Prosper

Summary

Prosper is a P2P online lending platform offering fractional investments in consumer loans.

  • Website: https://prosper.com
  • Investment Types: Consumer (P2P) Loans
  • Security Types: Debt
  • Sectors: P2P Loans
  • Minimum Investment: 25
  • Advertised Returns: 7.75%
  • Open to all investors

Pros

  • Open to anyone
  • Low minimums ($25)
  • Regular cashflow
  • Automated investing
  • Detailed data available on each loan allows for highly customized investment strategies

Cons

  • Need to invest in many, many notes (100+) to achieve diversification
  • Loans are unsecured
  • Loan terms are only 36- or 60-months
  • Average returns appear to be declining over time

Prosper logo

Overview

Prosper was the very first onilne P2P lending platforms, and along with Lending Club remains one of the two main players in the consumer P2P loan space.

Types of investments Prosper offers

Prosper is effectively (if not technically) a 2-sided marketplace, matching borrowers looking for personal loans up to $35,000 with investors willing to loan to them. All of the loans are divided into $25 fractional notes, so each loan is spread across dozens or hundreds of investors.

What do you get when investing with Prosper?

Each loan made by Prosper is graded from AA-HR (with A being the lowest risk and HR being the highest risk). High-risk borrowers are charged higher interest rates, though they are in turn much more likely to default.

Prosper fee structure

Prosper charges a 1% fee on the monthly payments collected from borrowers. If a loan is delinquent, additional fees are collected to cover the cost of collections (whether that’s done in-house by Prosper or via a 3rd-party collector). Unlike LendingClub, Prosper does not provide details on the amount of that compensation.

Potential returns and cashflow

Prosper advertises an average return of 7.75%, a number that has been declining in recent years. In part because they’ve been around for several years, and in part because of the substantial disclosure requirements from the SEC, there is a wealth of historical data about note performance. Individual investor performance depends heavily on diversification as well as the particular mix of loan grades and other borrower factors.

Payments are collected montly and deposited regularly into your Prosper account, where they can optionally be automatically re-invested.

Regulatory framework and due diligence expectations

The regulatory framework for P2P lenders is quite distinct from the rest of the investment crowdfunding ecosystem. The borrower side of the equation is regulated via the Consumer Financial Protection Bureau and the Federal Trade Commission, while the lender/investor side is regulated by the SEC. As part of the process in place, each loan is registered and filed with the SEC to comply with securities regulations.

Once a borrower applies for a loan, the platform grades the loan quality and files a detailed disclosure with the SEC. The loan is then made available to prospective investors; once enough investors express interest, the loan is funded.

While Prosper does perform a credit check, much of the application is information supplied by the borrower and not independently verified.

(Here’s much more on the gory details of the rather-complicated regulatory landscape around P2P lending from Harvard Business Law Review.)