What happens when you default on your Prosper debt?

Prosper was founded in 2005 as the original peer-to-peer lender in the United States. It matches personal loan borrowers with lenders, also called investors. While others have since joined the marketplace and Lending Club is now the largest online provider for personal loans in the U.S., Prosper does a substantial business. It has an A+ rating with the Better Business Bureau but has received 128 consumer complaints.  Here’s what happens when you default on your Prosper loan.

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How does Prosper work?

Prosper is an experienced lender with somewhat strict guidelines, generally approving borrowers with good credit and reliable income. It shows some leniency, though, allowing a borrower’s debt-to-income ratio to be up to 50%. Like other peer-to-peer lenders, Prosper charges an origination fee, which is a percentage of the loan amount. It provides loans from $2,000 to $40,000, with loan repayment terms of three to five years. The loan interest rate is fixed but can reach upward of 35.99%, depending on the applicant’s creditworthiness. 

“Lending Club and Prosper started with strict guidelines and lowered standards over the years to expand the customer base. They increased rates to take on that risk,” said Michael Bovee, co-founder of Resolve, a couple founded to help people in financial distress. 

What if I fall behind on my Prosper payments?

Because there are different rules for fixed-rate loans and some online lenders, it’s important to understand how Prosper might handle your account if you become delinquent. Prosper might:

1. Charge off your loan sooner

Fixed-rate loans can be charged off after 120 days of nonpayment, which is two months sooner than for credit cards. This means that when your account is delinquent for four months, the lender can report it as a loss, which will hurt your credit score. It also means that your account may be moved into a collection process or even sold quickly. So, with a delinquent personal loan from Prosper, you may need to take steps to resolve your debt fairly quickly.

2. Not sue you

Prosper doesn’t want to tarnish its reputation or scare away customers, so it doesn’t sue for payment on past-due accounts at this time. This means that while your credit score gets hurt by your nonpayment, it is unlikely that you’ll be taken to court by Prosper.

3. Sell your debt to a debt buyer

In lieu of suing, Prosper often sells delinquent accounts to debt buyers. “Prosper realized it only collects on 20 to 30 percent of bad debt, which can mean taking what they can get when they sell debts is more attractive to them,” Bovee said. The good news for the consumer is that debt buyers tend to be open to settling.

4. Negotiate a settlement

While Prosper may negotiate a settlement, it is more likely that you’ll be able to negotiate with the debt buyer that acquires your account. 

5. Not participate in your debt management plan (DMP)

Because peer-to-peer lending involves multiple investors, these lenders don’t offer interest rate concessions to help you pay off your debt. This means that if you are working with a credit counselor to establish a DMP, you can’t include this loan. Prosper may allow your payments to be made through your credit counseling agency, but this is only a convenience for you, not a cost savings. 

There may be other options to investigate, such as requesting a forbearance that would allow you to take a break from making payments for a short period if your money issues are temporary. It’s important, though, to confirm with Prosper that a forbearance will prevent a late payment from showing on your credit. 

If your financial challenges are not short term and you don’t have the funds to settle, you may want to consider bankruptcy because all unsecured debt – including your Prosper loan – will be discharged if you are approved for Chapter 7. 

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