Prosper is a P2P online lending platform offering fractional investments in consumer loans.
- Open to anyone
- Low minimums ($25)
- Regular cashflow
- Automated investing
- Detailed data available on each loan allows for highly customized investment strategies
- 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 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.
Breadth of offerings on Prosper
Prosper processes a large volume of loans, so there is usually a wide selection of available notes. In some cases there may not be notes available that meet your specific criteria, though the automated investing option will match you with a note that meets your criteria when one becomes available.
In addition to several automated risk profiles, you can also manually set a note profile mix, or even individually pick loans to invest it.
There are also two 3rd-party firms that emerged to provide alternative (and they would argue more sophisticated) algorithms for selecting notes and managing investments across both LendingClub and Prosper. The firms, LendingRobot and NSR have recently merged, and like Prosper have also been tuning their more recent offerings more toward institutional investors.
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.
P2P lending was one of the earliest outposts of the Fintech and crowdfunding ecosystem, but as the demands for more capital have growth along with the remaining companies in the space, Prosper (and LendingClub) have increasingly turned to institutional investors to provide capital to fund their loans. (Indeed, in recent years, LendingClub has added several new loan types including auto loans, business loans, and medical loans, but as far as I can tell, those are not availble to individual investors.)
While the transparency and the dealflow offered by Prosper are great, in the long run it's doubtful individual investors will remain a major part of the capital supply for LendingClub and Prosper (and insted can probably expect to start seeing exposure to these kinds of loans offered through instruments like ETFs). (In fact I chatted briefly with Prosper's then-president, Ron Suber, at an Online Lending meetup in New York, and in our conversation he was pretty clear that within just a few years, he expects that very few individual investors will go directly to a platform like Prosper or Lending Club, and instead will “dial in the exposure they want” through a robo-advisor or human financial adviser, and get at it via ETFs and other instruments.)