors, hoping to get the 8.89% return quoted on the Prosper website. This can happen so long as borrowers make their scheduled electronic funds transfers or bank draft payments into the investor’s accounts. Investors keep their percentage of late payment fees. Prosper keeps the $15 fees issued for failed payments, such as returned checks and insufficient funding issues.
Borrowers may be able to obtain a loan for as little as a 5.99% interest rate (for top-rated AA loans), or as much as 35% APR, spread out over either 3 or 5 years. One of the big draws for borrowers is that they can combine their loans, possibly getting a lower rate of interest while making only one monthly payment. There are no penalties for partial pre-payments, early payoffs, or prior Prosper loans. Prosper makes its percentage at the closing. Except for the AA and A-rated 3-year loans, the borrower will pay a 4.95% closing fee that will be taken out of the total amount before it is transferred to the borrower’s account.
Besides the $25 minimum investment level, the big difference between Prosper and a bank is the risk of unsecured loans. However, borrowers are often required to submit documents (of employment and/or income sources) proving their financial eligibility to pay back the loans. Also, Prosper’s visible and increasing levels of verification provides an incentive to both borrower (to submit documents) and investor (to consider the borrower a good lending prospect). Prosper appeals to those with existing debt and those without the ability to borrow from a bank, and there’s no collateral requirement of putting up a house, or some other valuable item, as a security. Just as in the stock market, the higher risk loans (often with poorer credit scores) can allow for better interest rates. Savvy crowdfunding investors may want to diversify, choosing to lend at lower interest rates to higher-rated borrowers with good credit scores, to cover over any risk included with lending to those with poor credit scores.