An Introduction to the Prosper Trading Platform

Last week I did an in depth review of the Lending Club trading platform and today we are going to turn our attention to Prosper.

There are many similarities between the two platforms but also some real differences. Prosper uses FOLIOfn to manage their trading platform which is the same company that Lending Club uses although the platforms are completely separate. If you have both a Lending Club and Prosper account you need to register separately for an account on FOLIOfn.

The biggest difference between Lending Club and Prosper’s approach to the trading platform is that Prosper only allows investors from the same states as the retail platform. Whereas Lending Club allows 17 additional states to invest via the trading platform Prosper does not allow any. You can only trade Prosper notes on FOLIOfn if you live in one of the 29 states that allow investors.

This big difference means that the market on Prosper is not quite as vibrant as Lending Club; there just aren’t as many buyers. There are usually somewhere around 5,000 notes for sale on the Prosper platform at any one time which is about one-third of the volume on Lending Club.

Selling Prosper Notes on FOLIOfn

Selling notes on Prosper is a simple process. You can do it right from the Prosper Notes screen. When browsing your notes you can just click the check box next to the note and then click the Sell Checked Notes button. That will take you directly to Folio (assuming you have opened an account) where you can list your loan for sale. Then in just three more clicks you can have your loan listed for sale. You can also browse all of your Prosper notes within Folio and sell them that way.

Auction vs Fixed Price

Until a year ago Prosper used to have an auction model on their retail investment platform. That changed to a fixed price model in December 2010 but the auction model lives on in the secondary market. When selling a note on Prosper you can choose between an auction and a fixed price. Typically just over half the notes on the platform are for the auction format.

Sellers will sometimes list their notes for sale at a discount using the auction format in the hope to attract bids. If you really need to sell a note this can be a good way to do it because notes that have a deeply discounted selling price will nearly always attract bids. And if there is a good payment history there is every chance the note will attract multiple bids.

You Cannot Sell Late Notes on Prosper

This is another big difference between Lending Club and Prosper. On Lending Club you could sell late notes on the trading platform – not so on Prosper. Only notes that are current can be listed for sale. This is also a big factor in the reduced number of notes on the Prosper trading platform.

How to Price Loans for Sale

The introduction of the auction format does create more options for sellers. If you are in need of cash and want to liquidate many loans on your portfolio then I would price everything at a 5-10% discount in the auction format and you are very likely to sell every loan. With multiple buyers on most discounted notes you may end up taking only a small loss on many notes. For those notes with increasing credit scores and a good payment record you will likely end up with a profit.

When researching this article I contacted long time Prosper investor CA-lender. He shared that the trading platform today isn’t quite as profitable for sellers as it was a year or so ago. Notes that might have gone for a 1-2% premium in 2010 now are selling for 1-2% discount – particularly high grade notes such as those rated AA and A. Investors in those lower interest notes are getting more picky in which notes they will buy.

When selling a loan Prosper you have certain parameters you must fall within. You cannot price a loan unfairly either on the low end or the high end. The range is fairly broad – from a 50-60% discount up to around a 40-50% premium depending on the loan term. Keep in mind all the loans are current.

If you have a loan with a long payment history, say at least 12 months of on time payments, you may be able to get a 5% premium or more if it is a high interest note. For notes with a short payment history then it will be very rare to get much or a premium. Buyers are typically looking for that payment history before they are willing to pay much of a premium.

Buying Prosper Notes on Folio

The biggest problem for buyers of notes is that, like Lending Club, you cannot use any of the credit data from the original loan listing to find loans. It would be great if you could just take your saved searches on Prosper and then apply them to the trading platform to see if any loans there match your criteria. Maybe this will happen some time in the future but that is not reality today.

The vast majority (usually around 70% or so) of notes for sale, both in the auction and fixed price formats, are on sale for a premium. Like Lending Club there are many notes on the platform that will simply never sell. I see notes on sale for an 8% premium that have litte payment history and have a declining credit score. No buyer will ever consider purchasing a note like that but because it is free to list notes for sale there is not much to lose from the seller’s perspective.

Filtering the Thousands of Available Notes

As a buyer you can filter the available notes by loan grade (AA-HR), credit score change, remaining payments – these options match Lending Club’s options. Prosper also gives you a loan term selection (12, 36, 60 month loans), a price range selection, current yield, auction or fixed price listing and a premium/discount field.

The loans are always sorted by time left, so you can see the notes that are about to end their listing cycle at the top of the page. There are no other choices in how the loans are sorted.

How to Buy Notes on Prosper’s Trading Platform

The buying process is very simple. Once you decide on your filters then you can click on the note and check out the listing – this shows the credit score history, current yield as well as the details of the original loan listing. You will also see the all important payment history table that shows when each payment was made and the timetable for expected future payments.

Then it is a simple matter of deciding how much you are willing to pay for the loan. You will find some competition if you are bidding on high interest loans with an excellent payment history. Most of these loans are listed in an auction format and it is a bit like eBay in that when you bid you have no idea what the maximum bid is of current high bidder. For the fixed price model once you click Buy Now the loan will move into your account – a process that typically takes a couple of days.

There are a small group of very active buyers of notes on Prosper. One of the most active buyers of notes is Reflective-Rupee (link to their Lendstats profile), who until Worth-Blanket2 came along was the largest investor on Prosper. The times I have sold notes on Prosper it was Reflective-Rupee who purchased them.

One of the interesting features on Prosper’s trading platform is that you can see the purchase history of each note and who purchased the note. For some of the older notes you can see that they have been traded three or four times. So, while this platform might not be quite as vibrant as Lending Club, it is still a healthy market.

I am curious to hear from others. Have you used the Prosper trading platform as a buyer or seller? Your comments are always appreciated.

  • Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.