Prosper: Does the Prosper Lending System Work

If you are looking to borrow money there are numerous sources available. Unless you have bad credit! If you have money that you are looking to invest, there are also many sources but which to you choose? The Prosper lending association claims to help both types of people. It is the purpose of this article to look at what Prosper is, how it works for borrowers and lenders, and the group structure that is available. So let�s look at what Prosper is.

Prosper is an online auction website where people can buy loans and request to borrow money. Prosper claims that it is the first P2P lending company in the United States and is founded by former E-LOAN founder and CEO Chris Larsen. The site claims that it allows people to borrow or lend money at market driven interest rates. Prosper claims that it fully discloses the complete workings of their system and say they have 330,000 users and have funded $70 million in loans. Using Prosper requires only your social security number, your bank account, your income level and your driver�s license number. Prosper charges a number of fees, including a 1% closing fee to the borrower.

For the borrower, Prosper allows members to request loans of up to $25,000 with the average funded loan being $5,000. Loans can be obtained to either refinance higher interest debt such as credit cards or payday loans, to invest in real estate, to invest in other income producing or appreciating assets, or to invest in small businesses. The interest that a borrower will pay is determined by the individuals credit score and can be as high as 29% for high risk borrowers. The top rate depends on the state the borrower lives in. Prosper states that it is not designed for someone who wants to get a fast loan because it breaks the loan up into multiple pieces to distribute risk, and then funds from the lenders offering the most attractive interest rates. After a loan is funded, the borrowers can look at the funds on offer, and choose whether to take at that rate or wait for a better deal. Once a loan is funded, a borrower will typically receive their loan within 2 to 7 business days. Borrowers may be required to fax documentation and if required will have 7 days to submit this documentation. Borrowers who fail verification do not get a loan, and are permanently suspended from Prosper. While it is possible that a high risk borrower can get a loan, there is no guarantee because Prosper is not doing the lending but rather individual lenders.

Lenders specify the amount of money they want to lend, the maximum amount to bid on each listing, and the minimum interest rate they�re willing to receive. After selecting a minimum interest rate, the lender bids in increments of $50 to $25,000 on the loans they choose to fund. Unlike the borrower, lenders are not charged any servicing fee. Many lenders are attracted to prosper by the higher then average interest rates related with high risk borrowers. These rates can sometimes be as high as 29%, depending on the borrower�s state. Prosper says that the lenders can see the number of delinquent accounts a prospective borrower has, the number of delinquencies in the past seven years, total credit lines and any credit inquiries in the past six months, among other details. Lenders must wait until $25 accumulates in their account before they can withdraw funds. While many lenders are drawn to Prosper because of the high interest rates, the risk is also higher then for borrowers with better credit and lower rates.

Borrowers can also become part of a group, where the group's reputation is based on the group member�s repayment patterns. A group is essentially made up of complete strangers will give you a fair chance to explain your need and get it filled. Prosper strongly prefers, but does not require, that potential borrower to join groups. Groups serve various services for borrowers on Prosper and groups with successful repayment histories should attract more lenders offering lower rates. Groups are rated by the past payment performance of their borrowers, and it is in each group leader's interest to be selective about the members that they allow to borrow money as a member of their group. Groups have been allowed to buy a five star rating by making payments for borrowers with the underlying idea being that groups whose members repay their loans reliably will earn a good reputation among the lender community. Because of this, future borrowers from those groups will be perceived as less risky and therefore be able to borrow at lower interest rates. Prosper is structured so that group leaders may receive compensation for their efforts, based on the number, size, and quality of loans originated on behalf of borrowers in their groups.

In conclusion, it does appear that Prosper can work for some people. While borrowers with bad credit do have a better chance of securing a loan because the lender likes the higher interest rate, there is still no guarantee that they will be funded. There is no fee involved for the borrower if the loan is not funded so they have nothing to lose by applying. The lender is taking some risk, however, especially if funding a high risk loan but Prosper says that the borrower must pay with automatic loan payments through a bank account which does minimize the risk to the lender.