Last October I wrote that I had applied for an $11,500 debt consolidation loan from the unique person-to-person lending network Prosper. Here’s an update to how this amazingly cool service has helped me.
A little background: I have been chipping away at an obscene credit card debt since college, but the high interest rates (19-20%) were making it nearly impossible to get very far ahead. Despite having a fairly established credit history and a perfect payment history (no late payments or defaults), the sheer amount of debt I was carrying made it impossible to get new credit like a 0% balance transfer credit card or even a debt consolidation personal loan. Debt counseling agencies were not an option for me because I had not defaulted, so they would hurt my credit rather than help it.
After reading about Prosper, I decided to give them a try.
Setting up a profile and loan request was about as easy as setting up a Facebook account. The only difference is Prosper pulls your credit to display a grade (AA-E) to potential lenders. The great thing about Prosper is that the initial credit check is a “soft inquiry”, meaning it won’t appear on your credit report. The inquiry only appears if your loan is funded and initiated. Also, it costs nothing to create a loan request.
I asked for a loan of $11,500 to cover the balance on my highest interest rate credit card. In my profile I described, very honestly, my past mistakes and pointed people to my website to show my newfound appreciation for making sounder financial decisions. I used Prosper’s message boards to get advice for creating an appealing listing; one tip I received was to include my photo.
I asked for an interest rate of 16 percent, which was about average for my credit grade (B) and debt to income ratio (on the high side). Obviously, 16 percent is high, but it is still three percent less than I was paying.
The great thing about Prosper, however, is that it is an auction environment, and lenders compete with each other to get the best loans. Fortunately, my loan was attractive, and my interest rate was bid down to less than 14 percent. Again, that’s way more interest than anybody should be paying for any loan, but for me, it beat the alternative.
My listing closed after seven days. Once the listing closed and my loan was funded, Prosper was in touch to re-verify my identity (not surprising they would want to do that before shooting eleven grand into my bank account!)
The verification process was stringent. I had to fax them at least my ID and two proofs of address (utility bills or credit card statements from within six months) and speak with a representative on the phone. However, once that process was complete, the money was transferred to me (minus a $150 fee) and my credit card balance was at zero. Prosper deducts payments from my checking account on the first of every month, which is perfect because my debt is disappearing and as long as I balance my checkbook correctly, I don’t even feel it. In 33 more months I will be completely debt-free!
Update: I paid off my Prosper loan in full a few months ago, and estimate I saved approximately $2,000 with this loan.
Pros and Cons of Prosper
I liked the idea behind Prosper even before it worked for me. I believe, however, peer-to-peer lending is a work in progress. The following pros and cons are from the borrower’s perspective. Once I get out of debt I definitely plan on giving back to the Prosper community (and investing for myself) by lending, but I will hold off on commenting on the lending side until then.
- Loans are available to borrowers who can’t qualify with traditional banks
- Auction environment provides possibility for better interest rates
- Soft credit inquiry makes applying for a loan possible without posting to credit accoun
- Puts a human face on lending; borrowers have the ability to explain why they are a good investment
- No early payoff penalties
- For well-qualified borrowers, interest rates cannot compete with commercial lenders
- Only 36 month terms are available
- Maximum loan is $25,000
- Borrowing process takes about two weeks, possibly more
In my opinion, the pros outweigh the cons. If you’re looking for an alternative way to get a loan (or invest some money), I recommend checking out Prosper. It’s even free to join and post a loan request.
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