While Lending Club may be the main platform on the peer to peer lending scene, experienced lenders are quick to remind the public that there is another option worth considering. Prosper hails from San Francisco like Lending Club, and currently has about 15% of the market. They are the underdog, with their struggle giving both benefits and drawbacks to their lenders.
What are the benefits of lending money through Prosper? What kind of experience can you expect to have when investing through them?
In this Prosper review, we will examine the entire platform from the foundation up, identifying its strengths and highlighting its weaknesses.
Like our review of Lending Club, this post is written for those of you who have yet to take the leap and begin peer to peer lending. Our goal is that, by opening up the platform with a full Prosper review for the general public, there will develop a greater sense of trust for the idea of peer to peer lending, and in parallel we will bring more people to open an account and try it for themselves.
Let’s get started.
Trust & Consistency (3.5 stars)
Perhaps the main barrier that stops people from beginning peer to peer lending is awareness. Most people do not even know it exists, something that sites like LendingMemo are trying to change. But second to that awareness is trust. These platforms did not even exist ten years ago, yet people exploring peer to peer lending have to consider trusting their hard-earned cash into these somewhat newly established companies.
Examining trust in platforms like Prosper requires us to look at two different things: their past and their present. We have to ask, “How has this company performed over time?” and “How is it currently performing today?”
Prosper’s Rocky Start
Prosper’s ability to innovate is clear: they were the first ever peer to peer lending platform. However, the way they initially set up their system did not work well. In respect to their past history, Prosper gains a few negative marks.
We won’t go too deeply into Prosper’s drama, but the quick version is this: when they first launched back in 2006, they lost money for the majority of their investors. Their platform originally used a barter system, allowing lenders to bid against each other in offering lower and lower interest rates on loans. The result of this barter system was a lower rate of return for almost everybody involved. Secondly, their underwriting process originally was not very rigorous. This meant a lot of people were approved for a loan who should have been denied, so they experienced higher than normal defaults.
Prosper eventually shut down and reorganized itself, emerging in 2009 with approval from the SEC. When they reemerged their system was much improved. They smartly mimicked Lending Club’s model of setting interest rates themselves while making their underwriting more rigorous. Things got better quickly. In the graphic on the right, you can see the return rate in 2009 compared to 2007. There is a dramatic difference between the two years: 8.7% vs -7.1%.
I believe it is accurate to say that Prosper has learned from its mistakes. As a platform, they are far better set up for success today than they were when they launched in 2006. These past three years have been largely trouble free.
Prosper Marketplace: Today
Just as we examine a platform’s history, we also need to look at its current situation. In this way, Prosper is also experiencing some current hardship. Despite over seven years of issuing loans, Prosper is not yet cash-flow positive. The majority of its funding still comes from outside investors. While this is not any reason to panic (most companies like Prosper get started this way), it does add to the odds that Prosper will not become stable as a company in the future.
Additionally, as you can see in the picture below, they ended 2012 with a sudden decrease in total funded loans, a pattern that continued into January 2013. In Prosper’s defense, they just reworked their management and received a generous new round of funding: $20 million to be exact. Certainly, these deep pocketed investors would not give this much money to Prosper without closely examining it and feeling optimistic about its future. Finally, March brought back refreshingly positive numbers.
Both the major peer to peer lending platforms, Lending Club and Prosper, have done a great job at opening up their history to the public. You can download their entire loan history directly off their website for independent review, something sites like Prosper-Stats and NickelSteamroller have taken advantage of to offer tools that help lenders refine their lending strategy. As an added benefit, it means Prosper and Lending Club have made it difficult for themselves to lie about their success as a company. We know, accurately, how many loans Prosper has issued, how many of their issued loans were completely paid off by responsible borrowers, and how many people defaulted, irresponsibly skipping out on repayment.
For all these reasons, Prosper earns a trust factor of three stars. If Prosper gets their current situation figured out and becomes cash-flow positive, this score will change for the better.
How Easy is it to Become a Lender? (5 stars)
Prosper has done a great job helping people get started as lenders. The process of creating a new account through them is quick and easy. A new lender can choose to open a regular taxable account or a retirement account like an IRA. The application has them hand over the usual information like address, date of birth, and social security number so that Prosper can verify your identity. If you are looking to just open an account and explore the platform without committing any funds, you will be happy when you discover how easy this is.
Unfortunately, not all states currently allow lenders to open an account. In the graphic below you will see only about thirty states currently have access to invest money through Prosper. While the platform continues to get access to additional states, each state has its own requirements, and it seems most of the “low-hanging fruit” is gone. I would be surprised if many additional states are added in 2013.
Once you have been approved for a lender account, getting set up is pretty straight forward. You simply move funds over from a checking account and begin choosing loans to invest in. Prosper gets bonus points for its Intstant-Transfer option. This great feature allows lenders to immediately begin lending with funds that are still transferring over from their checking account.
Overall, Prosper gets perfect marks in this category. There is not much more they could do to make it any easier to start lending with them.
Prosper’s Website (4 stars)
Peer to peer lending is only just beginning to find its place in the United States. For this reason, Prosper receives high marks for creating a great platform with little to model itself after. A lender can usually open an account with ease, searching for new loans while keeping an eye on their current investments. Payments arrive smoothly, and most of the lender experience is understandable. Considering peer to peer lending only began in 2006, it is remarkable that Prosper has created such a functional site. To boot, the Prosper website is refreshingly well designed. There are areas where it could be improved, but overall it is clean and straightforward.
Upon first logging in, you are greeted with the Account Screen. From here you can see two major numbers: the total value of your account and the current Annualized Return you are earning on your investment.
A Better Learning Curve
You can get a further detailed look at your account by clicking the View Details link. The information that is presented to you is full of the typical peer to peer lending terminology like “Total charged-off notes”, and Prosper gives you helpful floating definition boxes over these terms if they are confusing to understand. These floating definition boxes are really helpful, because often the terminology of peer to peer lending can be a barrier for brand new lenders to get started.
Calculating Your Return
There is a problem with the way Prosper calculates the interest you are earning on your account, here called Annualized Return. While their calculation is a decent starting point, it does not include uninvested cash in its calculation. So if you transferred $20,000 into your Prosper account but invested only $25 in a single note earning 10%, your account would say you are earning 10% overall. In fact you are earning something around 0.01% because $19,975 would be sitting there earning no interest at all.
Secondly, their Annualized Return does not discount itself for late loans. Say you had hundreds of very late loans, the majority of which were going to default. Your annualized return would still be trumpeting the high value of your account.
To help this problem, Prosper does provide a measurement called Seasoned Returns. This is for loans at least 10 months old, and reflects a more realistic number of what you are earning overall. However, I don’t understand why Prosper does not simply make the Annualized Return calculation accurate to begin with.
Filtering Loans on Prosper (5 stars)
Probably the most complicated part of peer to peer lending is going onto these websites and choosing loans to invest in. There are often hundreds and hundreds of available borrowers to choose to fund, and some of them are dramatically more likely to pay you back than others. For a quick overview of loan filtering read my previous writeup here.
One way you can find loans to fund is by letting the platform choose loans for you. Prosper has a page called Browse Listings where they offer a selection of various loans in which you can choose to invest.
However, the best loans are found by sorting the platform ourselves. Their main competitor Lending Club does not give filtering its own page, but squishes its Filter Notes section into a sidebar. Prosper, in contrast, has done a great service to us here, setting up a section of their site solely for filtering.
Considering the complication and terminology that can sometimes be involved with filtering, Prosper’s approach is much better. Their Advanced Search page has a button called Additional Criteria. This link contains a complete layout of all the search criteria lenders use when looking for loans. Furthermore, Prosper has hover-over definition boxes for the different terms (IE: Debt/Income Ratio, Public Record), a much-needed feature for new lenders to get started.
Huge Plus: Fine Tuned Filtering
Prosper has created a way to sort their platform’s available loans using a variety of different criteria. For instance, people who have had long dependable credit histories are more likely to pay back their loans than people with short irresponsible histories. Using filters, a lender can choose to fund loans to borrowers who are statistically more likely to be responsible.
The platform gets refreshingly high marks here. Unlike their main competitor Lending Club, Prosper allows you to sort the available loans using very specific criteria.
Let’s do an example. Say you wanted to sort available loans by earliest credit line on the Lending Club website (a very good filter for finding responsible borrowers). They let you choose one of only four options: Any, 1 year or more, 5 years or more, and 10 years or more. However, borrowers with one year of credit history are lumped into the same filter as those with four years of history, even though there can be a large difference between the two.
Prosper, in contrast, lets you adjust a filter like Earliest Credit Line down to the exact year. Instead of a four-option button, they offer the ability to do full inputs for every search value. This gives lenders the ability to fully filter the platform down to very precise criteria. For lenders like myself who have very specific loans in mind, this finely tuned approach can mean excellent returns for our account.
Prosper receives perfect marks in regard to their filtering. Well done guys!
Funding Loans (4 stars)
Between themselves and Lending Club, it is Prosper who gives you the widest selection of borrowers to invest in as a peer to peer lender. You can choose to fund loans of safe AA-rated borrowers for 6% interest, or you can fund the riskiest HR-graded (high risk) borrowers for over 30% interest. Of course, most people live somewhere in between these two. Either way, there is a very wide selection of borrowers who are looking to have their loans funded. The riskier borrowers you take on, the higher the interest rate you can possibly earn. My Prosper account is currently earning around a 13% return.
Prosper does lose a point here regarding their maximum loan amount. Their competitor Lending Club issues loans up to $35,000, but Prosper only funds loans up to $25,000.
Borrowers in Depth
On the Prosper website, you have the option to examine borrowers more closely once you have found a few notes that pass your filter criteria. They do a really great job at laying out a borrower’s credit history, stated income, and all sorts of other variables that give a good picture of who you are considering lending money to.
The different terms they use are all dotted underneath, indicating that if you hover over them they have pop up definitions for what each of them mean. This can be extremely helpful for people who are just beginning as lenders.
Once you have had a loan pass your filters and follow-up inspection, you can fund it by typing an amount into the box above the Invest Now button, purchasing the note in a pop-up confirmation screen. It really is as simple as that.
Prosper’s Best Feature: Automated Quick Invest
One of the main complaints I hear from people who are thinking about peer to peer lending is that they do not have time to go online every week and monitor their account. They are eager to begin lending, but simply cannot lend very actively. For people looking to make peer to peer lending more passive, Prosper has created a feature called Automated Quick Invest. In my view, this is the best feature of Prosper’s platform.
It works like this: once you have set up a good filter for their website (they call filters ‘saved searches’) you can save this filter for later use. Then you can set up the website to automatically fund notes for you whenever they add new loans to their platform. Prosper sends you an email to let you know each time they fund another loan for you. This way, lending money through Prosper can became a vastly more passive investment than lending through their competitor Lending Club.
Overall, Prosper does a great job at funding loans. They lose a point for only having a maximum of $25,000 per loan, but overall earn a respectable four stars.
How Easy is it to be a Lender on Prosper? (3 stars)
Prosper does a decent job at helping you maintain your account. They adequately categorize your issued loans by giving them a status of Current, Late, Charged off (Defaulted), or Paid in Full. To get a feel for how your investment is doing, you can keep an eye on the statuses of your loans whenever you log into your account. It would be good to further examine any loans that have gone late or defaulted, as this could help inform your investment strategy going into the future.
But Prosper loses marks here. They do not help you organize your invested notes very well, mostly just displaying them on a single screen. They would be wise to mimic Lending Club’s option to place these notes into different portfolios, so that you could compare different groups of notes against each other.
Payment History and Collection Logs
Prosper does a good job at breaking down the payments each borrower has made, as well as any updates that are happening on a problematic loan. If a borrower misses a payment, the platform contacts them to figure out the problem. If they fail to resume payments, Prosper will send the loan into collections. All this is communicated to you as the lender, as seen in loan example below.
Notes from loans on these platforms are legally defined as securities, which means they can be bought and sold, even after the loan has been funded. Prosper has contracted with a company called FOLIOfn to create a place to buy and sell previously purchased notes. If you need to close out your account but still have active loans being repaid, you can sell them on this secondary market.
Similar to Lending Club, their FOLIOfn section is not set up very well. Buyers on the secondary market have a tough time sorting the platform for prospective loans. It would be great if Prosper set up its secondary market to have the same filtering ability as its main platform.
Prosper’s FOLIOfn service is not nearly as active as the one on Lending Club. There are fewer notes for sale (currently less than 10,000 compared to over 55,000 on the Lending Club site). Partially this is because the platform is much smaller, but it’s also because Prosper does not allow its lenders to sell notes that have gone late, something Prosper might consider changing in the future.
Good notes that are earning good interest and have solid repayment history can be sold for a premium, while poorly performing notes often have to be sold at a discount. Discount your notes enough, and you could liquidate your entire account in a week or less, which can be a helpful option to have in the event of a financial emergency.
The reality is that Lending Club is dominating the peer to peer lending arena. However, lenders should not be too quick to ignore Prosper as a viable alternative. There are some wonderful benefits (as well as some drawbacks) to this peer to peer lending underdog.
The fact remains that Prosper is the most innovative platform on the market when it comes to the average American investor. Their platform and website was the first to launch back in 2006, and has always broken new ground when it came to new technologies. While Lending Club has yet to even introduce an automated investing option, Prosper is already coming out with even newer developments, like last month’s announcement of a bankruptcy protection vehicle.
Their status as the most innovative company in peer to peer lending is obvious when it comes to their website. Not only is it slickly designed (with beginner lenders in mind), but it is properly organized with specific pages given to creating savvy filters, filters that can target (riskier) borrowers with interest rates over 30%, the highest return available today.
Regarding filters, Prosper gets perfect marks because (1) the website gives filtering its own page, and (2) all the terms have mouse-over definition boxes, (3) their filtering allows for full fine tuning.
Finally, Prosper gets accolades for its best feature: Automated Quick Invest. Between Prosper and Lending Club, only Prosper allows you to make peer to peer lending a nearly passive investment.
While Prosper has some obvious strengths, they are not without their weaknesses. Their reputation is still recovering from their early mistakes in 2006, and their recent lack of growth is giving pause to the curious new lender. In seeking to entrust our money to this new avenue of investing, we must have companies that are consistent and trustworthy.
Furthermore, Prosper seems to be caught up in the Annualized Return hype, not including late loans or uninvested cash when calculating lender return rates. They would be wise to make this simple fix so that lenders like myself do not have to go off-site for a better valuation of our account.
Finally, Prosper should also work on increasing their maximum loan amounts up to $35,000 to match Lending Club, as well as allowing late loans to be sold their secondary market.
While Prosper continues to play the underdog within the peer to peer lending scene, lenders would be unwise to dismiss the platform as unworthy of their investment. While they do struggle in keeping pace with Lending Club’s success, the reality is that Prosper is the only peer to peer lending platform that can be set up and used passively. Bottom line: Prosper is a great option for the prospective peer to peer lender.
Open a lender account at Prosper.
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