The Internet has created a new environment where it is possible to get loans without using traditional sources, like banks. Dozens of peer-to-peer (P2P) lenders have sprung up across the Internet, offering loans to borrowers that are often under terms that are more favorable than what is available through banks. The Prosper Loans Marketplace, better known simply as Prosper was one of the first P2P lending platforms established.
P2P lending sites bring borrowers together on the same website with the investors who will fund their loans. The borrower makes a request for a loan, that request is made available to investors, who will then fund the loan. Those loan fundings are typically referred to as “notes”, and an investor can hold as many notes as he or she decides to invest in. And since there is no bank involved in the process, the borrower often pays less in interest than would be the case with a bank loan. Meanwhile, the investor earns a much higher rate of return than would be possible on investments held through a bank.
Since it began operations in 2005, Prosper has funded more than $6 billion in loans, and has more than 2 million members. The company is based in San Francisco, and runs its loans through WebBank, a Utah-chartered, FDIC member industrial bank.
What Kinds of Loans Does Prosper Make?
For the most part, Prosper makes one type of loan – personal loans. But they can be used for just about any purpose you can imagine. For example, you can use a Prosper personal loan for:
- Debt consolidation
- Home improvement
- To cover medical or dental expenses
- For business purposes
- To make large purchases
- To cover household expenses
- For the purchase of an automobile, motorcycle, recreational vehicle or boat
- To pay for special occasions
- To cover vacation costs
- To pay taxes
- “Green loans” – to purchase energy efficient equipment for your home
- Short-term and Bridge Loans
- And even for baby and adoption expenses
Prosper will lend between a minimum of $2,000 ($6,000 in Massachusetts), up to a maximum of $35,000. All loans have terms of three years or five years, and are fixed rate, fixed payment installment loans that will be paid in full at the end of the term.
There is one purpose for which you cannot use a Prosper loan, and that's postsecondary educational expenses. Because of a federal law known as the Higher Education Opportunity Act, designed to protect students who take out private education loans to pay for college expenses, Prosper loan proceeds are not eligible for this purpose.
Prosper Works Especially Well for Credit Card Debt
One of the most popular purposes for Prosper personal loans is to pay off credit card debt. The most obvious advantage is debt consolidation – consolidating several credit card lines in a single loan with one monthly payment.
Here’s why that loan purpose is so popular:
Saving on interest. Since Prosper personal loans are installment debts, you are also converting revolving loans with variable interest rates – that can go as high as 29.99% under certain circumstances – into fixed rate debt where the rate will never increase. Converting credit card debt with an average interest rate of 20% into a personal loan at 12% will save you a lot of money by itself.
Getting off the revolving debt merry-go-round. The fact that you will pay the loan off within five years will save you even more interest. There's a reason why credit card debt is set up to be revolving; it's a revolving door of debt that is very difficult to get out of. That's because even while you are making efforts to pay off your credit cards, it’s likely that you are re-using credit lines again and again anytime you have a need for extra cash. The five-year time limit on Prosper loans means that your debt will be gone for good at the end of that term.
The credit score surge. There is a secondary benefit to consolidating credit card debt through a debt consolidation installment loan. Many borrowers experience an increase in their credit scores shortly after doing the consolidation.
This has to do with the credit utilization ratio that the major credit bureaus use. It is heavily based on credit cards, and it is calculated by dividing the amount of credit card debt owned by your total credit card available balances.
So for example if you have total credit lines available of $40,000 on five credit cards, and you owe combined balances of $30,000, your credit utilization ratio is 75% ($30,000 divided by $40,000).
FICO scoring models like a credit utilization ratio of not more than 30%. If you have one that is 75%, it can have a significant negative impact on your credit score.
But by paying off the $30,000 outstanding balance and consolidating debt using a debt consolidation loan, your combined credit card balances go to zero immediately. That means that you will have a credit utilization ratio on your credit cards of zero, which typically results in a sudden increase in your credit scores.
Additional improvement comes from the fact that by paying off five credit cards, you've lowered the number of debts where you have outstanding balances immediately as well. This is also a positive factor in determining your credit scores.
Though there is somewhat of a decline your credit score due to the fact that you have a brand-new installment loan – on which there is no history of successful payments – that is typically more than offset by the improvement in your credit utilization ratio and the decline in the number of debts with outstanding balances on them.
That's why borrowers consolidate credit card debt through a Prosper personal loan typically see a quick improvement in their credit scores.
Prosper Personal Loan Requirements
In order to qualify for a loan through Prosper, you must be a US resident, and reside in one of the 47 states where Prosper makes loans. This includes all US states except for Iowa, Maine, and North Dakota. You must also have a Social Security number, a verifiable email address, and a bank account.
Credit. In order to qualify for a loan with Prosper you must have a minimum credit score of 640. Prosper uses Experian to determine your credit score (FICO 08), so if you pull a credit score on your own, and it’s from some source other than Experian, you may not be approved for a loan, even if that score is above the 640 minimum requirement, if Experian is showing less than 640.
Since your credit will depend upon your credit report and credit score as provided by Experian, you will have to resolve any credit disputes through Experian, and not Prosper.
Income. Any income that you declare on your loan application must be verifiable. That means pay stubs and W-2s if you're employed, copies of recent income tax returns if you are self-employed, or third-party documentation of retirement or investment income. You cannot use your spouse's income for qualification purposes. Since Prosper loans are personal loans, you cannot make joint application. Prosper does not allow the use of either cosigners or co-borrowers.
Collateral. All loans made through Prosper are unsecured, therefore no collateral is ever required. That includes auto loans and bridge loans, even though such loans typically are secured by collateral. Prosper makes personal loans available for the purchase of physical assets, but the loans are not specifically auto loans or bridge loans, just personal loans that you can use to purchase those assets.
Prosper Personal Loan Pricing
When you apply for a loan with Prosper, the platform determines your Prosper Rating. This is a proprietary rating system that is similar to a credit score in that it is predictive of the likelihood of loan default. Prosper uses this rating in setting the pricing on your loan.
The Prosper Rating is determined by a combination of factors, including your FICO score, the term of the loan, expected loss rate, economic environment and competitive environment.
The top Prosper Rating is AA and it comes with a low end rate of 5.99% APR for a three-year loan. At the opposite end of the spectrum, HR is the lowest Prosper Rating, and has a maximum rate of 35.97% APR for a three-year loan. Five-year term loans are available at all Prosper Rating levels, but only a three-year term is available on an HR graded loan.
There are no application fees or prepayment penalty fees with Prosper, but they do charge an origination fee of between 1% and 5% of the loan. That fee is deducted from the loan proceeds once your loan is funded, so that you do not have to pay it as an upfront fee out-of-pocket.
If you're not familiar with P2P loans, understand the charging origination fees is typical in the industry. As well, the range of between 1% and 5% is also the industry standard.
The Prosper Loan Application Process
Applying for a loan with Prosper is a three-step process:
- You choose a loan amount, state the purpose of the loan, indicate your credit level – Excellent, Good, Fair or Poor (FYI, Poor is an automatic rejection)
- Your loan is listed, which makes it available for inspection and evaluation by potential investors; a loan listing can be active for up to 14 days
- Once your loan is fully funded by investors, the verification process will take place, as well as the loan review, and loan documents will be prepared
Simply having your loan listed results only in a “soft credit pull”, so your credit report will not be hit with an inquiry. During the verification process, your credit report will be pulled, and your income will be verified, as well as your identity.
Much of the verification process is based on documentation that you provide to Prosper. You can do this by uploading documents (payroll, tax and other information) to the “My Account” screen on the Prosper website, or you can email them to firstname.lastname@example.org.
If everything checks out with the way that you disclosed it on the loan application, your loan will be closed and you will receive your funds. Receipt of funds generally takes place between two days and eight days after the loan is fully funded by investors, and all of your loan information is verified. Loan proceeds are transferred to you electronically using the automated clearing house banking network (ACH).
Multiple Prosper loans. You can have more than one loan on the platform at the same time. However, your credit score must be at least 640 when you apply for the second loan, and the combined loan limit of both loans is limited to $35,000 in total.
In addition, your first loan must be current, and there can be no late payments within the last 60 days. You also cannot have a payment that was more than 15 days late within the past year, nor can you have more than two returned loan payments within the past three years. There are other specific requirements, but they are based on your credit score.
Loan repayment methods. You will have two options to make your monthly payments. The first is electronic funds transfer, in which the payments will be automatically deducted from your bank account on the due date. The second is by bank draft, which will enable you to pay your loan directly through your bank account.
Prosper tries to discourage payment methods other than the two listed above. However, in their discretion they may accept either payments via pay-by-phone or by ground mail. Either payment option will require a processing fee of up to $15.
Site security. There should be no complaints about Prosper in this regard. Prosper equips all servers with an Extended Validation (EV) Secure Socket Layer (SSL) certificate so that you will be certain that you are actually on the Prosper website, and that all data entered will be transmitted in a secure encrypted channel. Data security is provided by a combination of firewalls, intrusion detection systems, a malware detection system and a data loss prevention system. Data is stored in a highly secure data center, that is audited based on SSAE 16 Type II and or SOC 2 Type II standards.
Should You Apply for a Loan with Prosper?
If you are in the process of applying for a loan, you will no doubt investigate several sources. Prosper should be one of the leading sources that you check out. Loan purposes are practically unlimited, no collateral is required, and all loans are fixed rate installment loans with a maximum term of five years. You may also find that the credit score requirement minimum of 640 is more flexible than you will find with banks and other loan sources.