Web peer-to-peer lenders bypass traditional FIs
SAN FRANCISCO (5/25/06)--A new website billing itself as an Internet Age alternative to payday loans allows people to borrow money directly from each other.
Prosper.com, which has been operating since February, uses the eBay approach to loans, enabling its users to bypass traditional financial institutions--including credit unions--in the person-to-person loan process (Salon.com May 22).
To list a loan on the site, borrowers determine how much they want to borrow and the maximum interest rate they want to pay. They provide personal information such as annual income, bank account number and Social Security number. They authorize Prosper to collect financial data from credit agencies. Prosper shows potential lenders the data, including a credit grade, the number of credit lines the borrowers opened in the past decade, number of delinquencies, and a ratio of debt to income.
Prosper.com manages the loan. Borrowers pay 1% of each loan; lenders pay 0.5% on the money owed to them.
Participants are urged to join "affinity" groups. It's easier to get a loan when one is a member of a group, and the rates received are better. The theory is that membership in a group instills some financial discipline because defaulting on a loan adversely affects others in that group.
Some experts say such lending sites could topple the credit industry, bringing transparency and fairness to the market. The premise is that borrowers shut out of the traditional loan market can find money at reasonable rates. Lenders can get a better rate of return than they would on some other investments.
Critics question the risks involved for both borrowers and lenders, the site's adherence to equal opportunity regulations and the idea that people would risk their own money to lend to someone with a poor financial history. However, the site already is proving that people do loan to others in need.
Some say the site would be one of the ways the Internet might transform the credit industry into a fairer, more equitable business.
Prosper.com CEO Chris Larsen was co-founder in 1996 of E-Loan, one of the first Internet loan brokers.
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