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Peer-to-Peer Lending Hits a Roadblock


Update: Since writing this post, both LendingClub and Prosper are registered with the SEC and running fully for both borrowers and lenders.

Two years ago I wrote several articles about peer-to-peer lender Prosper and the debt consolidation loan I secured through the site.

But this year Prosper and competing lender Lending Club have been forced to temporarily suspend their lending operations as they pursue registration with the Securities and Exchange Commission (SEC).

While LendingClub reopened its site last week, Prosper just recently shut down and may remain down for several months. What does this mean for lenders, borrowers like me, and the future of peer-to-peer loans?

While some alternative lenders including Zopa Loans have ceased making loans indefinitely, Prosper will continue making loans, but only after regulators approve Prosper’s securitization of its loans. This will help the site avoid any potential legal problems it could face from doing business in relatively uncharted territory.

What Prosper Pausing Means for Borrowers

While Prosper will not allow lenders to invest in any new loans for up to six months, Prosper will service existing loans as usual. That means borrowers’ payments will be due as usual and lenders will receive their disbursements as borrowers pay down their loans.

I just made my 24th on-time Prosper payment out of 36 total installments. I’m looking forward to being rid of the loan in just one more year, but I also continue to be eternally thankful for the loan that will have saved me $1,000 in interest over the credit cards I was able to pay off. Prosper allowed me to consolidate and refinance some that debt in a way that simply wasn’t possible with other lending sources.

New borrowers can still request a loan on Prosper, which the site will try to fund via other lending sources. Unfortunately, these loans will be subject to many of the same restrictions and rigid credit requirements as traditional bank personal loans. Given the current credit crunch, it is unlikely that loan requests from sub-primer borrowers will be funded.

Borrowers have an alternative in Lending Club, which is back in operation and currently making loans to borrowers with at least a 660 FICO score and who have no current delinquencies. Learn more about Lending Club.

What Prosper Pausing Means for Lenders

As mentioned above, current Prosper lenders will continue to receive the disbursements from existing loans as borrowers (hopefully) make their payments on-time. Current lenders cannot, however, invest in new loans until Prosper emerges from its registration period. Unfortunately for Prosper, this means many lenders will withdraw their funds and may not return to Prosper immediately when it reopens.

Should everything go as planned for Prosper, lenders will again be able to invest in loans. The question remains whether they will still be willing to do so.

Are you a Prosper lender? Is your portfolio still profitable, or are borrowers defaulting? What has your experience been—and will you return to Prosper when it reopens?

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. I’m a Prosper lender and I currently have 4 (out of 35) loans that are late, but none of those are recent. I’m pretty bummed that I can’t lend any new money at the moment and because the money in my Prosper account doesn’t earn interest, I’m withdrawing the payments as they come in and reinvesting them elsewhere. Eventually, I hope to lend on Prosper again, but we’ll just have to see how long that takes.

  2. Thanks for sharing, Forest. Yeah, I’m surprised they don’t offer at least a tiny bit of interest on lenders’ cash accounts. At least something to keep all those people they spent time and money attracting from cashing out over the next few months.

  3. Thanks for your article.

    I am looking for a small loan so I came across your article and decided to try these sites, only to find out they are not issuing loans:

    Zopa: sends me to a credit union

    Prosper: is not taking loan applications: “We’re sorry; we are unable to fund your loan at this time. ” and sends me to a shady “partner”.

    Finally, Lending Club was good (I should have tried them first). I listed a loan for $5,000 at 11.46% rate. Not bad compared to my 18.99% credit card rate. Crossing fingers!

  4. With the social movement of the web there is no doubt in my mind that Peer-to-peer lending will survive and even thrive. Prosper and lending club are paving the way and will have to clear the brush, but it will all get sorted out.

  5. Hi David,

    Thanks for keeping up on the peer-to-peer lending sector! We wanted to tell you and your readers that Loanio launched earlier this month. We are currently accepting new borrowers and lenders, and we hope you get a chance to check out our site at http://www.loanio.com.

  6. Have you tried using lendingclub? Unless I misunderstood, lenders are required to have an annual income of over 70k. That sure seems to exclude a significant amount of the population. Is my understanding correct or did I miss something?

  7. @Mark, thanks for letting me know about Loanio, I’ll be sure to check you guys out soon.

    @Phillip, you’re right…LendingClub has restrictions on who can be lenders. Their site says lenders must:

    “have an annual gross income of at least $70,000 and a net worth (exclusive of home, home furnishings and automobile) of at least $70,000; or have a net worth (determined with the same exclusions) of at least $250,000.”

    Also, LendingClub only accepts lenders from 21 states right now, and has restrictions on borrowers too. Borrowers must have a FICO of 640 and meet other credit requirements.