February 13, 2006

Live Long, and Pay Me the Money You Owe Me

THERE’S A really cool story in The New York Times today regarding prosper.com, a San Francisco-based service which acts as a clearinghouse for individual lenders and borrowers. The Times describes the service as “like lending to a friend, except you’ll get interest.”

Personally, I think that analogy only makes sense if you’re Bert Gordon in “The Hustler” and you’re lending to your friend Eddie Felson. The rates at which people on the site are willing to borrow seem downright amazing when taken alone: 9 pc to 12 pc looks about average, and there are several requests to borrow at 15 pc or higher.

Still, when one puts it in perspective, even a loan at 15 pc is made on better terms than one would get through a traditional credit card. And why the hell should the credit card companies have a monopoly on squeezing people for every cent they’ve got allowing people to fulfill their dreams?

From the Times:

"We looked at eBay and said, 'Why can't we do this for money?' " said Chris Larsen, Prosper's chief executive.

Mr. Larsen, who founded and led E-Loan, an online lender that was bought last year for $300 million by Popular Inc., says Prosper could save borrowers and lenders money because it was a leaner operation than traditional financial institutions. He noted that consumers make, at most, about 4 percent on their savings accounts, which banks then lend to credit card customers at 14 percent or more.

"That's just a huge spread," Mr. Larsen said. "We think if you allow people to participate directly, it's a more efficient marketplace. People can make a better return on their deposits, which then become the source of credit to others."

Prosper has an incredibly innovative idea here, and it certainly seems like it could work. It gives its lenders lots of neat tools, such as being able to sort potential borrowers by credit rating, reducing risk through making multiple loans in small amounts, and judging for oneself whether the borrower is credit worthy. Plus, the potential returns are impressive.

Of course, there’s a reason the potential returns are better: there’s more risk involved. For this whole shebang to work, Prosper’s lenders have to be willing to shoulder the risk of making unsecured personal loans to borrowers, and perhaps borrowers with less-than-perfect credit. Plus, even though the site has safeguards to help prevent defaults – such as the satisfaction of knowing your wayword debtor will get bugged by a collection agency until he pays up – a default is still a default. So the risk of losing money here seems quite real.

Still, it’s a fascinating site to check out, if only because it’s neat to see how the site’s mini-market is working. For instance, one man consolidating his credit card debt has nearly reached his goal of borrowing $10,000 at 9 pc. Another person, also consolidating debt, is nearly halfway to getting a $2,500 loan at 12 pc. Meanwhile, the guy who wants to borrow $14,000 at 1 pc per year has gotten no takers at all. It just goes to show that even on the Internet, there's no such thing as a free lunch.

Posted by Benjamin Kepple at February 13, 2006 09:13 PM | TrackBack

Prosper.com looks to be an intriging concept and website ... but hold on to your wallet!!!!

Posted by: Swammi in Solon at February 14, 2006 08:40 AM

Hey Ben, could you loan me $5 at 0%? I'll pay you back on Tuesday.

Posted by: Derwood Kerzanginghetti at February 14, 2006 09:52 PM


Posted by: Benjamin Kepple at February 15, 2006 03:57 PM

I'll gladly pay you Tuesday for a Blimpie quint today.

Posted by: Geoff Brown at February 19, 2006 11:45 AM

Mmmmmmmmmm. Blimpie. I always ordered a quad w/ blue cheese and fried onions myself, and strangely, never deviated from this selection.

Posted by: Benjamin Kepple at February 20, 2006 06:06 PM

Quint with cheese (sometimes blue), mushrooms, onions, and bacon on an onion roll. Mmmmmm.

Posted by: Geoff Brown at February 20, 2006 09:33 PM