For several years now I've written about my adventures investing in peer to peer lending. I've been a small time investor with Lending Club and have been extremely happy with the results that I've seen with them over the years.
I've had net annualized returns on my money in the range of 11-12% annually, and despite a few hiccups here and there it's been very stable.
We just bought a new house last summer, and since we put down a nice sized down payment we're currently replenishing our emergency fund. Once we finish with that, however, we'll be looking at getting more gung-ho about our investing, including possibly starting to invest more money in peer to peer loans.
Lending Club has always been the company we've used for investing in peer to peer lending, but they're not the only game in town. The other big player in the P2P arena is Prosper.com. I briefly opened an account with Prosper years ago, but never really invested anything with them after hearing about their high default rates, among other issues.
This past month after reading a lot of positive things about changes that Prosper had been making in the past few years I decided to give them another go, and open an account.
So today I'd like to do a brief review of Prosper, their site and how to open an account.
Peer To Peer Lending: What Is It?
Peer to peer lending, also known as social lending or peer to peer investing (and shortened to “P2P lending”) is a relatively new banking phenomenon in the United States. Prosper was one of the first to launch their platform back in early 2006, followed shortly thereafter by Lending Club.
With P2P lending individuals lend to or borrow money from other individuals without going through a traditional bank or other financial institution. Instead the lending happens through online lending marketplaces like Prosper and Lending Club. On those sites borrowers go through a loan approval process, have their credit checked, and then if they're approved – get an unsecured loan at a lower rate than they're likely to get at a traditional bank. Investors on the other hand receive interest on their money that rivals or surpasses what they might get elsewhere.
While P2P lending isn't available in all states for the different platforms, it is a growing market, and even traditional banks are starting to take notice. In February of 2014, for example, the two major platforms Prosper and Lending Club combined for a total loan volume of over $313 million. Over the past year Prosper has been growing at a fast rate, showing a staggering 645% growth. People are starting to see the potential that P2P lending has.
When they first opened their doors the loans on Prosper were funded through a dutch auction style format where lenders and borrowers determine the rates that the loans will receive via auctions.
After problems with high default rates and questions about the creditworthiness of some borrowers, in 2010 Prosper changed their business model a bit. They changed it from an auction style format to instead have pre-set interest rates on their loans based off of their proprietary formula for determining each prospective borrower's credit risk. They also set stricter lending standards that were designed to keep default rates lower. Their changes have worked and default rates are lower, and returns higher.
As of March 2014 Prosper now offers loans to borrowers for anywhere from $2,000 up to $35,000, and earns their revenue on a transaction based method. Borrowers are charged an origination or closing fee of anywhere from 2-5%, and investors are charged an annual 1% servicing fee.
Signing Up For Prosper
Signing up for Prosper is a simple 5 minute process. You'll just need your personal information, and your bank account information so you can link an account to get started investing.
Currently investing in Prosper is allowed in 30 states. If yours is not one of them you'll find out in the first step of the process where it asks for your personal information.
3 Steps To Sign Up
First things first. Go to Prosper.com via this link and click on the button to “open an account”.
Once you're on the site, here are the 3 easy steps to open your account.
- Step 1 – Enter your personal information: If investing is not allowed in your state it will tell you at this point in the process when you choose your state of residence. The form asks for email, password, name, address, phone, date of birth and social security number.
- Step 2 – Enter your bank account information: Enter your bank's information including routing number and account number.
- Step 3 – Agree to the terms and conditions: On step 3 you'll need to agree to the terms and conditions of using the site, acknowledge receipt of the prospectus, and agree to verify your identity through a credit check.
Once you've signed up you'll get some welcome emails, including a request to verify your email address for your account. Make sure to keep an eye out for that and verify. Also make sure to complete the process for linking your bank account so that you can invest.
Investing In Loans On Prosper Marketplace
Investing in loans on the Prosper Marketplace is a relatively simple process. There are a few different ways you can do it.
You can quickly invest in loans on Prosper using the quick invest feature. Just enter amount to invest, maximum amount per loan, prosper ratings you want to invest in and then chose more detailed filters if you want.
Once you've chosen your filters and loan grades, you click on the “Find Loans” button and it will bring up a list of loans that fit your criteria for your to invest in.
If you've chosen multiple grades of loans, Prosper will equally divide your investment among the grades (if enough loans fit your criteria). You can then either choose to invest in all of the loans, or pick and choose the ones you want, filtering them further by grade, term (1, 3 or 5 year loans), and other information. Once you're satisfied with your order you just click the “Invest Now” button to see a confirmation of what your order will be. When satisfied click on the “Place Order” button and you're done!
Automated Quick Invest
When you've gone through the quick invest process, you can also setup the system to automatically invest for you based on your search criteria and filters that you've setup in your order. When the order is complete, just save your criteria and then activate automated quick invest. Then the system will automatically invest money for you when loans become available that fit your criteria.
To get started you just do a search for loans, set a maximum investment amount per loan, then set an order amount limit or let it ride until available cash in your account runs dry.
For me this is one of the best ways to invest in P2P lending, find a good set of criteria to search for and filter loans by, and then automate investing.
You can also just browse all available listings by going to the “Browse Listings” menu option. Depending on the day and time there may be a few or many available loans. Just click into an individual loan from the listings page, and then click on “Invest Now” if you want to invest. Piece of cake.
Strategy For Investing In P2P Lending On Prosper
When investing in P2P lending, what are some good strategies and concepts to keep in mind to keep your ROI high?
For notes purchased since July 2009, every Prosper investor with 100 or more Notes has experienced positive returns. 100 Notes can be obtained with an investment of just $2,500.
- Diversify your lending: Don't get caught investing large amounts in one or two loans, diversify your lending in smaller amounts among larger numbers of loans. I've heard horror stories where people invest a larger amount in a single loan, only to have the loan go into default. Decrease your risk by lending smaller amounts. For me that means I keep my investment at $25 per loan. So if I'm investing $500, it means investing in 20 loans.
- Keep to the middle and diversify: I've heard others give this advice, and it has served me pretty well. Some folks have tended to avoid lower interest rate A grade loans because of the risk of interest rates going up and having the low interest earned in these loans not being worth it. On the other hand it can be a problem if you invest in too many HR high risk loans as well. Defaults and charge-offs can mean a much lower real world interest rates than the one you think you're going to get. Diversify your loans among different grades.
- Do your research and set your filters: Do your research on P2P lending sites like Lend Academy, LendingMemo or Lend Stats to find out what some of the more effective filters and search criteria are to improve your ROI. For example, Lend Academy has stated that one filter he likes to use is to ensure that recent credit inquiries for borrowers is zero, in other words they haven't been shopping around for credit at a lot of places. In his experience using that one criteria has vastly improved his ROI.
- Start slowly and dig in: If you're just getting started with P2P lending, start slowly and keep your investments in small amounts per loan. Dig into the details of the loans you're considering. Figure out the different kinds of borrowers that are showing up on the platforms. Figure out which ones look like a good investment and which ones to avoid. Are the borrowers giving an adequate description of what the loan is for and are they fully answering all questions?
Prosper Marketplace Is A Good Place To Start Investing
I originally signed up for Prosper way back in 2008, and at the time I wasn't sure Prosper was right for me. I kept hearing about the high default rates that people had experienced (in some cases estimated as high as 39%), and returns that weren't that great.
In the past few years Prosper has made great strides, however, and they now have much stricter lending criteria than in the past. Their default rates have dropped drastically – and in my opinion they are now a great option when it comes to diversifying your investment portfolio.
Looking to get started in peer to peer lending? Prosper may be a good place to start. Open your account through the link below.