Bankers beware; there is a new player in the lending market.  Prosper.com, now in its second year, provides a revolutionary outlet for non-traditional lending.  The Prosper model is simple: users apply for a loan, which is then funded by peer lenders.  All of the payments flow through Prosper, who earns a percentage of each loan but otherwise passes profits along to the peer lenders.  All it takes to join is a social security number and a few minutes of your time.

Why use Prosper?  The advantages are clear, both for borrowers and lenders.  Say you have decent credit and income, but you don’t own a home.  Furthermore, you have $10,000 in credit card debt, at rates ranging from 14% to 21%.  Prosper makes it possible to borrow unsecured money at lower rates, possibly as low as 9.27%, to consolidate that debt. 

If you need a small loan, say $5,000, to pay for some medical bills or a vacation you are planning, you may be able to obtain a loan for even less.  And if you have poor or no credit, Prosper makes it possible for you to obtain a loan when no other lender may be willing to make the loan. 

As a lender, the potential is dramatic.  By accepting the default risk associated with higher risk loans, you can create a portfolio of loans that may return upwards of 20%.  Such returns are difficult, if not impossible, for a small investor to find elsewhere.  And it only takes $50 to begin.

What is the drawback?  If you are a homeowner, you may be able to find lower rates (and a tax advantage) by borrowing against your house instead of using Prosper.  As a lender, you must make decisions about borrower credit, a task normally left to big business.  However, according to a recent Yahoo! Finance article, to date “Prosper has had 0.5% of total loan amounts default and 6.5% fall behind on payments for a month, compared to 4.2% and 4.4% for card companies.”  It seems that Prosper.com borrowers may be more inclined to pay back debt owed to peers, rather than debt owed to massive, impersonal banks.

The Prosper.com idea is fascinating and may prove profitable for many young people, either as borrowers or lenders.  If you are interested in using Prosper.com, please consider joining the Quarterlife Finance group on Prosper.com to help boost your reputation as a borrower and obtain lower interest rates.  We will help you obtain funding as a borrower, and help you (as a lender) to locate profitable loans while helping your fellow Quarterlifers build solid financial foundations.  In future posts, we will examine in greater detail how to use Prosper.com to build wealth and strengthen your financial future.

 

 

Did you enjoy this article? If so, please subscribe to the RSS feed, or enter your email address below to subscribe to the daily email digest.
This entry was posted on Tuesday, February 27th, 2007 at 9:30 am and is filed under Prosper.com. You may e-mail this post to a friend. You may print this page. Responses are currently closed.