One of the biggest names in the loan business is Prosper, which claims to have approved more than 700,000 people for loans since its 2005 launch.
Prosper offers personal loans at low rates, and have topped “best of” lists for the last several years for pioneering the peer-to-peer lending business model.
Peer-to-peer lending, also known as “marketplace” lending, can be an excellent alternative to banks or credit card swapping.
Instead of borrowing money from a bank, platforms like Prosper connect people who want to borrow money with people who want to invest money by lending it to other individuals, who are charged an interest rate, which is passed on to the lender, who makes money on the transaction.
The New York Times called Prosper a
“leader in the emerging category of peer-to-peer lending.”
How do Prosper personal loans work?
First, go to Prosper.com, where you can receive a quick rate estimate for completely free.
This “soft pull” does not affect your credit score.
Enter some personal info — name, birthday, address, housing costs and income — and select a loan amount from $2,000 to $40,000.
Prosper also wants to know the reason you want a loan, and will prompt you to choose from broad categories like medical expenses, housing, business purchase, vacation, adoption and debt consolidation.
Again, this soft credit check will not hurt your credit score!
Once you request the amount you'd like to borrow, you'll instantly be shown the lowest rates you qualify for.
After you decide which offer works best for you, your loan information is reviewed through an underwriting process.
Underwriting, which is the process of reviewing and analyzing your application before the final loan approval, doesn't typically take long.
Once approved, your loan goes to market, where investor see the details of your loan, and can choose to fund it.
Your money is then deposited straight into your bank amount through direct deposit.
Prosper promises a low APR, fixed three- or five-year terms and monthly payments.
Prosper is one of the most competitive personal loan companies and looks for people with solid employment and credit histories.
Prosper says its borrowers typically receive loans within five days of being approved.
The money is automatically transferred to your bank account.
If you’re consolidating your debts with this loan, you will then pay off the individual loans with each respective creditor, and proceed with just one fixed monthly payment to Prosper – WAY more simplified than worrying about multiple interest charges, due dates, etc.
Prosper isn’t just for debt consolidation, though.
Its main categories for personal loan use also include home improvement, medical/dental expenses, car purchases, household expenses, special occasions, vacations, taxes, business purchases and baby/adoption expenses.
What happens if I miss payments — or lose my job or otherwise can't pay my Prosper loan?
Prosper doesn't allow any changes in the terms of a loan once it becomes active.
This means losing your job, becoming ill, or any other circumstance won't affect the terms of the loan.
This is important to keep in mind, since Prosper establishes very clear expectations of their borrowers.
If a borrower is late by over 15 days on a Prosper loan, they're charged a late fee.
If you default on your loan past 120 days of its due date, the loan will be “charged off,” which means it's eligible to be sold to a debt collector.
Once this happens, the borrower is never again allowed to borrow from Prosper.
Plus, the charged-off account is really bad for your credit report.
Basically, just pay your loan on time and you'll be golden!
Why is Prosper better than a personal loan from a bank, or using a low-interest credit card?
Prosper offers unsecured loans, which few banks offer. In fact, the majority of personal loans are unsecured.
The difference between a secured loan and an unsecured loan is that a secured loan is backed by collateral (valuable assets like a home or car), and lower rates.
Unsecured loans are backed by your creditworthiness, instead of assets.
The main difference is that borrowers who default on unsecured loans risk damage to their credit score, and facing collections from a debt collector.
Borrowers who default on a secured loan, though, risk losing their collateral – which is a huge deal if it is your home, car or business.
The difference in choosing a personal loan vs. a credit card comes down to the type of purchase you plan to make. A good rule of thumb is this: if you're planning to use the money to pay for daily expenses, bills, or to make a purchase and you anticipate being able to pay for in full within a month, use a credit card and pay the balance by the payment due date.
However, if you're planning to take on a bigger expense, like remodeling your kitchen or consolidating your debt, take out a loan and make payments on time monthly.
How does Prosper work for investors?
Prosper also works by letting individuals invest in loans — in fact, investors have funded more than $11 billion in personal loans since 2006.
Investors can invest their money in “notes,” or portions, of a loan.
This is way more doable for most investors when compared with funding an individual's entire $20,000 loan.
Investors receive their share of the profits via a “pro rata” basis which ensure everything is proportionately divvied up.
To invest in personal loans through Prosper, first set up an account on Prosper.com.
You will be asked to declare your income and net worth, share your social security number, and link to your checking or savings account (for verification and direct deposit purposes).
Prosper supports either taxable accounts or IRA accounts – either new or rolled over from an existing IRA or a 401(k).
Prosper requires a $25 minimum investment to get started, but most investors recommend investing at least $1,000 to be adequately diversified.
Depending on your investment strategy, there are several options for finding the right investment.
Investors can browse loans by borrowers’ FICO score, Prosper’s ratings, and term length.
Prosper assigns its loans ratings ranging from lower risk/lower return to higher risk/higher return.
There's also an automated option called Quick Invest that allows you to set your investment criteria and invest automatically when a loan matches your interests.
Prosper investors see an average return of about 7.3 percent, according to the company.
Monthly returns are deposited straight to your account, and you can browse loans by borrowers’ FICO score, Prosper’s ratings and term length.
They do charge a 1 percent yearly fee to invest, and the investment length is either 36 or 60 months (three to five year loans for the borrowers).
What is debt consolidation?
If you have good enough credit to secure a loan, it can be an effective way to consolidate your debt.
That comes in handy if high-interest debts, like those associated with credit cards, are bugging you but your total debt-to-income ratio isn’t ridiculously high.
The other major way of consolidating debt is by getting a zero-percent or minimal interest balance-transfer credit card. This can have its perks, but also its downfalls.
You’ll have to pay off the balance in full before the promotional period ends, or you’ll be back to paying interest again – and if you panic during an emergency, you’ll run the risk of charging something else new entirely to the card that you got to pay off your other cards!
Having a personal loan works a bit differently.
One of the best parts of getting a personal loan is that you have a fixed rate that you pay back every month over a set period.
The idea is to use the loan money to pay off your other debts, and then just pay back one, consolidated loan at a fixed rate — one that is hopefully lower than some of your other debt. Easy peasy.
Does Prosper charge a loan fee?
Prosper doesn’t charge anything up front, but a one-time origination fee is charged after you secure a personal loan.
That fee is 1% to 5% of your loan amount, depending on your Prosper rating, and the money comes out before the loan is transferred to you.
Keep that in mind when requesting your loan, make sure you’re asking for enough to cover both the sum you’re borrowing and the origination fee.
For instance, if you’re approved for a $10,000 personal loan, and the origination fee is 2%, that’s $200.
So you’d actually receive $19,800 in your bank account. In this case, you may want to seek a personal loan for $10,200.
As far as actually paying back your loan, Prosper will let you choose an auto-pay option to make things easier (and to ensure you don’t accidentally forget about a payment amid the hustle and bustle of everything else in life).
You can also play it old-school and send in a paper check each month, but be warned: Prosper will charge you a processing fee for checks — 5 percent of your payment or $5, whichever is less.
Who is eligible for a Prosper personal loan?
According to Prosper, applicants should meet the following minimum eligibility requirements:
- Minimum FICO credit score of 640
- Debt‐to‐income ratio below 50%
- Stated income greater than $0
- No bankruptcies filed within the last 12 months
- Fewer than seven credit bureau inquiries within the last 6 months
- Minimum of three open trades reported on their credit report
Pros and cons of Prosper
- This can be a really effective way to consolidate your debt.
- Borrowers get approved quickly — you’ll know almost instantly if you’ve been approved.
- No embarrassing face-to-face interactions. Studies find that people do not seek the credit services they need because they are ashamed of their financial situations. Since Prosper loans are handled remotely, you don’t have to negotiate with anyone face to face.
- Prosper has lots of safeguards – including encryption – to keep you and your info safe. Lenders never know your identity.
- You can choose between a three- or five-year loan, so you have some flexibility, which is always nice — especially since you can always pay it off early.
- There’s always a chance you could get turned down for a loan.
- You’ll get charged a late fee if you miss your monthly payment.
- Speaking of which, Prosper won’t let you adjust your payment schedule, so this requires a lot of discipline.
- This is not a great option if you don’t have good credit and steady income.
- You can't change your payment due date (but you can pay ahead of time each month).
- You can’t change the amount of your loan once it’s approved, even if there’s an emergency.
Is Prosper right for you?
Prosper has an A+ rating with the Better Business Bureau, and it’s been accredited with the BBB since 2012.
This is always worth noting, but particularly so when your hard-earned money is involved!
Prosper is best for people who already have decent credit and are trying to consolidate loans.
Prosper requires a minimum credit score of 640, but it tells investors that the average score of borrowers using the service is 710.
You also need to have a credit history that’s at least two years old.
In fact, most people who borrow through Prosper have been building credit for about a decade.
Here’s another thing to keep in mind: The average income of people who go through Prosper for loans is about $89,000, although there is no income requirement.
While you can pay off your loan early (and that’s a great feeling), keep in mind that you have to pay it all back by a certain date — three or five years depending on the conditions.
You’ll need to do some math up front to make sure you’ll be able to make monthly payments.
While you can keep kicking credit card repayment down the road by just making minimum payments (though that’s not advisable since it will take forever and ultimately cost you more), you can’t do that here.
Prosper is a great option for personal loans.
While some people find that they may not qualify, most borrowers have nothing but positive reviews of Prosper.
Learn more about Prosper personal loans >>
Holly Johnson is a financial expert, award-winning writer, and Indiana mother of two who is obsessed with frugality, budgeting and travel. Her personal finance articles have been published in the U. S. News, Wall Street Journal, Fox Business, and Life Hacker. Holly is founder of of the family finance resource, ClubThrifty.com, and is the co-author of Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love. Learn more about Holly here.