Review on Prosper.com – Can We Leverage on it to Achieve Financial Freedom?
It seems like Ebay has a lot of effect when comes to building an online business system. Today, a lot of web sites or online business systems are built based on the concept of Ebay and I think Prosper.com is one of them. 
Prosper.com is a community that lets people lending and borrowing money to each other in Ebay style or peer-to-peer. It is a very famous site that many people are paying attention on it. You can lend or borrow money through Prosper over the internet without leaving your house hunting for lenders and borrowers. As a lender, you can easily find people to lend money to over Prosper.com. This is because since Prosper launched, it has attracted more than 270,000 members to their service. As a borrower, there are plenty of people ready to lend money to you over Prosper.com. The good thing is you don't even have to open your mouth shamefully, well, you will know this feeling if you try to borrow money from others.
Prosper.com is a great investment opportunity, at least to me, because it is a source of making money or funding for your investment and business. So in this article, I am going to share with you some of my thoughts over Prosper and see how we can leverage on it to achieve financial freedom.
Without further ado, here is the information:
How Prosper Work
Before we move on to talk about how to leverage Prosper, we must know how it works and how it can help us.
Generally, Prosper is a place letting people lend and borrow money in a form of People-to-People lending through the internet. It is by-passing the bank as the middleman of the transaction and letting people dealing with people directly. I brought a simple example from Prosper.com and show you how the concept works.
John needs a small loan, $3000. So he posts a listing over Prosper.com for a loan he wants and interest that he can afford. Lisa and other lenders start bidding on John's listing at a rate that is fair. At the end, the bids with the lowest interest rate will combined into a single 3-year loan for Joe. Each month, John's payment will be deducted from his bank account until to the lenders until the loan is paid off.
John's $3000 loan is not always coming from a lender. It can be a combination of money from several lenders.
If you want more information, you can always go to Prosper.com.
The Theories to Make Money from Prosper
Now you should have an idea how Prosper works. So let us move on discuss how to make money from it.
Generally, you have 2 ways to make money from Prosper:
- Lend Money to others. Lending your money out through Prosper and earn some interest as passive income.
- Get funding for your business and investment. Collect some money through Prosper to start your business or invest in a higher return investment.
Lending Money to others can be a good idea to build passive income. In Prosper, no bank or other parties as middleman, you and the borrower are dealing directly. So the process is quite simple and the interest rate is quite high too, at least all the interest is paid directly to your pocket. In Prosper, you can lend out your money up to 24%+ high interest rate which considered as a high-return investment. This can easily give a great competition to your saving account.
On the other hand, if you have a great business idea, however you don not have any money to start it. Now you can get some fund for your business through Prosper. Of course, you must prepare a great business proposal to explain your business idea to lenders so they can have a brief idea about you. Your credit is also important here. Besides that you also need to do some research and calculation over how much interest you can offer to people. Maybe not as high as a bank loan. Just offer the rate that you can afford.
The risk of Prosper Money Game
Every money game has its own risk, this is what I always believe. In this world, there are no financial investments that are guaranteed, except saving account. So before you jump into the money game of Prosper, you must understand the risk of the game and the rules to play it.
Well, don't you agree that risk only exists if you lend out your money? Come on, if you borrow money from others, the only risk you have to worry is whether you can pay back the money on time. This is all about your money management. However, if you are a lender, then you have to treat yourself as a banker and think about the risks exist such as late payment or default.
Actually Prosper is doing some good job in their system to protect the lenders:
- All the potential borrowers must submit their information for credit check. From here, you will know:
- The credit rating of a borrower. Ranging from AA through E, HR(High Risk) and No credit(NC).
- The debt-to-income ratio of a borrower.
A borrower also has to key-in their important information such as social security number, 2 phone numbers and also driver;s license number. This will ensure a borrower is coming from USA.
- Prosper has developed good relationships with the major credit reporting agencies. So any missed payments or default cases will be reported immediately.
- Borrowers have a better chance of receiving some better bids on their loan if they from a group of trusted users. So if a borrower missed payments or defaults, the reputation of the entire group is at stake. So if the borrower is from a trusted group, the group leader may take some action to help you in order to protect their group trustworthy rate.
If you ever been to Prosper.com and read their lenders section in FAQ, you will know that you are advised to reduce risk by diversify your investment money / lending money. For example, you have $2000 extra money to be lent out. Then you bid $100 on 20 listings with an average interest rate 10% and 1 out of 20 is default, you still make money. Anyway, here is the calculation:
$2000 @ 10% - 3 years loan
$100X20 @ 10% Interest = $2323.80
($2323.08 is the total money you will get at the end of the loan)
However, something happen, 1 of the borrower went to default. So…
$100X19 @ 10% interest = $2,222.81
($2222.81 is the total money you will get at the end of the loan with 1 default lender)
PS: the above example is extracted from Prosper.com
Like what you can see, you can protect your money by diversify it to different borrowers. Well, every investment has its own risk, it is about how you manage the risk.
Tips Help Lender assess risk
As an investor, we cannot stop because one investment has risk. Instead, we should learn how to assess the risk and then compose a plan to manage it. So here are the tips that we can use to reduce the risk of making money from Prosper:
- Debt to income Ratio. Please pay attention on this ratio. From this number you will know the financial health of the borrower and whether he/she able to pay back the full loan in 3 years time.
- Group Ownership. If a borrower belongs to a good credit group, there are high chances that he/she will pay back the money to you. But of course, good group = lower interest rate = less money for you.
- The reason. Read the story why borrower wants the money. To me, I will never lend money to someone to buy doodads such as car, gadgets and etc.
- Credit Information. this is the most useful information for you. From the information, you will know the credit history of a borrower and hence analysis whether you can trust the borrower.
- Employment/Income Source. So you want to know whether a borrower can pay back the money to you? Then you must know their income sources. Whether he is working for someone, unemployed or self-employed. Why kind of job or business they are doing and of course you must predict whether he can afford his debt.
Conclusion
There are many positive and negative thoughts on Prosper over the internet. Some people think that it is too risky to give a try on Prosper. But there is a man who have lent out $750,000 in Prosper and decided to leverage on Prosper for retirement. So it does not have right or wrong to invest in Prosper. Every investment has its own risk, the only thing is whether you want to spend time to learn how to manage it or not. I am not saying that Prosper is suitable to you and it can 100% make you money and make you rich. But to me, it is a kind of investment that we can leverage on to achieve financial freedom. At the end, it is your rights whether you want to give it a try or just look for the next new investment.
Good luck!
Harrison
Achieve Financial Freedom, Do Something Profitable, Ways To Make More Money