What is Prosper.com?
Prosper.com is America's first peer-to-peer lending site that allows investors to offer consumer loans directly to borrowers to earn an interest rate. Essentially, the
website gives the investor the opportunity to function as a bank, evaluating risk and approving loans in order to make a return. Investors bid on shares of loans,
funding as little as $25 per loan to build a portfolio of loan shares. Founded in 2006, Prosper has been on the leading edge of the peer-to-peer lending market,
a relatively new concept in lending. While it has certainly had its challenges, including a shutdown in 2009, Prosper remains an interesting concept for investment
for individuals looking for increased returns. The firm now has more than 1.6 million members and over $400,000,000 in funded loans, connecting people who want to invest
money with people who want to borrow money.
Prosper.com Problems Resolved
As an early customer of Prosper in 2007, I loved the concept of funding individual goals and found the process of looking through loans to be interesting and fun. I enjoyed reading the ideas people had for using the money – remodeling their house, starting a business, etc. When the financial crisis came in 2008, it became less fun as many of the loans went into default and my returns went negative. It was also a surprise come tax time when I paid taxes on the interest earned, but was unable to write off the losses on the defaulted loans. It would be safe to say that I’d soured on Prosper for quite some time. In retrospect, Prosper’s only bright side seemed to be that it kept me from investing in even worse asset classes at the time.
Prosper’s shutdown in 2009 to go through the SEC filing process had it emerge much stronger on the other side. The tax treatment was fixed, with ability to write off defaulted loans and pay taxes only on the net gains. In addition, the liquidity problem was solved by allowing members to buy and sell loans on marketplace. This solved one of the primary disadvantages of Prosper by offer an option for investors to withdraw their money if needed by selling their investments. There’s a cost to selling loans, so it’s typically not advisable, but the option for liquidity was a step in the right direction.
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Investing in Loans With Prosper.com
In addition to the ability to bid on individual loans, Prosper also offers packaged portfolios of loans that meet an investor’s risk/return desires. The portfolios are a good
option for quicker investing for lenders that lack the time or interest to sift through loan listings and bid loans. While it can be interesting, it likely would have been
cumbersome and tedious in the long term to need to continuously bid on listings. The ability to use the portfolios allows for quicker investing and alignment of investing
While Prosper offers lenders much higher returns than many alternatives, it has also faced the downward pressure of interest rate competition. With borrowers able to get
low interest rates from traditional banks, the rates borrowers are willing to pay on Prosper loans has also decreased some. In 2011, Prosper reported a 10.69% annualized
seasoned rate of return, net of fees, for all loans issued from its re-opening after SEC registration (July 1, 2009). That’s certainly much better than many investment
alternatives, which makes it an attractive option for a place in an investor’s portfolio.
Prosper also offers Prosper IRA, which alleviates the concern that the investments in Prosper were generating tax liability that could be avoided in traditional investment
vehicles within IRAs. However, the IRA requires a $5,000 initial investment to open, so it’s not a vehicle to just try out. It seems likely that only experienced P2P
lenders would want to take the leap to using the IRA. For investors that want to use Prosper for retirement savings, the IRA is a nice addition to the company’s offerings.
Prosper.com Review: Company Pros
- Easy to use
- High rates of return
- Interesting, fun lending platform
Prosper.com Review: Company Cons
- Less liquid than savings accounts or CDs
- Short historical track record
Prosper.com Review Comclusion
With interest rates at historic lows, investors have been seeking additional ways to earn more return on their capital. Prosper’s peer-to-peer lending platform allows users to earn a higher return on their investments than is commonly paid by more stable investments such as savings accounts and CDs. Its risk is more analogous to stock market investments, but so are the returns. Without many years of data in both bear and bull markets it’s difficult to predict the returns of P2P lending against other investment classes. For savers looking to experiment in ways to find higher returns, P2P lending sites like Prosper provide another option for earning returns.
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