Prosper is a peer-to-peer lending service that brings in Lenders and borrowers together on its platform. The borrowers borrow money from a number of lenders and lenders lend money to a number of borrowers.

Prosper can be very attractive to both borrowers and lenders.  Started in 2006, California based Prosper.com is currently the largest peer-to-peer lending service with over 1.25 million members and 350,000,000 in funded loans.

Prosper offers borrowers loan rates as low as 6.59% depending on credit-worthiness and return rates as high as 38.54%.  Both borrowers and lenders eliminate the need to get a loan through a bank by working directly with one another.

We connect people who want to invest money, with  people who want to  borrow money

My experience with Prosper

I have various saving goals  and for that I need to earn higher than average return on my investments.  I invested $1,000 and heres the break down of my investments within borrowers in prosper.com.

Here is the loan breakdown that I chose

• $500 to individuals with good credit
• $300 to individuals with average credit
• $200 to individuals with below average credit

To spread your risk, you too need to break your loans in to small pieces. A loan to a borrower with high credit may be less riskier but, a loan to a borrower with low credit brings in highest return. Its also advisable to bring down your individual loans to near $50.

For example, I gave loan to 4 individuals with below average credit, with $50 each. Making it $200 as total amount.

Now since I have used the system for about 6 months I am going to increase my loan exposure. A higher return would enable me to reach my goals quickly.

Application Process and Benefits to Buyers

Borrowers can apply for loans for a variety of purposes including debt consolidation, home improvement, business, auto and other.  A loan amount on Prosper ranges from as little as $2,000 to as much as $25,000.

As part of the application process, borrowers’ credit scores are checked and rated; they also share their current income, expenses, and previous payment history.  (For instance, those with a credit score of 760 or above earn an AA rating and the best interest rate available, which can range from 6.59% for a one year loan to 11.76% for a 5 year loan.)  The lower your credit score and rating, the higher the annual percentage rate (APR).

Borrowers also pay a closing fee as low as 0.5% for AA rated borrowers to as high as 4.5% for those with a lower credit score and rating.  This amount is taken from the loan before the borrower even receives the loan money.

A bonus for borrowers is that there is no prepayment penalty, so they can pay down the balance early with no penalty.  In addition, these loans are unsecured, so the borrow does not have to offer up any collateral.

Investing Process and Benefits to Lenders

Lenders are able to manually choose who they want to invest in or to utilize quick invest.  Quick invest helps a lender lower their risk by allowing them to set a list of criteria and allowing Prosper to find the loans that best fit within the criteria.

Then, instead of investing all of your money in one person, you can spread your investment over a variety of borrowers, thereby lowering your overall risk.  You can begin to lend with as little as $25!

For lenders, Prosper offers higher returns than many current market investments, averaging an actual return of 10.6%.

If you choose to invest in an AA rated borrower, your return may be lower (averaging 7% or so), but of course, that type of loan has a much lower risk.

If you invest in an E rated borrower, who typically has a credit score of 680, you could earn as much as a 15% return, but your risk rate is much higher.  Lenders do have the option to buy or sell notes at any time.  Once a loan is accepted, lenders will pay a 1% fee yearly.

Prosper allows both borrowers and lenders to mutually benefit by linking them together and eliminating the middle man.

Borrowers can obtain a loan at a reasonable interest rate, and for some borrowers, Prosper may offer loans that traditional banks would not.

Lenders can earn a higher interest rate than what may be found in traditional markets.  While peer-to-peer lending is not without risk, Prosper tries to limit the risk by properly screening the borrowers and a trusted rating system while providing a system that benefits both borrower and lender. I provisioned $10,00 in my annual budget this year towards Prosper loan.

I never borrowed money through it. I am living debt free life. Its just an investment option for me.

Your loan security

Prosper gives the lender pre-selected rates based on the borrower’s credit history and the riskiness of the loan.  Prosper uses Experian credit score to evaluate a borrowers. Prosper requires new borrowers to have a score of 640 or above. Existing Prosper customers only need a credit score of 600.

I am satisfied with the services that Prosper offers. I have used it and seen the good results.

My experience however is not the same as everyone’s. If you make a bunch of risky loans and chase the highest interest rates possible then your loans can be defaulted. As with every other investment options, if you diversify your risk, and make small loans to various lenders, then you can make an above market return through Prosper.

Readers, share your experience with prosper, if you have used.

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