This is the second in a series of post on my exploration of Prosper. the peer to peer lender.
See Part 1 , See Part 2 , See Part 3 , See Part 4 , See Part 5
Today the trial deposits posted to my account. Prosper uses a method I haven't encountered before, the trial deposit and withdrawal. As in, they deposited 21 cents and withdrew 4 cents. You have to know both amounts to authenticate your account. I've seen the two deposits before, and I've seen companies take there deposit back, but never has the withdrawal been part of the authentication. So I set up my account and initiated a funds transfer.
During the funds transfer process there was an option to do an instant transfer. This is something I've never seen before. Often times I'm frustrated by having to wait 3-5 business days for money to actually move. To qualify for instant transfer you must meet certain requirements, which I can't meet yet. From the website they are:
- Transfer amount must be between $500 and $10,000
- Sum of pending transfers must be <20% of lender's active loan value
- Your active loan value must be at least $2,500
Obviously someone who just signed up can't meet these criteria, but maybe later I'll take advantage of it.
After initiated the funds transfer I decided to explore the website a little. One of the things I noticed is that the potential earnings could be much greater. Some loans started at over 30% interest rate, whereas the highest interest rates at Lending Club were around 20%. However, the higher interest rate is due to a greater risk. Prosper doesn't observe the same minimum loan requirements that Lending Club does, so interest rates have more variability. Another thing that occurred to me is that interest rates on Prosper don't necessarily reflect risk. Because of the Ebay like process of bidding on loans, the interest rate a borrower pays can be substantially less than their actual risk level. Probably the biggest factor is the Debt-to-Income ratio of the borrower. For a more in-depth post on how this affects loan risk, check out this post.
Some other differences I've observed between LC and Prosper. On Prosper, borrowers can post a picture. This adds a human element to the process, but hopefully that won't be a factor in my decision. Unless they post a really stupid picture. Like LC you can ask the borrower questions. Additionally, borrowers can have friends write character endorsements for them. You also get a credit summary, just like LC, but the borrowers are required to go into more detail about their expenses. Since that part is unverified, you can only trust it so far. The credit report is your only outside objective look at the credit risk of the borrower.
Prosper has been around longer than Lending Club, and so these feature may be coming to LC in the future.
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