Interesting Business Model of PROSPER.COM

Prosper.com is one of the first and most popular exampled of Peer to Peer (P2P) moeny lending platforms. The P2P platform was started in 2006, to bring together borrowers- who are in need of affordable loans, with the investors who will fund it for them.

About Prosper

Prosper Marketplace, Inc. is a San Francisco, California-based company in the peer-to-peer lending industry. Prosper Funding LLC, one of its subsidiaries, operates Prosper.com, a website where individuals can either invest in personal loans or request to borrow money.

Although borrowers must have a minimum credit score of 640 to qualify, the average credit score among Prosper borrowers is 710. Prosper has originated more than $12 billion in personal loans ranging from $2,000 to $40,000 since 2006 by matching borrowers to potential investors through its online platform. It matches lenders and borrowers, eliminating the role of banks as gatekeepers, capital allocators and underwriters.

Prosper is a pioneer of peer-to-peer and marketplace lending with over $16 billion in funded loans to over 1 million customers. The firm’s mission is to advance financial well-being.

The company is a bunch of experts and specialists in peer-to-peer lending, personal loans, alternative investments, online investing, social lending.

Business Model of Prosper

In Prosper.com, the company collects revenue by taking a fee on its customers’ transactions. Borrowers who receive a loan, pay an origination fee of 2.4% to 5.0%, depending on the borrower’s Prosper Rating, and investors pay a 1% annual servicing fee.

Actors Performing

1. Borrower
2. Investor
3. Prosper (The Administrator)

Borrower

How can a Borrower utilize this platform? 

A borrower can utilize this platform by borrowing a loan from any individual or institution in a form of a personal loan and more. A Prosper personal loan is one that is not based on collateral. Unlike a car loan or a mortgage that is based on the value of the car or house being purchased, a Prosper personal loan is based on other factors, such as an individual’s credit history as reflected in their credit score. A Prosper personal loan is made for a fixed time period.

What kind of Loans does Prosper deal with?

For the most part, Prosper makes one type of loan – “Personal Loans”. But they can be used for just about any purpose the borrower can imagine. For example, borrowers can use a Prosper personal loan for:

• Debt consolidation: It is the act of taking out a new loan to pay off other liabilities and consumer debts, generally unsecured ones.
• Home improvement
• To cover medical or dental expenses
• For business purposes
• To make large purchases, such as buying an automobile
• To cover household expenses
• For the purchase of an automobile, motorcycle, recreational vehicle, or boat
• To pay for special occasions, such as engagement rings and weddings
• To cover vacation costs
• To pay taxes
• “Green loans” – to purchase energy-efficient equipment for your home
• Short-term and Bridge Loans
• Baby and adoption expenses

While these are specific purposes for loans, the basic loan set up remains the same. Each loan is fixed-rate, unsecured, payable over three or five years, and has no prepayment penalties.

Prosper will lend between a minimum of $2,000, up to a maximum of $40,000. All loans have terms of three years or five years and are fixed-rate, fixed payment installment loans that will be paid in full at the end of the term.

How does the Loan Process work?

Applying for a loan is a simple multi-step process, that looks something like this:

• Borrowers can create the loan listing and provide basic information, then Prosper will obtain the credit score and determine the rate and terms.
• Based on the borrower’s credit score and other information Prosper will obtain, and the borrower will be assigned a credit grade, from AA to HR.
• Borrowers then create a loan listing, which is their request for a loan. They will add a description of their loan purpose and financial situation. It will appear on the platform to be reviewed by investors.
• Once the loan listing is fully funded and the borrower’s information has passed Prosper’s verification process, they will receive their loan.
• The listing will stay active for 14 days, or until the loan funds.
• Loan funds are deposited directly into the bank account within days.
• Borrowers can begin making their monthly payments.

How can a Borrower meet the Prosper Loan Requirements?

In order to qualify for a loan through Prosper, the borrower must be a US resident and reside in one of the 47 states where Prosper makes loans. This includes all US states, except for Iowa, Maine, and North Dakota. The borrower must also have a Social Security number, a verifiable email address, and a bank account.

Credit: In order to qualify for a loan with Prosper, the borrower must have a minimum credit score of 640.

• Prosper uses Experian to determine your credit score.
• Minimum of two years of credit history
• No bankruptcies within the last 12 months

Income: A borrower must declare the income on their loan application must be verifiable.

• A debt-to-income ratio of less than 50 percent

Origination fee:

• Risk grade AA – 1% to 2% for a three-year term, 3% for a five-year term
• Risk grade A – 4% for a three-year term, 5% for a five-year term
• Risk grade B – 5% for either a three-year or five-year term
• Risk grades C through HR – 5% for either a three-year or five-year term

Collateral: All loans made through Prosper are unsecured; therefore, no collateral is ever required.

Three Simple Steps for Loan Application Process

Applying for a loan with Prosper is a three-step process:

1. The borrower can choose a loan amount, state the purpose of the loan, indicates their credit level – Excellent, Good, Fair or Poor (Poor is an automatic rejection).
2. When the loan is listed, which makes it available for inspection and evaluation by potential investors; a loan listing can be active for up to 14 days.
3. Once the loan is fully funded by investors, the verification process will take place, as well as the loan review, and loan documents will be prepared.

Investor

How do Investors Invest?

Investing at Prosper is a relatively simple process. It begins when the borrower applies for a loan. If the borrower meets Prosper’s underwriting criteria, such as a minimum FICO score of 640 (for a new borrower) then the loan will be listed on the platform for investors.

There are two distinct platforms at Prosper, the whole loan and fractional loan platforms. The whole loan platform is for very large investors, usually funds or other institutional investors, where loans are made available in their entirety. Investors can not invest in a part of the loan, they must take the entire amount.

This review is most concerned with the fractional loan platform where investors can invest in small portions (fractions) of loans. Investors can open an account with as little as $25, which is also the minimum investment per loan. This way investors can build a portfolio of loans, taking just small fractions of each loan.

Once an investment has been made, the amount is pooled with other investors. Assuming the loan is fully funded and the borrower passes all verification steps then the loan is issued to the borrower, less Prosper’s origination fee (up to 4.95% depending on loan grade). Then within 30-45 days, investors should start seeing payments showing up their account, as principal and interest payments are made every month over the life of the loan.

Investor Eligibility to Invest

Not everyone can invest at Prosper. There is a list of requirements that all investors must meet before they can open an account:

• Individual investors must be 18 years of age or older, have a valid Social Security number as well as a checking or savings account.
• Investors must reside in an eligible state. As of this writing residents in the following states may invest: Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
• Some states, Alaska, Idaho, Missouri, Nevada, New Hampshire, Virginia, and Washington, have financial eligibility requirements of a $70,000 annual gross income and a $70,000 net worth. Also, no residents of these states may invest more than 10% of their net worth in Prosper notes.

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