On Prosper.com
May 30th, 2006 | by mbhunter |I started seeing posts on Prosper.com only recently. It’s intriguing.
This site brings people who want to borrow money to people who want to lend it. (And takes a little money from both sides to keep the lights on, but hey — I didn’t expect it would be for free!)
Borrowers sign up and provide enough information that allows Prosper.com to pull a credit history and assign a credit rating. They then can ask for money at some rate. They post why they want the money, how it will be used, etc.
Lenders sign up and fund their account. As borrowers post their listings, lenders will bid by amount and rate (lower rates win out over higher rates). If the total amount bid fully funds the desired amount, then the lowest-bidding lenders win the ability to lend to the borrower at the highest rate offered by one of the winning lenders.
So, this provides a medium for person-to-person lending for people who can’t (or don’t want to) deal with banks or credit cards for a loan. Some fellow personal finance bloggers are considering becoming a borrower while others already have an active portfolio of loans as a lender.
Since, if anything, I would be in a position to become a lender, these are things I would consider:
- Is it on the up-and-up morally? Lending to a AA-rated person looking to secure an investment property by borrowing $15k at 9% probably isn’t morally wrong because the interest rate is in line with business loans. Now, getting into high-risk lending at 20% or more, is that loan-sharking, or worse, usury? And even if it’s neither, how am I helping the person by lending to them at 20%? That question doesn’t have a clear answer.
- Is the rate really good enough? The money is lent for up to three years. The borrower has the option to pay it off early, but they don’t have to. So even though 7% looks good now, if 3-year CDs start paying 8% or more next year, my money’s stuck.
- Am I in trouble if I lose my principal? Going for the high-risk loans potentially has a high payoff, but these loans are by no means a sure thing. The risk of default is substantially higher for E- and HR-rated borrowers than for AA or A borrowers, so in going for these kinds of loans it’s best to start slowly (if at all) and not risk more than you can afford to lose. There are consequences if the borrowers don’t pay back their loans, but the loans, being unsecured, are of lower priority in the event of a bankruptcy.
I’ll be watching how others do it a little more before I decide to sign up or not.
Any comments? Is a high-yield bank account good enough for you, or would you use Prosper.com to try for more?
6 Responses to “On Prosper.com”
By Financial Freedumb on May 31, 2006 | Reply
I think the whole argument that people are lending people money to help the other person is a bunch of baloney. If anything people are there to make money off of loaning money. Prosper.com is making a buck on your pretty penny, and the people borrowing are just paying higher rates than I think is really fair. If you’re an AA borrower, why not borrow from credit unions or banks that have much lower rates? If you’re a really high risk, then maybe I could imagine turning to prosper.com.
By Financial Freedumb on May 31, 2006 | Reply
I should add, I do like the basic concept, but I think it needs to refined.
By Tim MMF on Jun 2, 2006 | Reply
I think it’s a supplement to a regular investment portfolio, not a substitution. I agree that it’s wrong to loan to an AA or A at more than probably 6% but the lenders are there to make money not necessarily to be generous. Great post. I’m surprised you didn’t notice Prosper posts eariler.
Take it easy.
By Steve on Jun 4, 2006 | Reply
If I didn’t already have 2 late loans in, I would say it was a great idea!
By Commodore64 on Jun 6, 2006 | Reply
When you consider the fact that some of these “Pay Day” loan places charge effective interest rates of 50%+, a 20% loan from Prosper looks pretty good.
jb