Peer-to-Peer lending on the Internet

Obtaining a loan for a mortgage or any other type of expense can be a long and arduous process. There are many steps and financial factors that must be looked at when trying to obtain any type of loan. The traditional methods for finding a loan have been to go to your bank, credit union or financing company and apply for a loan. But times have changed. Since we are in the midst of the “age of the internet,” just about anything ca be done online, and this now includes getting a loan.

According to a July 24, 2006 article in The Wall Street Journal, “Want to bid on a loan? A San Francisco start-up looks to create a marketplace in peer-to-peer lending,” by Mylene Mangalindan, there are internet sites popping up that make it possible for individuals to lend money to one another without ever even meeting. The article focuses on the new company, Prosper Marketplace Inc., which matches potential borrowers to lenders who have the money to finance their loans.

“Such peer-to-peer lending, analysts and Prosper lenders and borrowers say, is useful for individuals who have bad credit or have a hard time getting loans through traditional means like banks and credit unions. But it is also for people who are interested in an alternative way to get a fast loan, for, say, developing a small business or joining a poker tournament. For lenders, the attraction is the returns from interest rates as high as 29% - if they can handle the risk of lending money to strangers. And some say they like the ideas of helping a person get out of a financial jam or get a project of the ground,” according to the article.

This alternative to traditional methods seem like it could be the new future in lending. But the company has only been up in running since February, so it is hard to tell how successful it will be. There is not quite anything like Prosper in the United States, but similar companies are already up and running in the United Kingdom.

The method of Prosper’s loan process is actually quite simple. Borrowers must answer simple background and personal information questions about themselves, and then create a profile with their requested loan amount and the reason for the loan. They are given a rating based on their credit score and their interest rates will be set accordingly. After this, lenders can go on and browse the site, and bid on which loan they would like to finance.

“After the account is open, lenders can start bidding to finance all or part of a loan and submit the rate at which they’re willing to lend. Bidding lasts three to 10 days; the borrower determines how long the bidding will last. All loans are for three years with monthly payments. But a borrower can pay more than the minimum each month or pay off the loan early.”

The site has been attracting borrowers and lenders because of the human interest aspect to it all. They get to find out a little bit about each person they are loaning money to, while also gaining a profit from the interest rate. The borrowers and lenders each pay one-time fees to the company and the lenders are actually “buying” the loans from Prosper.

“Borrowers pay Prosper a one-time fee of 1% of the loan amount. Lenders pay an annual servicing fee of 0.5% on each loan. Technically, the bidders aren’t lending the money directly to the borrowers. Instead, Prosper makes all of the loans from its own funds, and the lenders are then purchasing the loans from the company using the money they’ve deposited to their Prosper accounts. So, since Prosper is doing the actual lending, the bidder doesn’t require a lending license.”

Only time will tell if Prosper Marketplace Inc., will indeed prosper. The idea behind it is smart and is pretty much a win-win situation for everyone involved. High risk borrowers can obtain a loan they probably wouldn’t have gotten by using traditional methods, and lenders gain larger than normal profits from the high interest rates.

Back to Articles