Accessing loans in the Web 2.0 environment just got more personal, enter Prosper.com. Some dub it p2p lending, micro-financing, social lending… but regardless of what you want to call it, the whole idea behind Prosper.com is pretty simple – It’s “Structured†personal lending/borrowing. Say Mr.Webstartup needs a loan for $20,000.00 but can’t get it through a conventional bank, he can sign up with Prosper.com and create a loan listing (keep in mind you must have a minimum credit rating of 520). This Listing states the amount you want to borrow (Currently this has a $25K ceiling), the interest rate you desire to pay and yes, the reason why you need this loan (heck, you can even attach your picture if you think it will help).
Lender(s) (anyone willing to lend money) take all this information into consideration along with your credit rating/debt-to-income ratio and may make bids for your loan accordingly. A lender can loan a minimum of $50.00, so a borrower may end up with his/her loan funded by 10 different people (if not more). Prosper binds all the lowest bids together comprising the requested loan amount (with an final interest rate computed from these lowest bids) and present’s this to the borrower in one loan. That’s it, done! You have a newly minted loan. When the borrower pays the monthly amount due, it is allocated to each lender on a pro-rata basis.
As the old saying goes, “you are the company you keepâ€, well this is also applicable in on Prosper.com. To strengthen a borrower’s chance of getting a loan or getting a lower rate, a borrower can join a group with a good payment history and get a good standing by association. But just don’t think you can just go strolling into any group, because your loan payments (or should I say lack thereof) can tarnish both your own reputation and the group’s as well.
Simply put, these personal loans are “syndicated†by many different lenders spreading the risk. This is similar to how some banks and insurance companies spread risk. Prosper.com can be used by lenders as an investment alternative. Spreads between today’s bank account savings rates (2.14%) vs. bank lending rates (~18-20% with certain credit cards, if not more) can be so huge you could drive a truck through it. As a lender with say $2000.00, you can make a portfolio of loans to a spectrum of borrowers based on their credit ratings. Interest rates range from as low as 8.02% to 29.00%. Providing the borrower doesn’t default, 29.00% is quite a handsome return. Heck, some Hedge Funds are on Prosper.com such as Capitalistpig Hedge Fund in Chicago with more than $150,000 in 1,300 loans at an average interest rate of 20%.
Buzzfans, please note these can be risky loans and one should always allow for defaults when making loans. Per Prosper.com’s website, the default rate is 1.89% for $65,000,000 in loans outstanding. Not bad compared to the 4.5% of credit cards, but that number always has a chance of increasing as high. Banks with all their sophisticated computer models are still lending money despite the aforementioned default rate, so why not you (with prosper’s lower default rate). If this fits your risk appetite, also be aware that there is no secondary market (liquidity) yet established for this sort of lending, so you cannot sell your loan to someone else and move on. You will have to stay the course for the life of the loan (all currently set at 3yrs).
To wrap up my review on Prosper.com, let me hit some quick points.
Founder: Christian Larsen, the 45 yr co-founder and former chief executive of E-Loan sold to Popular Inc. (NasdaqGS:BPOP - News) in 2005.
Business Model: The “e-bay†of personal lending.
Monetization Model: charging borrowers an upfront fee of 1% to 2% and lenders 0.5% to 1% of the annual loan balance.
Competitors: Zopa (UK-based, coming stateside soon), CircleLending and The Lending Club (on facebook.. see Rex Dixon’s blog).
Age: 1 yr +
This new Web 2.0 social lending platform can have tremendous benefit for both borrower and lender bypassing traditional banking institutions. But always remember, as a lender don’t lend more than you can afford to lose and as a borrower don’t borrow more than you can pay back…… enjoy!
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