Social Lending
November 2nd, 2006 by Ian
Credit card companies, banks, loan sharks, online stock trading sites (make all their money in margin interest), and mortgage companies make a lot of money in the huge business of lending. On a retail level however, lending people money generally isn’t a profitable or painless way of investing. This is changing. “Social lending” is catching on online through a site called Prosper.
What Prosper does in their own words:
Prosper, America’s first people-to-people lending marketplace, was created to make consumer lending more financially and socially rewarding for everyone.
The way Prosper works is intuitive to people who have used eBay. Instead of listing and bidding on items, people list and bid on loans using Prosper’s online auction platform.
People who want to lend set the minimum interest rate they are willing to earn and bid in increments of $50 to $25,000 on loan listings they select. People who lend can easily diversify using “standing orders”, which automatically make many small loans to different borrowers.
They recently annouced their membership level surpassed 100,000 users and $20mil in loans. The business is apparently catching on as there is another for the United Kingdom called Zopa backed by the same investors, Benchmark Capital. Fidelity also appears to supporting with investment capital. Here are the answers to some questions I had when first hearing about it:
1. What if borrowers don’t pay their loan back?
In the event that one of your loans becomes more than 1 month late, Prosper will assign a professional collection agency to attempt to collect the overdue amount. Each collection agency has its own fee structure, but will only collect a fee for their services if funds are recovered.
2. What fees are involved?
Borrower pays 1% closing fee and if they don’t do electronic payment an additional 1%. Lender pays .5% servicing fee and a fee for collection if it gets to that point. There are also fees for delinquency.
3. What the largest loan possible?
$25,000
4. What is the group features all about?
Responsible people tend to stick together. At Prosper, a group can be official, like a school’s PTA, or informal, like the neighborhood dog-walking club. In either case, one person is the designated group leader who confirms that everyone in the group is real.
When you join a responsible group with a good payment history, you get a good reputation by association, and lenders are more likely to offer good interest rates. But, belonging to a good group puts some pressure on you, too. If you stop making your loan payments, you’ll not only tarnish your own reputation, but the group’s as well.
5. What are the default rates?
They just launched a feature with data on their loans.
6. What are the interest rates?
I saw rates up to 25.5% on their featured loans. There is one there now where a borrower has a B credit rating and the loan has 175 bids for a total loan size of $20,000 at 19.99%. Here is Prosper’s answer:
Interest rates are based on the rate selected by the borrower that is matched by the lender.
Payments are due each month, based on a fully-amortized repayment schedule over a 3-year period. Each monthly payment is the same and there is never a balloon payment or “revolving credit”. By the time the loan term ends, the loan has been completely repaid.
See their FAQ here.
