Are you looking for a way to earn bank-like profits without taking on excess risk? Investing in peer-to-peer lending through a platform like Prosper could be a good solution for you.
However, peer-to-peer lending is still a relatively unknown investment opportunity. Before choosing to leap into lending money, it’s important to understand the risks and rewards of P2P investing generally. You’ll also need to gain an understand of the different P2P investment platforms.
In this review, we explain how the Prosper platform works for investors, and how you can start your P2P lending journey at Prosper.
If you're looking to borrow, check out how Propser compares to the best personal loan sites.
- Peer to peer lending platform
- A way to earn a higher interest rate, but higher risk
- We like Propser as a CD alternative
Prosper Investing Basics
Prosper is a peer-to-peer (P2P) lending platform. Investors on the site can invest as little as $25 in personal loans to other people. All personal loans issued on the site are unsecured personal loans with fixed interest rates.
Prosper uses a ranking system on loans to rate loans on a scale of AA to F. AA have the lowest yields, and are the least likely to default. F loans have the highest yield, but are most likely to default. (There used to be a G loan, but that has been discontinued).
Investors typically develop a desired loan allocation to maximize their returns while minimizing their risk.
Historically, a typical investor earned between 3.5% and 10.1% by investing in loans on Prosper over the long term. Of course, Prosper has been around for just over a decade, so it’s not obvious how future investors will fare.
Why P2P Lending?
Most “traditional” investors get plenty of exposure to the finance sector by investing in individual stocks, index funds, or broad-based mutual funds. So why might you consider investing in personal loans to individuals?
Generally speaking, there are two major reasons to consider adding P2P lending to your investment mix. The first reason is that you would like to see bank-like returns with bank-like risk. By cutting out the banks, you can get the first cut of all profits on these personal loans.
The second reason to consider P2P lending is if you’re underexposed to the financial sector. This could happen if you’re an individual stock investor who doesn’t have many banks in your portfolio. It could also happen if you’re heavily invested in leveraged real estate (you own rental properties with a mortgage). In the case of leveraged real estate, you have financial sector liabilities that may not be matched by financial sector assets.
Being “underexposed” to the financial sector isn’t necessarily a bad thing. But it is a risk that could lead you towards peer-to-peer lending.
Who Can Invest Through Prosper?
Individual investors must be United States residents who are 18 years of age or older to invest with Prosper. You need a Social Security number and a checking or savings account.
Certain states restrict investments to people with certain net worths, or income levels. Check Prosper’s help desk to learn if your state has these restrictions.
Investors must live in one of the following 28 states or the District of Columbia: Alaska, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Louisiana, Maine, Michigan, Minnesota, Mississippi, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Wisconsin, or Wyoming.
Investigating and Investing on Prosper
If you’re interested in and qualified to invest on Prosper, you can explore lending options through its loan marketplace. Currently, Prosper only has 42 loans available to fund. Most of the loans are from A-rated investors.
From the loan marketplace, you can see the loan rating (AA through G), the loan yield, the reason for borrowing, and historical returns on the loans. You can also learn exact details about the borrower’s credit profile if you have an account on the site.
One of the most important things to note about loans on Prosper is the difference between the yield and the historical returns.
For example, a B-ranked debt consolidation loan showed a yield of 10.94%. However, the average historical return on similar loans is just 3.6% to 7.2%. Basically, even for a B-ranked loan, an awful lot of people are defaulting which erodes your earning ability.
All of this information is freely available to investors who are registered on the site.
Should You Invest in P2P Lending Through Prosper?
Overall, Prosper is one of the best, most established P2P lending platforms. However, the platform seems to be suffering from a low number of loans right now. It could be that too many competitors (including traditional banks) are pushing borrowers away from P2P platforms.
If you’re interested in P2P lending, I would absolutely create an account at Prosper, and even consider making a few $25 investments to see how the platform works.
However, before you sink too much money into the platform, carefully evaluate the risks and benefits of P2P investing. You will see a lot of loan defaults, and that can destroy the returns you’re expecting to earn.
If P2P lending is right for you, I would also recommend having accounts with multiple P2P platforms instead of just one. This will give you access to a wider range of loans. Some other top P2P lenders include LendingClub and Funding Circle.