Have you ever wondered what it would be like to be a banker? A new trend is emerging online that will give you a flavor for what it’s like. Prosper.com is the leader in this new trend, called peer-to-peer lending, where people borrow money directly from other people, instead of through a more traditional loan with a bank or on their credit card.

What’s interesting about Prosper is that lenders bid on loans in an eBay-like auction format. A lender bids on a loan by specifying the dollar amount and interest rate s/he is willing to contribute to the loan. When the bidding period ends, lenders having bid the lowest interest rates on a loan are the ones that fund it.

This post will focus on the lending side of Prosper instead of the borrowing half, since the lending side provides passive income opportunities. The rate of return of this passive income depends on many factors including your risk tolerance, diversification, the amount of up-front due diligence, discipline with your lending rules, factoring in for any defaults, and finally a bit of intuition as to the borrower’s character.

My personal average APR on Prosper is currently 14.86% with 21 loans, no late payments and no defaults. None of my loans however are over 3 months old, so there’s still plenty of time to test the thoroughness of my Prosper strategy.

Anatomy of a Prosper Loan

All loans on Prosper are for a 36-month term, however borrowers are able to pay off the loan sooner without penalty if they so choose. Prosper assigns each borrower a credit grade from “AA” to “E”. It also has an “HR” category for those high-risk borrowers. Prosper assigns this grade based on the borrower’s FICO score from Experian (one of the three major credit bureaus):

Along with the credit grade, lenders are given a profile of the borrower’s credit-related data. The credit profile includes:

• Debt-to-income ratio
• Number of credit inquiries in past 6 months
• Date when first credit line was opened
• Number of current credit lines
• Number of open credit lines
• Revolving credit balance
• Percentage of bankcard utilization
• Employment status
• Length of current employment
• Income range
• Occupation
• Number of current delinquencies (if any)
• Amount delinquent
• Number of public records in past year and past 10 years

You’re only allowed to see this profile when you’re logged into the site; however you can create a free account without obligation of lending any money and still access this information.

Following the credit profile, a loan listing contains a description provided by the borrower for why they need the loan and why they’re a good candidate. Borrowers frequently include information on their income and expenses to provide potential lenders with additional information for making a decision.

As alluded to earlier in this post, potential lenders have the ability to ask the borrower questions directly should there be something not sufficiently explained in the description. These questions and answers are also displayed on the loan listing so they’re visible to all members.

This review continues with a look at the pros & cons of Prosper loans.

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