Prosper: Peer-to-Peer Lending

A company I stumbled onto about 5 years ago was Prosper.  It is a peer-to-peer lender, that allows individuals to make loans to other individuals. This is great for some borrowers, who may not have been able to get lending through a bank, and it is great for investors, who are looking for a little more return, and can tolerate the risk.

 

What Prosper Does

Prosper is a great “middleman” because it allows lenders to see a borrowers credit history, and every borrower has to post a story as to why they want the loan. Once enough lenders have signed on, Prosper then vets the borrower to make sure that everything is legitimate.

Another great aspect is that you can lend as little as $25 per loan. That way, as a lender, you can hedge your risk of borrower default by lending to various different parties. You can also hedge among different credit profiles.

One of my favorite types of loans to invest in, which I have had the most success with in the past, is borrowers who need a loan but don’t have any credit to start with. In this economy, they have most likely had trouble getting a loan from a bank, but unlike so many Prosper borrowers, they have not proven themselves to be irresponsible, they are just new!

 

Make Money Investing in P2P Loans

Prosper is a great alternative investment if you are looking for something different than just stocks and bonds.  Loan money using Prosper is essentially an investment.  Your rate of return is the interest you receive on the loan minus any servicing fees and defaults.

The great thing about Prosper is the small loan amount you can do.  This essentially lets you diversify as an investor – loaning a lot of small amounts instead of one big amount.  As such, if one loan does default, you still have many others that will still earn you interest.

Another great aspect of lending is that the borrower repays both principal and interest at the same time.  As such, you will get back your money faster, so you can loan it out again and continue to make even more money.

 

Readers, have you ever used Prosper or another peer-to-peer lender?