How to Make Money Investing on Prosper

How diversified are your investments?

I always look for different forms of alternative investing in order to diversify my portfolio and there certainly seem to be no shortage of new possibilities popping up.

One platform that has actually been around for a few years now is peer to peer (P2P) lending site, Prosper. Admittedly, there were a few hiccups when Prosper started prior to 2009, but since then the platform has thrived and has thousands of enthusiastic users.

The idea is that Prosper matches up investors with those looking to borrow money. It’s a way to make potentially good returns but, of course, is not without risk.

Here’s what you should know about using the platform to make money:

What is peer to peer (P2P) lending?

Peer to peer (P2P) lending is a way for individuals who need to borrow money to do so without going through a traditional financial institution. Why would they do this? Sometimes it’s because their needs fall outside of what a regular financial institution would approve, maybe they wouldn’t be approved due to something on their financial record, or they’re looking for a potentially better deal.

From the investor perspective, P2P lending is an opportunity to make a return through the interest charged on what you lend. It’s opening up a market that otherwise wouldn’t be available to you on any kind of scale because you’re not a bank or large lender.

P2P lending is a way to cut out the middleman and bring the investor and borrower together. You might also hear it referred to as “social lending.”

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How does Prosper work?

Prosper is a platform to bring together borrowers and the lenders who invest in consumer loans. It helps both parties to bypass the traditional financial institutions and to work on satisfying each of their financial needs more efficiently.

As an investor, you open an account with Prosper and then get to choose which loans you’d like to invest in. It’s a bit like the crowdfunding platforms you see (such as Kickstarter or Indiegogo), you’re not directly lending to the borrower, but you’re choosing a loan to chip a contribution (investment) into.

You will be issued notes that correspond to the specific loan chosen. These notes fall under the asset class of “consumer credit” which is considered a riskier investment category to get involved with.

The minimum investment per loan is $25 and you will get to choose your preferred loans based on your appetite for risk. As with any kind of investing, those which are deemed higher risk also have a higher potential return, whereas loans at the “AA” end of the scale represent low risk and lower returns.

How is that risk calculated? It tends to be a combination of things such as the credit rating of the borrower and the purpose of the loan. You can select the loans you’d like to finance by filtering criteria such as:

  • How much you’d like to invest and the maximum amount per loan.
  • Prosper rating of the borrower.
  • Any criteria you have for loan purpose.
  • Your preferred term for the loan/notes. (Current terms are between three and five years, although according to their prospectus, they may offer terms between three months and seven years in the future).

While $25 is the minimum investment for one loan, investors are encouraged by Proper to invest more in order to diversify their portfolios. They say those with a minimum of 100 notes invested ($2500) tend to enjoy higher and more predictable returns.

Of course, this is entirely up to your own preferences. Some people start out with much less invested and still manage to see returns. It’s worth noting that you can’t simply reverse your investment decision if you need the cash. The loans are for set terms so unless the borrower pays it back early, you’ll probably need to wait. You may be able to on-sell your notes to another investor via FOLIO investing.

How to make money on Prosper

After you’ve made a loan, you will receive payments of both principal and interest back into your account. You can choose to have these payments either reinvested or credited into your bank account.

The projected return on these investments is between 4.2% and 11.65%, although these rates are not guaranteed. You’ll have to also account for the fees which Prosper charges. These might include loan servicing fees for processing borrower payments (which are charged against your account) and collection expenses if the loan becomes past due. These are never to exceed the value of the note.

What are the risks?

As mentioned, these investments do fall under “consumer lending” which is considered to be a higher category of risk for investments. Prosper is quite open about the fact that these investments carry a high degree of risk, as outlined by the statement below from their prospectus:

“The Notes and PMI Management Rights involve a high degree of risk. You should carefully consider the risks described below before making a decision to invest in the Notes and PMI Management Rights. If any of the following risks actually occurs, you might lose all or part of your investment in the Notes and PMI Management Rights.”

They also note in their prospectus that if you can’t afford to lose the entire amount of your investment, then it is not a suitable investment option for you.

The primary (and most obvious) risk is that the borrower may fail to repay the loan. This could result in the loss of the entirety of your notes for that loan, which is why it is highly recommended that you diversify across different loans and levels of risk. The payments made into your account are dependent on the borrower making their repayments, so it’s possible you may go through months where no payments come in.

Here’s what you should know about payments, taken from Prosper’s prospectus:

“PFL will only make payments pro rata on a series of Notes after it receives a borrower's payment on the corresponding Borrower Loan, net of servicing fees. PFL also will retain from the funds received from the relevant borrower and otherwise available for payment on the Notes any non-sufficient funds fees and the amounts of any attorneys' fees or collection fees our in-house collections department, a third-party servicer or collection agency imposes in connection with collection efforts. Under the terms of the Notes, if PFL does not receive any or all payments on the corresponding Borrower Loan, payments on the Note will be correspondingly reduced in whole or in part. If the relevant borrower does not make a payment on a specific monthly loan payment date, no payment will be made on the Note on the corresponding succeeding Note payment date.“

Is Prosper for you?

Ultimately, whether or not using Prosper is a good move for you comes down to your appetite for risk. It has to be emphasized that this is not a “safe” investment option and you may well lose money you have put into notes.

This is where the key is to be able to diversify. If you have the available capital, it’s better to spread your risk across different loans to boost your chances of getting a return.

Prosper provides you with a large platform through which there are plenty of opportunities to connect with good borrowers. It has an advantage over smaller platforms because it is relatively well-known and attracts a large number of “good risk” borrowers. Their claim is that they attract borrowers with higher average incomes and FICO scores than the average in the population.

The bottom line? I’d do it if you a) can afford to lose the money invested and b) don’t need that cash for the next 3+ years.

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Featured image photo credit: investmentzen via Visualhunt

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Comments on How to Make Money Investing on Prosper

  1. P2Peasy says:

    Great post. Thanks for sharing such a great post.

    1. Susan Lassiter-Lyons says:

      You bet! Thanks for reading!

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