by Steve Ott
In order to create liquidity for its loans and attract more investors (aka lenders), Prosper is establishing a secondary market that will allow investors to buy and sell p2p loans funded through Prosper. To properly establish the market, Prosper must close for several months to register with the SEC (Securities and Exchange Commission).

Prosper will not be the first peer to peer lending company to establish a secondary market for its loans. The Lending Club, another popular peer-to-peer lending company, shut its doors for approximately six months and has just recently opened to investors. Prior to registering with the SEC, anyone with a little bit of cash could invest in a p2p personal loan through The Lending Club. Since then, investors are now obligated to meet minimum financial requirements. These requirements include either an annual gross income of $70,000 and a net worth of $70,000 (excluding home, home furniture, and automobiles) or a net worth of at least $250,000. It is yet to be determined if Prosper investors will face similar requirements.

The purpose of a secondary market is to increase lending and therefore maximize profits. Prosper and The Lending Club believe that if investors have the option of cashing out before the term of their loans are up, then they will be inclined to lend more money. Investors who may have felt uneasy about committing their money for the life of the loan will now have a means of releasing themselves from the contract. Investors may also purchase high risk personal loans for a fraction of the face value. It will also be a new revenue stream for Prosper since additional fees will presumably be charged (Lending Club charges a 1% trading fee) for the buying and selling of loans in the secondary market.

Creating an additional market is a big gamble on Prosper’s part since investors and borrowers have the option of using Lending Club or Loanio for unsecured personal loans. However, this new growth is a good indication that Prosper is in this for the long run since they have yet to be profitable and are still willing to sacrifice revenue in order to create a better product.

Stephen Ott is the co-webmaster of an informational website dedicated to peer-to-peer lending. To learn more about p2p lending, please visit Peer-to-Peer Lending Info.

Article Source: Why has the Peer-to-Peer Lending Company Prosper Temporarily Closed Its Doors?