There was an article in the Washington Post this weekend that caught my eye. It talked about a people-driven loan service. Propser.com allows people who need to borrow money post an ad describing their needs. Investors can then visit the site and pick which loans they would like to fund. In order to help investors diversify their risk, Prosper allows them to partially fund a wide variety of loans, thus spreading the risk over several investments. Minimum bids are $50, all loans have a 3 year maximum duration, and loans must be $25,000 or less.
The Ebay-esque service directly connects investors and lenders, passing by more traditional lending institutions. Borrowers post highly personal ads, with people often posing with their families or young children, apparently hoping to up the sympathy factor in the minds of potential investors. Lenders can then bid on loans, which results in lower interest rates for borrowers.
Prosper is really an interesting service, and can benefit both investors and borrowers alike. Investors typically earn higher returns than they might at bank, while borrowers are typically charged lower interest rates than they might find elsewhere. Apparently, the system has been successful. Since its launch last year, Prosper has grown to 140,000 members, lending some $33 million. According to the Post, less than 1% of the loans have defaulted, and less than 3% were three months late.
Another noteworthy item about Prosper is that many non-profit groups have formed on the site, which encourages borrowers to join groups to strengthen their rating. The leaders of these groups forego their fees paid to them by borrowers or profits earned from the loan service, putting the money toward a good cause. For example, Medical Benefactors is a group that uses interest payments to help fight childhood diseases in third world countries. There are groups that donate to AIDS/HIV and cancer research. There are college groups, ethnic groups, and groups organized around clubs, such as the Boy Scouts of America. Lending to a charitable group is an attractive option for investors because they know that their funds are going to a cause, rather than to a bank or third party investment vehicle.
Despite the site's success, there have been some concerns about fraud. In order to borrow money on the site, people must disclose highly personal information, such as their social security number and credit card information. Potential borrowers are given a credit rating and are subjected to fraud and identity checks. Also, the site has a pretty substantial section on security and privacy policies.
Anyway, I think this site is a great idea, and while I would probably be too sqeamish about handing over my personal information, it seems like a great option for people who need small amounts of cash quickly.
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