When I first read about this in the UK, I knew it was only a matter of time before something like it started here in the US. I stumbled across a new site that has started to do person to person lending in the US the other day. The site is called Prosper.com and it came out of beta testing a couple of days ago.
The concept is quite unique and is based on a person to person lending strategy that takes banks out of the middle. In theory, those who need to borrow money will be able to do so at rates lower than a bank would charge while people lending money can earn rates higher than banks would be willing to pay. A win-win situation for everyone.
Currently the site has a limited number of people seeking loans which is to be expected since it has only been out of beta testing a few days, but this causes some problems for those that are interested in lending. Unlike zopa where there is no one on one lending (to lessen the risk to those lending money in zopa, the lender’s funds are spread among a minimum of 50 different borrowers) Prosper has no such risk management policy. The lending is one to one meaning you take the full risk if a person defaults. One way to combat this would be to lend small amounts to a lot of different borrowers, but with so few borrowers currently in the system, it’s impossible to spread this risk in this way at the moment.
For people that have money to lend, they sign-up at the site and indicate the amount money they are prepared to lend to other people and for what period of time. The funds must be transferred to a Prosper account before they are able to bid on lending rates with a
$1,000 minimum on the transfer (prosper.com left a comment that this was a typo in their information that is being removed). The borrowers are given a credit score which is obtained from Experian ScoreX Plus (SM) credit score from your credit report, and assigns one of eight credit grades depending on the results:
|Credit Grade||Credit Score|
|AA||760 and up|
|High Risk (HR)||Up to 539|
In theory, the better grade your credit score is, the lower the interest rate you’ll have to pay because lenders will see it as a lower risk than those with lower credit scores. The borrowers debt to income is also shown to give a better feel of how well they can repay. The borrowers exact credit score is never displayed. The site says that getting requesting your score will not affect your credit score:
Having Prosper obtain your credit grade won’t affect your credit score! Although we are making a request for your credit score, we’re doing so at your instruction so no inquiries viewable by subsequent users of your credit report will be placed in your credit file. That means your credit score won’t be affected when you register or post a listing. Only if you obtain a loan through Prosper will an inquiry that others can see be placed in your credit file.
If enough people bid to cover the loan wanted, the money is taken out of the lender’s funds and deposited directly into the bank of the borrower. It then becomes a loan in every sense of the term and the borrow is required to make monthly payments over the term. It is at this point reported to the credit agencies and would also be reported it defaulted upon. If a borrow defaults, it will eventually be sent to a collection agency.
Taking a look at the people currently looking to borrow money, it doesn’t give a lot of confidence in those saving for the things they want before purchasing them (my entire approach to personal finances). Some of the current requests for money include $2,700 needed for getting a new wardrobe, $3,000 needed for a vacation and $5,000 needed for a car “fun project.” There is one listing where the person has 0% credit card expiring and he is trying to lock in a better rate than his cards are going to give him which seems to be a more responsible approach to getting the most out of the system if you are a borrower.
This will certainly be well worth the time to keep an eye on to see how it develops. If the borrow base increases so that you can spread the risk of the money you’re lending out, it could be a way to earn some premium rates (if they continue to stay relative high compared to other investments). There also seems to be possible opportunities for those who need to borrow money to do so at lower rates than they may be able to obtain elsewhere.