Bid online to invest
Ed has a situation many of us may have experienced in our youth. He’s working his way through school in an in-demand field, and expects to be employed after graduation. In the meantime his mother offered him an interest-free loan to pay educational expenses.
But Ed’s found theres still a cost:
“Well, I have concluded that THERE IS a price to pay! This loan, although at zero interest, is NOT FREE. It’s actually an enormous burden,” he says in his request for a loan at Prosper.com.
That’s why he’s requesting an $8,000 (US) loan at 9.00 per cent interest. And 2 days and 23 hours before his loan request will close, he’s found it fully funded, with 182 people bidding online in order to each loan him part of the total loan.
Bidding online? Isn’t that what you do to pick up bargains at eBay? Well yes. And since February 2006, it’s also been a way for people to lend money – from tens of dollars to thousands of dollars – to other people.
“Until now, financial institutions have controlled who is able to obtain credit and the rates people pay,” said Chris Larsen, Chief Executive Officer and co-funder of Prosper, in a press release issued as the company came online. “Over time, this one-sided control has bred inefficiencies and excessive margins – leading to higher rates for borrowers, and restricting people who have money to lend from entering and generating income from this vital and lucrative market.”
“Prosper gives people the opportunity to take back the marketplace for consumer credit,” said Larsen.
How does it work?
A basic transaction is fairly simple. People who want to borrow money create a listing much like one at eBay, detailing how much money they would like to borrow at which interest rate, and other details about themselves and what they intend to use the money for.
Borrowers also provide Prosper.com with enough personal information to obtain their credit score and also to calculate their debt-to-income ratio. Then the site gives them a Prosper.com credit grade based on that third-party information.
The credit score and debt ratio are added to the listing and then it goes “on the market” on the site.
Lenders browse listings and decide whether or not to bid on the listing. They offer a particular amount of money and the interest rate they would like to receive. If a loan is fully funded – with more money lent than is needed – then the winning bids are determined by interest rate, with the lowest rates winning the bid.
All the money is transferred electronically, with the loan amount (minus Prosper.com’s borrowing fee) transferred to the borrower’s account, and the borrower’s payments (minus Prosper.com’s amortized lending fee) transferred monthly to the lender’s account.
Legally, the lender is not lending the money directly and so does not require a lending license – instead, the Prosper.com “lender” is actually purchasing the loan from Prosper.com.
What’s the attraction?
For borrowers, going outside of traditional financial institutions may mean they are able to borrow more money, or money at a lower interest rate, than they would otherwise be able to. For lenders, high interest rates are attractive, and as small amounts can be spread over multiple loans, there’s an easy way to diversify.
But for both parties there’s also a human element. There is something uplifting about choosing a particular person in whom to trust enough to risk some of one’s hard earned cash. And although there certainly are individuals who use Prosper.com who default on loans for one reason or another, people may feel more obligated to pay money back when it is going to specific individuals and not a faceless institution.
Even reading the listings is entertaining and at times, touching. Like the family seeking a loan to cover adoption expenses, or the couple rebuilding after a house fire. Or Ed’s desperation to be free of his mother’s interference and his willingness to pay 9 per cent to those who can make it happen.
Not yet available to Canada – but there are alternatives
Prosper.com is only available to residents of the United States at this time. But if it takes off like eBay did, it may become a more international phenomenon. In the meantime, there are Canadian alternatives to traditional borrowing and lending, even if they are a little harder to track down. The Canadian Gateway to Microfinance (http://www.microfinance.ca/en/index.cfm) provides information about many of them.