With the rise of peer-to-peer lending platforms like Prosper, investing directly in consumer loans has become easier than ever. Prosper connects individual investors with borrowers looking for personal loans. As an investor, you can browse loan listings on Prosper and choose which loans to fund based on the borrower’s credit data. Investing through Prosper offers attractive returns compared to other fixed-income investments like bonds or CDs. However, investing in consumer loans also comes with risks like borrower default. In this article, I’ll provide a step-by-step guide on how to invest with Prosper, including an overview of the lending process, required documentation, investment strategy tips, and key risk factors to consider before investing your money.
Understand Prosper’s online lending process and how investors earn returns
When you invest through Prosper, you are purchasing fractional portions of loans originated through their platform. Here is an overview of how Prosper’s lending process works:
Borrowers apply for loans by submitting personal and financial information. Prosper evaluates the applicant using credit data and proprietary algorithms to assign them a Prosper Rating from AA (lowest risk) to HR (highest risk).
Prosper lists approved loans on their platform for investors to browse. Each listing includes the loan amount, Prosper Rating, interest rate, and other details.
As an investor, you can search and filter loan listings to identify those that match your investment criteria. You can invest as little as $25 in any given loan.
Once a loan is fully funded by investors, the borrower receives their money, minus an origination fee Prosper charges.
The borrower makes monthly payments on the loan. Prosper collects and distributes payments to the loan investors.
As an investor, you earn returns through the interest portion of the borrower’s payments based on the percentage of the loan you funded.
Open a Prosper account and link your bank details
To start investing with Prosper, you first need to open an account on their website. The account opening process involves:
– Providing your personal details like name, date of birth, address, Social Security Number, etc.
– Linking your bank account information so you can transfer funds to and from your Prosper account. They will verify your account through micro-deposits.
– Selecting whether you want to open a regular taxable account or a retirement account like a Traditional IRA or Roth IRA.
Prosper will also pull your credit report and ask some questions to verify your identity and assess your financial suitability as an investor. The account approval process usually takes 1-2 days.
Deposit funds to invest and browse loan listings
Once your account is open, you need to transfer funds from your linked bank account into your Prosper account to start investing. Prosper only accepts investments via ACH transfer or wire, not debit/credit cards.
You can then browse available loan listings on Prosper filtered based on criteria like Prosper Rating, loan amount, interest rate, term length, etc. Each listing provides details on the borrower’s financial situation to help you analyze their ability to repay. You can also see the percentage of the loan already funded by other investors.
Prosper offers automated investing tools as well. For example, you can set up an automated bidding tool to invest predefined amounts in loans that meet your customized criteria.
Select loans to invest in manually or automatically
When you find a loan listing that you want to invest in, you simply indicate how much you want to fund that loan and Prosper will facilitate the investment. The minimum investment per loan is $25. You can choose to invest in loans manually loan-by-loan or take a more automated approach.
With Prosper’s Auto Invest tool, you define your target return rate and risk tolerance. Auto Invest will then automatically spread your investment deposits across loans that satisfy your preferences. Many investors choose Auto Invest for the added diversification it provides.
Just keep in mind that your investment principal and returns are not guaranteed with Prosper. Loans can go into default if borrowers fail to make payments.
Manage your account and monitor returns
You can monitor the performance of your Prosper investments by reviewing your account dashboard. As borrowers make payments, you will receive principal and interest based on the share of each loan you hold. Prosper makes your share of any loan payments available for withdrawal or reinvesting.
You can also see data on the payment status of your loans. This helps you identify problem loans early so you can prepare for potential default. Prosper will facilitate debt collection if needed, but as with any lender investors take on default risk.
Lastly, you will receive 1099 tax forms from Prosper each year detailing your taxable investment income. So make sure to factor Prosper investment returns into your annual taxes.
Investing through Prosper provides individual investors access to consumer loans that traditionally only banks and institutions could invest in. By reviewing borrower credit data and spreading your investment across multiple loans, peer-to-peer lending offers attractive fixed-income returns. However, investors take on risks including borrower default. Managing these risks starts with diversification and data analysis. Overall, Prosper can be a compelling hands-on investment option for those seeking moderate returns on excess cash.