Prosper Decision: Choosing a Group (To Join or Not to Join)
The group you choose in Prosper can really make or break your loan. Beginners on Prosper often make huge mistakes here without realizing the consequences. Furthermore, greedy group leaders can sabatoge your chances for getting a good rate and getting your loan funded!
My pet peeve about Prosper is they do a terribly poor job of educating borrowers about groups. The worst thing is what Prosper refers to as "reward sharing". This is just a nice way of describing what are essentially (in my opinion) extra fees paid to group leaders. That's right, group leaders will take a cut of your loan, and sometimes it is a huge cut, depending on your credit rating. Here is a table of group leader rewards (fees) tacked onto your loan. The most important one is the Payment Reward, which is a percentage of your loan, and this can be as high as 4% of your loan interest rate for E, HR, and NC borrowers. A 4% fee tacked onto a loan is simply outrageous, and should be avoided. The way these fees work is (using a hypothetical example of an E rated borrower):
* If your borrowing interest rate is 15%
* Then the group leader takes an 4% fee if they do 0% reward sharing
* And the lender would see a rate of 15%-4% = 11%
On the other hand, if you are not in any group or are in a group with 100% reward sharing, the situation would be:
* If your borrowing rate is 15%
* Then the group leader takes an 0% fee if they do 100% reward sharing
* And the lender would see a rate of 15%
In order for the first case above to give the lender the same rate of return as the second case, you as a borrower would have had to ask for a 19% interest rate instead of 15%. Since with 100% reward sharing, the group leader "middleman" is not taking a cut, both you AND the lender end up getting a much better rate. So, ONLY JOIN GROUPS WITH 100% REWARD SHARING! There are so many excellent groups that do 100% reward sharing that it makes no sense to join one that does not. You actually may not even need to join a group if you have reasonably good credit and do a good job in posting your loan. See this table for average rates for group and non-group borrowers.
Another thing to consider when joining a group is whether it reveals something about you that you'd rather not reveal to a lender. Will the group you join help or hurt you by being associated with that group? Does the group have a good reputation and have a lot of members that have received funded loans? Do the group members lend to borrowers that join the group? Just a few things to consider.
See also: How to Write a Good Prosper Loan Request