Prosper Personal Loans: 2018 Review

Overview

Prosper is the oldest peer-to-peer lending platform in the United States allowing investors to make money through micro-loans since 2006. Since its founding, Prosper has seen a lot of changes within the peer lending niche and have helped make it possible for bond-wary investors to profit with nontraditional investments. If you are looking to earn a higher rate of return than your current fixed income investments, reading this Prosper review will be well worth your time.

Prosper Review

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Getting Started with Prosper

Prosper makes it easy to lend your money to Prosper borrowers. The minimum investment amount is $25 per note and you can open a taxable account for only $25 ($5,000 for IRAs).

Who Can Participate?

Possibly to limit investor risk, the peer-to-peer platforms restrict residency to certain states and household income amounts. Before applying, you should take the time to see if you qualify for membership.

While the accepted states can always change, Prosper accepts investor applications from the following states:

Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, and Wyoming.

You may also be required to have a particular income or net worth depending on your state of residence. For example, residents of Alaska, Idaho, Missouri, Nevada, New Hampshire, Oregon, Virginia or Washington must make at least $70,000 annually or have a net worth of at least $70,000.

Supported Accounts

With Prosper, you can open the following types of investment accounts:

• Taxable, non-retirement account
• Traditional IRA
• Roth IRA
• SIMPLE IRA
• SEP IRA
• Rollover IRAs

Since peer-to-peer loans are taxed as ordinary income, instead of the stock and bond capital gains tax, an IRA account can reduce your annual tax burden and give you more disposable income in retirement.

Minimum Account Balances

The minimum opening account balance for taxable accounts is $25. This also happens to be the investment minimum per note. As long as you have at least $25 in your account, all of that money can be invested. IRA accounts, however, require a minimum initial account balance of $5,000.

Prosper’s account balance requirement is more lenient than Lending Club that requires an opening account balance of $1,000 and only makes investments in $25 increments. Plus, there are no account maintenance fees if you maintain less than a certain dollar amount in your Prosper account.

All accounts have an annual 1% fee of the current loan principal for each not. If a loan is at least one month past due, you will also be charged the additional collection fees charged by the collection agency. These collection fees can cost up to 35% plus the standard 1% account balance fee.

Lending Club Features

Asset Allocation

One reason why peer-to-peer lending is rising in popularity is that the potential yield can be comparable to conservative stock investments with less volatility. If you invest in bonds, you are familiar with the difference between investment-grade bonds and junk bonds in terms of risk.

The same principals hold true with Prosper. As an investor, you have the choice to invest in “safe” borrowers with an AA rating or “high-risk” borrowers with an HR rating. There are also several credit ratings in between of varying risk levels.

By diversifying your investment portfolio and investing in a variety of credit ratings ranging from AA (safe) to HR (risky), Prosper claims you can earn 7.57% annually. When planning for retirement with stock investments, most financial planners will assume an 8% annual rate of return for the total stock market. To get this rate of return from peer loans is definitely possible for investors that want to diversify beyond traditional stocks and bonds.

Since Prosper is smaller than Lending Club, your investment options will not be as large. On the other hand, recent scandals have damaged Lending Club’s credibility. As with any investment, positive returns are not guaranteed. Prosper has tightened its lending standards over the past decade to reduce investor risk. While there will always be charge-offs and delinquent payments, Prosper is a solid pick and you can profit by using some common sense and discretion.

By diversifying in safe, moderate, and risky notes, you can potentially earn 7.87% annually!

Manual Investing

You have the option of manually investing in loan applications of any credit rating. All loans require a minimum investment of $25 per note. Some notes do require a larger initial investment above the $25 standard.

To make the screening process easier, Prosper has an advanced filter option that lets you filter unfunded loan notes with some of the following criteria:

• Loan type (i.e. debt consolidation, small business loan, car loan, etc.)
• Prosper credit rating (AA, B, C, HR, etc.)
• Employment history
• Credit history
• Debt-to-income ratio
• Previous Prosper loan history

Prosper has some of the most detailed filters if you want to perform an advanced search.

Automatic Investing

You can also elect for Prosper to automatically invest all or part of your account balance. This service is completely free and makes it easy to ensure your asset allocation is well-diversified.

Automatic investing is a good option for the “hands-off” investors and also for those that tend to be too conservative or risky.

Competitor Comparison

Pros of Prosper

Prosper is an excellent alternative to traditional stocks, bonds, and money markets for the below reasons:

• $25 minimum investment
• Fewer account fees than Lending Club
• Potentially higher return than bonds
• Free automatic investing

Cons of Prosper

Here are a few reasons why Prosper might not be the best option for you:

• Investors are not accepted from all 50 states
• Fewer investment options than Lending Club
• $5,000 initial account balance requirement for IRAs

Summary

Prosper is one of the oldest and largest peer lending platforms. They help investors earn solid returns on a consistent basis and their fees are reasonable. They are a good alternative to Lending Club if don’t live in a state supported by Lending Club or want additional exposure by joining a second peer-to-peer platform.