Prosper Marketplace is the second biggest peer to peer marketplace lending company in the world. Here is everything you need to know about the company.
Investing and passive income
Having a good source of making passive money is a very good thing. The idea of making money while you are asleep or when you are travelling cannot be compared with anything.
- One of the best ways of making this type of passive income is by investing in the stock market. People like Warren Buffet know this very well and have used the strategy to become very rich. In fact, most of the wealthiest people in the US have most of their net worth in the stock market.
- If you are already invested in stocks, you might consider the relatively new concept of peer-to-peer marketplaces. These are companies that facilitate the lending of money between people and companies.
- In a previous article, we have covered Lending Club, which is the biggest in the industry. This article covers Prosper Marketplace and everything you need to know about it. You can also have a look at Proper marketplace vs Lending Club.
What is Prosper Marketplace?
Prosper is a peer-to-peer lending platform in the United States. It was established in 2006 and has since then become the second-biggest company in its industry. According to information on its website, the company has lent money to slightly under a million customers. More than $15 billion has been lent in the marketplace. In 2018, the company had revenues of $176 million.
How Prosper Works
The idea behind Prosper is very simple. Investors who want to lend money on its platform create an account and deposit money. The company then screens the borrowers using information like FICO credit scores and their likelihood to pay. The approved borrowers then make a request for funds and are then given the funds by the investors. They will then pay back the money with interest to the investors.
To investors, the company provides an ideal method of diversifying their income. However, with interest rates so low, the investors can only make minimal returns. According to the company, the returns average between 3.4% and 9.2%. These returns are relatively lower compared to those gotten from stocks and real estate. As shown below, you can build a portfolio of loans across the different credit rating.
The chart below shows a simplified version about how the process works. To borrowers, the platform gives them a simple place to access funds faster. All they have to do is to create an account, check the maximum amount they can borrow, borrow, and then repay the funds.
Who Can Invest on Prosper?
As this is a relatively new field, it has drawn a lot of regulations, which are intended to protect the investors and borrowers. One area of regulation is on who can invest on the platform. Generally, Prosper is only open to Americans who are 18 years and above. They must have a social security number and a bank account.
Different states have different laws and regulations on who can lend money in the peer-to-peer marketplaces. For those in Idaho, Alaska, Missouri, Nevada, New Hampshire, Oregon, Washington, and Virginia, the investors must have an annual gross income of at least $80,000 and a net worth of at least $80k. Alternatively, they must have a net worth of at least $280k.
For those in California, they must have a gross income of more than $85k and a net worth of $85k. Alternatively, they must have a net worth of at least $200k. These investors must not invest more than $25k in loans. Finally, for those investors living in Maine, Missouri, and Oregon, investors should not invest more than 10% in Prosper and other P2P lending loans.
What are the Risks of Investing in Prosper?
There are a number of risks on people who invest in Prosper Marketplace. These are:
- Liquidity Risk. When you are in urgent need of funds, you cannot access them because the borrower has to keep paying on their timelines.
- Interest Rates Risks. When interest rates rise, the borrowers will continue paying back as agreed. Therefore, the investor will miss out on other investing opportunities.
- Company risk. Prosper – and other P2P marketplaces – are relatively small and new companies that have never been profitable. In 2018, the company had a net loss of more than $115 million. Therefore, investing in such a company is relatively risky.
- Default Risk. Since the borrowers are usually online and have no collateral, when they default, you will have all the risk. The same is true if someone dies.
- Hacking Risk. There is the risk of being hacked. In fact, people buy other people’s documents in dark web, borrow money and disappear.
Which are Prosper Marketplace Alternatives?
The peer-to-peer lending marketplace industry is growing rapidly and Prosper has a number of alternatives. The main ones are:
- Lending Club. This is the biggest company in the industry and is valued at more than $1.7 billion.
- Upstart. This is a relatively new player in the industry. It distinguishes itself from the other peers because it looks at other things like education level in addition to the credit score.
- Funding Circle. This is a UK-based peer-to-peer marketplace that is not yet in the United States.
- Peerform. This is a relatively small P2P lending platform that works in a similar way to Prosper.
Takeaway on Prosper Marketplace
Prosper is the second-biggest peer-to-peer lending company in the United States. It has succeeded in an industry that is fast-growing and one that is now dominated by Lending Club. As mentioned above, you should only use Prosper to diversify your income. It should not be the primary method that you use to make money. In addition to Prosper, you should also consider other investing methods like stocks, commodities, and index funds.
Peer to Peer Lending Sites
Kasper is our expert for saving, investing and bank accounts. Kasper holds an MSc in Mathematics and worked with Mercedes-Benz and the Dutch tax authorities.