Prosper owns and runs an online peer-to-peer lending marketplace that matches borrowers with lenders, who may invest in consumer loans. Bypassing traditional brick-and-mortar banks, credit card companies, and brokerage firms, both groups of people can satisfy financial needs efficiently through the peer-to-peer (p2p) approach.
As a lender/investor using this platform, you gain the opportunity to earn great returns when you take on risk associated with consumer credit. If you are interested in making money through Prosper, here's what you need to know to get started.
You Can Make Money by Investing in Notes (Similar to Bonds)
You can help make loans happen for specific borrowers at Prosper, but you don't lend directly to individual borrowers. Instead, you join as an investor, create and fund an account, and identify loans in which to invest based on factors that may include a borrower's credit rating and loan purpose, such as debt consolidation.
When you make an investment, you purchase notes issued by Prosper that correspond to specific loans listed on the marketplace. These notes represent the asset class of consumer credit, which can offer great returns but are considered risky and speculative investments.
The Minimum Investment Is $25
You can open an investment account and invest as little as $25. However, you are encouraged to invest more in order to diversify your portfolio and achieve more consistent returns. Investing more money and buying a larger number of notes historically has meant "higher, more predictable returns and lower volatility," according to Prosper.
Drawing on its research, Prosper suggests that investors purchase a minimum of 100 notes to experience positive returns or, put more simply, to make money. Investors are encouraged to invest $2,500 or more ($25 in 100+ loans) in their p2p portfolio.
Hold Investments in a Regular Account or an IRA
You can open a regular investment account or a Prosper IRA.
As mentioned earlier, there is a $25 minimum to fund an investment account; however; there is no annual account fee. For IRAs, there is a minimum balance requirement of $5,000 and an annual custodial fee of $100, which can be waived if certain account balances are maintained.
Invest by Selecting Individual Notes for Your Portfolio
The process of setting up and funding an account is simple and takes approximately five minutes, according to the company's website. After joining Prosper, follow the prompts to fund your account and use cash in your account balance to make investments.
There are two main ways to start investing at Prosper.
1. Use Quick Invest to Find Notes Quickly
The simplest, fastest, and easiest way to get started as a Prosper investor is through the Quick Invest feature. Enter the total amount you want to invest along with the maximum to invest in each loan. Choose among Prosper Ratings of AA, A, B, C, D, E, and HR assigned to the loans, with AA representing the highest quality and HR, the highest risk.
Refine your investment selections based on your preferences, goals, and investing style. For example, specify additional criteria for loan purpose, such as debt consolidation, or term, such as three-year notes. Apply these filters to find loans that meet your guidelines.
View details of loan listings and either invest in these notes or delete them from inclusion in your portfolio. To make your investment, click on Invest Now and then Confirm Order buttons.
2. Access "Browse Listings" to Choose Individual Notes
Go to Browse Listings to look at Featured Listings or View All Listings. You can choose among listings that Prosper is promoting or search through all available listings.
To locate notes that meet certain criteria, scroll down and find the Select Loans > Advanced area. There, choose a Prosper rating and specify additional criteria. For example, select borrower ratings of AA, A, and B; plus establish Bankcard Utilization as criteria and enter the values of utilization percentages you are willing to accept. Click on Search Loans to locate loan listings that meet these requirements.
If you decide to invest, enter the amount of money you wish to lend and click on the Invest Now button.
Your Wealth Grows When and If Borrowers Repay Loans
As borrowers repay loans, money is credited to your account. You will receive repayments of principal and interest, which are projected (but not guaranteed) to range from 4.22% to 10.21% annually depending on loan terms, Prosper ratings, defaults, and loan fees.
Your earnings can be reinvested in loans or transferred to your bank account. Payments from borrowers are processed and applied to your account throughout each month.
You cannot reverse your investments in order to generate cash although you could receive a cash infusion if borrowers pay off loans early. However, you may be able to sell your notes on a separate platform, Folio Investing.
View Activity, Balances, and Returns on Your Account Dashboard
The main area of your account dashboard provides a quick view of your Account Value and Annualized Returns. At a glance, view cash, notes, and pending investments that comprise the value of your account along with returns for "seasoned only" investments and "all notes."
Prosper defines seasoned returns as returns for notes that have aged 10 months or more, which historically have stabilized in terms of defaults. Differentiating between older notes and all notes gives investors a more realistic view of their expected portfolio returns.
For more information on your holdings, you can click on View Details to see how your portfolio is allocated among current, late, cash, and pending notes as well as investment returns categorized by Prosper ratings (e.g., AA, A, B, etc.). The dashboard displays various views of your portfolio and performance over time, providing you with tools to make investment decisions.
Your Investment Returns Are Affected by Servicing and Collection Fees
Fees for servicing loans (processing borrower payments) and collecting past due payments are charged against your account. The standard fee is 1% of outstanding principal balances of corresponding borrower loans. If a loan becomes past due, you may be charged fees associated with collection expenses, not to exceed the value of the loan note.
Prosper Has Strict Guidelines Regarding Its Investor Members
To get started and participate as an investor in Prosper, you must be 18 years of age or older, live in the United States, have a valid social security number, and have either a checking or savings account.
Currently, you must live in one of these states to purchase Prosper loan notes: Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
Certain states have financial suitability requirements, meaning that investment in this asset class must be suitable for the investor's objectives. As a measure of suitability, there are eligibility rules specifying the investor's income and net worth requirements along with restrictions limiting investment in Prosper notes to 10% of assets.
If your state does not allow investing directly in Prosper Notes, you can buy (and sell) notes on the secondary market through Folio Investing.
Returns Are Not Guaranteed
Prosper emphasizes that investing in its notes is a risky proposition and suitable only for certain investors. Getting a return on capital and earning interest is dependent on the borrower's repayment of loans associated with the notes purchased. You are urged to read the prospectus (see Prosper Prospectus in PDF here).
Since its start in 2005, the company has facilitated over $16 billion in loans to more than 900,000 borrowers. During its early years, lenders and borrowers agreed upon interest rates in an auction-style process; however, individual lenders/investors did not have the expertise to evaluate risk and assign appropriate rates.
In 2010, Prosper made changes to improve the investor experience, according to president Ron Suber. The company adopted a fixed-rate model in which rates are assigned based on factors such as borrower creditworthiness and loan term. As a result, lenders/investors can more readily craft an investment portfolio with more predictable (though not guaranteed) returns.
Get started investing with Prosper today!
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