Prosper Marketplace

Prosper Marketplace is America's first peer-to-peer lending (P2P) platform, a revolutionary concept that essentially cuts out the traditional banking middleman. Think of it as a digital town square where people who need to borrow money can connect directly with people who want to invest money by lending it out. Instead of depositing your savings in a bank for a meager return, you can act as the bank yourself, lending directly to individuals and earning interest rates that are typically much higher. Borrowers use the platform to apply for unsecured personal loans for things like debt consolidation, home improvement, or starting a small business. Prosper vets these borrowers, assigns them a risk rating, and then presents their loan requests to the investor community. For investors, it's an opportunity to build a portfolio of personal loans, diversifying their investments beyond the traditional world of stocks and bonds and potentially generating a steady stream of passive income.

Imagine strolling through an online marketplace, but instead of goods, you're shopping for loans. That's the core experience for a Prosper investor.

• Browse Listings: You browse hundreds of loan listings, each with a detailed profile. This includes the loan amount, the borrower's stated purpose, and, most importantly, the Prosper Rating. This proprietary rating, ranging from AA (lowest risk) to HR (highest risk), is Prosper's assessment of the borrower's creditworthiness.
• Build a Portfolio: You don't have to fund an entire loan. You can invest as little as $25 in a single loan note. This allows you to spread your investment across many different loans—a crucial strategy known as diversification. By building a portfolio of 100 or more notes, the impact of a single borrower failing to pay is significantly cushioned.
• Earn Returns: Once a loan you've invested in is fully funded, the borrower receives the money. You then start receiving monthly payments of principal and interest, directly to your Prosper account. Prosper handles all the servicing and collections, taking a small annual fee (typically 1%) from your returns for their trouble.

While P2P lending might seem like a modern tech play, its core principles can appeal greatly to a value investor. It's all about assessing risk and finding value where others might not.

• Price vs. Value: Each loan's interest rate is the 'price' you receive for taking on the risk of lending. A value investor's job is to perform their own due diligence. Does the interest rate adequately compensate for the borrower's risk profile? You're essentially looking for 'undervalued' loans where you believe the probability of repayment is higher than the market-assigned interest rate implies.
• Margin of Safety: Diversification is your margin of safety in the P2P world. A single loan default can wipe out your return on that specific investment. However, by spreading your capital across a large number of loans, you build a robust buffer. The steady payments from your 99 performing loans can easily absorb the loss from one that goes bad. A value investor doesn't try to avoid all risk; they manage it intelligently.
• Circle of Competence: Stick to what you understand. While Prosper provides data, you might develop a knack for assessing certain types of loans. Perhaps you feel more comfortable evaluating borrowers with stable employment histories seeking to consolidate high-interest credit card debt. Stay within your circle of competence and avoid loans with profiles you can't confidently assess.

Acting as the bank comes with bank-like risks. It's crucial to go in with your eyes wide open.

• Default Risk: This is the big one. The borrower may stop making payments, and you could lose your entire remaining investment in that loan. While Prosper's collection efforts may recover some funds, a total loss is possible.
• Liquidity Risk: These investments are not 'liquid.' Unlike a stock you can sell in seconds, there is only a limited secondary market for Prosper notes, and it may not always be active. You should be prepared to hold your investments for the full term of the loan (typically three or five years). This is a key aspect of liquidity risk.
• Platform Risk: You are relying on Prosper Marketplace to service the loans and manage the platform. While they have contingency plans in place, the failure of the platform itself is a remote but real risk.
• Interest Rate Risk: You are locking in a fixed interest rate. If overall market interest rates rise significantly, your returns might look less appealing compared to newer, higher-yielding investments. This is known as interest rate risk.