Prosper is an online marketplace for people-to-people lending services where investors can “play the bank” and earn a nice return on their money. I just completed my initial transfer of $100 to Prosper, and successfully lent out my very first loan. It took me a couple days of days to get used to the loaning system, but I am confident that anyone can profit from lending services, even the conservative investor.
Setup Your Prosper Account
Your first step is to register an account with Prosper.
IMPORTANT: If you sign up under my link, we each get $25 credit to our accounts automatically.
Next, begin browsing the marketplace and become comfortable with Prosper site features. After signing up, you will be asked to connect your checking/savings account to Prosper if you wish to participate in loaning services. I linked my Bank of America checking account, but you can add as many accounts as you please to your accounts page.
Once you enter your banking information, Prosper must verify the information with your bank, which took around 1-2 days.
Tip: If you plan to make frequent deposits in your Prosper account, use your high-yield savings account so your money will always be earning interest.
Make Your First Deposit
The best way to earn money from Prosper is to get active as soon as possible. Once your banking information is confirmed, send at least $50 to your Prosper account, so you can actively search for potential loans.
I started out with only $100, since the minimum loan amount is only $50. It takes around 4 business days for Prosper to transfer the funds from your banking account to your Prosper Account. I thought 4 business days was unusually long, but the money arrived soon enough.
Tip: Start out with a small sum before you begin loaning out thousands of dollars. Like any other skill, loaning money takes research, time, and most importantly experience.
Lending Money to Prosper Borrowers
There are two ways to lend money to prosper borrowers: through automatic bidding or manual bidding.
With automatic bidding, you set the requirements of your loan and Prosper bids on loans for you. With manual bidding, you have the responsibility to finding trustworthy borrowers to loan money to.
Manual bidding will earn you the best returns because you determine whether a borrower is qualified for a loan, not the computer system. And since searching for loans is really easy, you should take the time to do your own loan research.
When searching for people to lend money to, I look for 3 basic requirements for every borrower:
- debt to income ratio of less than 20% – this insures that the borrower earns enough steady income to pay back the full loan in 3 years time. Debt to income ratio is similar to a company's debt to equity ratio, so you can apply the same fundamental stock picking skills in your loan practices.
- verified banking account – if the borrower lacks a verified banking account, then he probably isn't committed to repaying your loan. Verification means commitment; commitments usually translate to success.
- no group ownership – group members receive lower interest rates because a group's total interest rate falls every time each member pays their loan on time. Lower interest rates = less money for you. Look for borrowers with strong credit records and zero group memberships.
Your search results will return a long list of borrowers who matched your requirements. Awesome! Now, click on the listings and read up on the borrowers' credit history, listing description, and desired interest rate. A solid loan candidate will answer questions truthfully, possess a strong credit record, and already have bids from other members.
When starting out, only bid on loans that have been 100% funded. Why? Because veteran Prosper members have already invested their money in the loan, so your chances of gaining a positive return on your investment are greater.
Bid on Prosper Marketplace Loans
You'll need to make a few calculations before you enter your desired interest rate bid for a loan.
Historical Default Rates on Prosper
The historical defaults chart lists the average rates of loan defaults for every credit grade. In other words, this is the percentage of prosper members who fail to pay back the loan in full. You have to subtract this number from your desired APR to calculate a fair rate of return on your money.
Historically, members with an E credit score default 9% of the time. If you made 10 loans of $50 each to 10 grade E members at a rate of 20%, you would only earn 20% on $450 ($455 on average) instead of $500. This reduces your principal, which also reduces the amount of interest you would earn.
Make Your First Prosper Bid
Just enter the amount you wish to loan out, your minimum interest rate, and the collection agency of your choice. The collection agency serves as a safety net just in case the borrower defaults on your loan. Collection agencies try to recover as much of your investment as possible, while charging you a fee of course. Hopefully, if you do enough homework and practice proper loaning methods, you can avoid the collection route.
This is just a beginner's guide to investing on Prosper. I will follow up with more advanced techniques on earning the highest returns on your investment in my next few posts.