Introduction to Prosper
- Potential borrowers apply for loans through Prosper.
- They fill out an application with all their information such as credit history, employment, income, reason for borrowing and more.
- Prosper gives them a rating of either AA, A, B, C, D, E and HR (High Risk I think)
- Investors (Lenders) get a Prosper account and fund it with cash.
- Investors can search for borrowers based on many criteria including employment, income, credit history, Prosper rating and more.
- Investors typically select many borrowers and commit to loan them each a small amount (about $50 to $100)
- When a borrowers loan request is completely funded by Prosper investors, the loan goes through and the investors committed amount is transferred to the borrower.
- The borrowers make payments on the loan and the payments show back up in the investors account over time.
This is basically how it works.
Prosper advertises that the average “seasoned returns” across loans from all Prosper ratings (AA through HR) is about 10% per year (at the time of writing). This number (10%) is based on all the actual data from previous years. So in other words, 10% is the average annual return that investors got using Prosper in the past (assuming they lent to borrowers of all Prosper ratings, AA through HR).
In the case that a borrower stops paying off the loan, Prosper uses a collection agency. This collection agency only gets paid if they successfully retrieve payment from the (delinquent) borrower. And the 10% annual return mentioned above already has this factored in so it’s still 10%.
- Higher interest rates than banks (bank rates are about 1% or less at the time of writing)
- Choose which loans to fund based on your own criteria
- Utilizes new and innovative internet powered platform cutting out the traditional middle man (banks) for better returns
- Not FDIC insured
- Not like traditional bank account where you can take out all of your money at any time
- While it’s highly unlikely to happen, technically you could lose all or most of it
Overall Prosper should be an innovative way to invest. It is essentially what has been going on for hundreds of years with banks. They hold your money, loan it out to others and make a profit from the interest on the loans, then they share some of the profit with you by making interest payments based on the current interest rate and the amount of money held in your bank account.
Today, Prosper and other “peer-to-peer lending” platforms are allowing us to do what the banks have been doing all these years, directly. Utilizing the internet and computers, we have the tools in our hands to lend directly, and get higher returns by cutting out the middle man. Don’t get me wrong, I don’t think this will completely replace the need for banks, and there is risk involved. But these tools open up powerful new possibilities for lending/investing that we have never had before. Prosper and peer to peer micro lending are truly a powerful and innovative way to invest that (I believe) will give investors an edge and ultimately mean a higher return on investments (in other words, more $$$).
While this all seems like it should work to bring decent returns on investment, I really need to test it out and see how well (or not) it works in reality. So I’ve started using Prosper with $500 as an experiment. I’ll be reporting back information and details semi-yearly on the returns with this initial $500.
Here’s how I’ve setup this experiment.
I’ve started with $500 in my account and made a simple criteria of employed borrowers with a credit score of 600 or more and loans that are 75% or more funded. The max amount I’ll lend per loan is $50. This is using Prospers “Quick Invest” feature. I’m also setting it to continue automate (“Automated Quick Invest”). This means that once some money is payed back and in my account, it will be reinvested in loans automatically (without me even having to log into Prosper). This is optional of course and I’m going to try it out for now. In theory, returns could be even higher if you immediately reinvest the money paid back by borrowers. So this automated quick invest feature is worth trying out for me.
Currently, I have 5 loans (or “notes”) cleared and 5 pending and $1 in cash.
I encourage you to test out Prosper for yourself as well, you could try a $100 or $200 experiment and fund loans with $10 or $20 each. Or try different things just to learn about it first hand and see how your returns are.