Bringing small borrowers and small lenders together is the idea behind the online social lending venture called Prosper.com.
Prosper, based in San Francisco, offers unsecured loans of up to $25,000 at a fixed rate for three years. Anyone with money can lend on Prosper, in increments as small as $50.
The system works a little like eBay, except that the bidding is to lend money at lower interest rates.
Since last year when it went live, Prosper has grown to more than 140,000 members and has originated about $33 million in loans.
Why it works
Borrowers pay lower interest rates than they might get from a bank or other lender. They make their pitches online, and they can disclose as much personal information as they wish. Some liken the experience to online dating.
Lenders collect higher interest rates than they might in a savings account, plus the satisfaction of helping another person directly. There is the risk of default, but less than 1 percent of Prosper's loans have defaulted. Close to 3 percent are at least three months late. Prosper encourages lenders to protect themselves by lending small amounts to many borrowers rather than a large amount to a single borrower.
Prosper collects two fees: a 1 percent origination fee from borrowers and an annual loan-servicing fee of 0.5 percent from lenders. It verifies the identities of prospective borrowers and lenders. It uses credit reports to create a borrower "credit grade" ranging from AA to HR (high risk) that lenders see as they look through applications. It automatically withdraws payments from borrowers' bank accounts and sends them to lenders. It also deals with defaults.
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