Understanding Prosper Loans

Want to know how to avoid borrowing from your bank? 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.

P2P lending sites bring borrowers together on the same website with the investors who will fund their loans.  It is basically removing the middleman, which is the bank, and creates a mutually beneficial financial arrangement.

The borrower makes a request for a loan, and 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.

The Prosper Loans Marketplace, better known simply as Prosper was one of the first P2P lending platforms established.

This Prosper review will show you how to avoid your bank for both investing and borrowing. 

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.

Prosper acts as the servicing agent on the loans, handling the technical details of each loan, collecting payments, and remitting repayments to investors. Legally known as Prosper Funding LLC, Prosper is a wholly owned subsidiary of Prosper Marketplace, Inc.

Is Prosper Legit?

In one word YES!  Prosper has been around for ten years now.  In the world of the Internet that is an eternity. 

As we cover the reviews of Prosper for borrowers and lenders you will see that this is a well maintained and viable way to invest and borrow money.  Prosper is subject to state and federal regulations, just like any loan producing organization is. 

To put an even more legitimate light on the company, all loans that are originated through Prosper.com are made by WebBank.  This is an industrial bank that is chartered in Utah and a member of the FDIC.

On a more personal level, I have personally been investing in Prosper for several years now.  A couple of years ago I started a comparison of Prosper vs. Lending Club and had very good results from both companies on my investments. 

Lending Club is the number one competitor to prosper in the peer to peer loan market.  I have had very good luck with them and you can use my Lending Club review to do a full comparison of the two.

I also offer other great reviews on different options to you such as the Betterment and  Motif Investing Review.

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 such as buying an automobile
• To cover household expenses
• For the purchase of an automobile, motorcycle, recreational vehicle or boat
• To pay for special occasions such as engagement rings and weddings
• 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

While these are specific purposes for loans, the basic loan set up remains the same. Each loan is fixed rate, unsecured, payable over three or five years, and has no prepayment penalties.

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.

How The Loan Process Works

Applying for a loan is a simple multi-step process, that looks something like this:

• Create your loan listing – you provide basic information, then Prosper will obtain your credit score and determine your rate and terms.
• Based on your credit score and other information Prosper will obtain, you will be assigned a credit grade, from AA to HR.
• You then create a loan listing which is your request for a loan. You will add a description of your loan purpose and financial situation. It will appear on the platform to be reviewed by investors.
• Once the loan listing is fully funded and your information has passed Prosper’s verification process, you will receive your loan.
• The listing will stay active for 14 days, or until the loan funds.
• Loan funds are deposited directly into your bank account within days.
• You begin making your monthly payments.

Open a Personal Loan Account with Prosper

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 the score from another agency is above the 640 minimum requirement, the loan might not be approved if the Experian score 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.

Origination fee. When you borrow through Prosper, you will be subject to an origination fee. The fee is based on your risk grade , as well as the term of your loan, and look something like this:

• Risk grade AA – 1% to 2% for a three year term, 3% for a five year term
• Risk grade A – 4% for a three-year term, 5% for a five-year term
• Risk grade B – 5% for either a three-year or five-year term
• Risk grades C through HR – 5% for either a three-year or five-year term

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:

1. 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)
2. 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
3. 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 approval@prosper.com.

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.

Speed. Prosper has worked hard to streamline their application process as much as possible. They know the loan process can be a headache, but they made it as simple as possible. For most people, they can get the whole application completed in a few days. You don’t have to worry about going to the bank every day, which means you can do it on your time.

Early payoff. If you decide you want to pay off your loan early to avoid the interest (hopefully you can), you’re not going to pay any fees. You shouldn’t be penalized for paying off your loan early.

Complaints Against Prosper

Every loan option is going to have some drawbacks. Prosper is no exception. When you’re looking for a loan, you need to consider every possible pro and con of the lender.

One of the complaints a lot of people have is having their application rejected. Of course, applicants always face the risk of being declined depending on their requirements.

We showed you the requirements for the Prosper loans, which can be a problem for some applicants. In most cases, the requirements are easier compared to other options, but some people don’t meet the credit score requirement. If you’re one of those applicants, there are other loan options, like Prosper.

Another drawback of Prosper is their limit on loans. Unlike a traditional bank, or the other loan sites, Prosper has a lower loan ceiling. They only offer loans up to $35,000.

For most people who are trying to consolidate their credit card debts, this should be enough. If it’s not, you’ll need to find another source for your loan.

There are also some complaints about uploading documents. Some users reported problems of getting their documents to go through, but those complaints were rare.

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.

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. If you’ve been having difficulty getting a loan from banks or other traditional sources, check out Prosper, and see if you can’t do better. I’m betting that you can.

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.

Check out Prosper and see what they can offer you. There is no application fee, no obligation, and no inquiry will show up on your credit report for listing your loan.