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Personal Loans Made Easy

Contributed by mm | April 29, 2006 1:39 AM PST

Will you ever lend money to someone you never had a beer with?

Most probably not. And it is quite understandable. In my lifetime, I only gave loans to few of my best friends who I know for decades and have full trust. Without knowing they have the capability and commitment to pay, how can one have the gut to open the wallet?

But how can those payday loan outlets happily hand over cash to anyone applies for a personal loan, and still make a profit?

You may argue that those payday loan shops verify credit information, and have the wielding power to put a dent to one's credit history. So the question is: if you have the credit information, and have the power to destroy the borrower's credit profile if he does not pay back to you on time, will you want to be in the business of making personal loans?

A booming web site Prosper.com is committed to empowering you to be the next loan shark by letting your money earn much more than the best rates from a savings account, and at the same time, reducing the cost of funding for people in need.

A personal loan transaction at Prosper.com is usually completed this way:

• A borrower makes an application to the community by stating how much money is needed, which rate s/he is willing to pay, why s/he needs the money and how s/he plans to pay back. All applications are for 3-year, fully amortized, unsecured loans up to $25,000.

• All potential lenders in the community can browse these personal loan applications and alongside the core elements of borrower's credit profile, including credit score range, length of credit history, number of current delinquent accounts, number of delinquencies in last 7 years, number of credit lines, and recent credit application history.

• If a lender is interested in a particular loan application, s/he can make a loan commitment in lots as little as $50, and name a minimal interest rate s/he can accept.

• There is no need for one lender to fund an entire loan. When a personal loan application attracts enough lenders' interest, Prosper.com will pool money from bidding lenders and channel the funds to the borrower, and from that point on, administrating the repayment process. All loans are currently

• In the event that a payment is behind, Prosper.com will take a series of actions to attempt to collect the money in the first month, then refer the loan to a collection agency after one month. After four months, delinquent loans will be sold to debt buyers and borrower's credit history will be impacted.

This is a pretty neat business model -- Prosper.com makes money by charging a service fee from the lender and a loan closing fee from the borrower, and at the same time, benefits both the borrowers' and lenders' community by removing frictions in the market.

Of course, for lenders to make a sizeable profit (defined as much higher than the savings rate), one needs to diversify the portfolio to dozens or even hundreds of individual personal loans, and take possible charge-off as a normal part of business. After all, even a loan shark will occasionally fail to recover the money.

Disclosure: I'm currently having $2,500 deposit at Prosper.com seeking profitable opportunities. Keep reading PFBlog and I will track my adventure.

This Post Has Received 71 Comments. Share Your Opinions Too.


CPA1298 Commented on April 29, 2006

I just went to the Prosper.com website; this thing looks pretty impressive. Has anybody out there tried it out? I get the feeling that the business is still pretty new.


James Commented on May 2, 2006

A good post. I'm curious to see how this business model makes out. The only thing that gets me is: if you have a substantial sum of fund you don't need for three years, why not invest it in high yield stocks? Why bother with this business model at all?

Please keep us updated.

Best,

James


Latin Guy Commented on May 2, 2006

James, the answer to your question is that, by playing the lender, you'll be playing with interest rates and default & credit assumptions - something akin to a investing in a bond. Therefore one should compare this business model with high yield bonds, but not high yield stocks, since with stocks you can loose your principal much easier.


hejustlaughs Commented on May 3, 2006

I actually couldn't get approved for lending. Young college student with little to no credit history = disappointment.


atlantageek Commented on May 3, 2006

Hi,
I've been a lender on prosper since early March and have about $2500 on account there ($2200 on loan to 19 different loans). Its a neat site and its easy to estimate your expected return (return - default rate) I'm aiming for 15% return on my loans. If you want to see some loan statistics check out my site at http://www.savagenumber.com


John Gratton Commented on May 3, 2006

The ethical quandary of loaning or borrowing money is a fast-moving river with a sandy bottom. I am intrigued by the idea behind your site - as well as prosper.com and will invite my readers to investigate both.


evil_twin Commented on May 3, 2006

I found another.
This one is owned and/or financed by eLoan.com, eBay and egg.com


evil_twin Commented on May 3, 2006


Andrew - Money Supply & Debt Blog Commented on May 9, 2006

I visited Prosper shortly after launch, but haven't look back into it until now. My question is, could there be a possibilty of increased defaults because of the nature of the site? Could a cute female college student get a better deal than an average middle aged guy?

On another note, there is a similar site that gives micro loans to businesses in the third world -- http://www.Kiva.org.


David Smith Commented on May 10, 2006

Prosper.com opens up an investment opportunity to individuals that were previously only available to large institutions. I don't have nearly as much money as other pfblog members, but I have made seven loans at an average rate of return of over 12 percent on a conservative portfolio of AA, A, and B credit risk loans. Because the credit card industry is so directly connected to the prime interest rate, these rates over the long term should be comparable to historical stock price returns.


We're In Debt Commented on May 19, 2006

This sounds a little shady to me. When are they going to start keeping points on the loans and compounding interest weekly?


Lazy Man and Money Commented on May 25, 2006

I started off slow, but I'm now at $400 in my account. I have $250 invested at 18+% with grade C borrowers and a debt to income ratio under 20%. I've read that Zopa (a similar site in the UK) has had very, very few people not pay up, so I'm willing to take a little more risk.

Why do this instead of stocks? I think the risk/reward is much better - especially because there's diversification amongst many borrowers.

See my Prosper.com history at LazyManAndMoney @ Blog Spot.com... (P.S. why don't they let me link legitamitely...)


Bobby Commented on June 3, 2006

Yep! you are absolutely right. I do think that trust is an important factor while lending money to someone.


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