Can Peer-To-Peer Finance Work? 261
Dotnaught writes "Two companies, Prosper and Zopa, appear to be convinced that social networking can be combined with borrowing and lending. They're intent on using eBay as a model for listing and bidding on loans without the involvement of a bank. Call it peer-to-peer finance. There are already some 800 groups on Prosper ready to loan money to specific causes, such as the Apple User Group, 'a lending group for those wishing to purchase either a Macintosh or Apple iPod.'"
Amazing! (Score:2, Interesting)
One of the drawbacks with banks et al is the insertion of the thick layer of bureaucracy between the lender and the lendee; its expensive, time consuming and impersonal.
If you have direct contact mechanisms like this, people find information far more accessable and that gives them a chance to take advantage of opportunities they wouldn't even have known about before.
It also gives people a chance to browse speculatively (bit like you do on Ebay).
My fear is that the State will barge in and regulate this to its death, since it's to do with money and lending and there's a LOT of State regulation of such industries, to the harm of everyone who wants to borrow and to the benefit of the banks, since it greatly reduces the competition they have to face.
I wouldn't want (Score:3, Interesting)
Re:Existing Finance (Score:5, Interesting)
Although it might not be as large a benefit to investors, it could increase competition in an already competitive market and help borrowers to secure better loan terms. Hopefully, this could also help out people with poor credit ratings as there are more potential businesses to loan them money.
It's not new, just a different slant... (Score:2, Interesting)
Not new, but different. Interesting idea nonetheless.
Similar to Angel investors vs VCs (Score:4, Interesting)
Two obvious examples are
And it's hard to underestimate the stupidity of some lenders. I imagine there are plenty of people with a lot of money who will seriously consider lending to a high-school kid to get an XBox in the same way that they consider lending to former Nigerian Royalty to help them get millions out of there.
Re:Existing Finance (Score:4, Interesting)
Speaking as someone who is committing money to a community bank [communitywiki.org] with roughly $2,000 in it, I think the thing is that people trust their own culture, and are more willing to accept risks and lend money within their own culture. People tell each other things amongst themselves, that they do not necessarily tell the banks.
If you lose, it was "for the cause," anyways. If you win, you've aided the cause.
The bank might not even be willing to talk with you.
I know a girl, she's going to college. She needs $50,000 for 4 years of loans. The banks aren't talking with her, and her parents are opposed to her going to college out-of-state. (Read: The parents want to keep her near, to better control her.)
If my culture were just a wee bit more organized, [communitywiki.org] I'm sure we'd have her in her preferred college. (UCSD, I believe.) As it is, we only have $2,000 amongst ourselves.
If only she were going to college in 4 years...
You may also want to check out the concept of Internet Bonding. [communitywiki.org] Basically, if you can look at all the things a person does online, says online, follow the ups & downs in their life, and so on: You can do interesting things with that. You can better evaluate risk. So, if you're operating within your culture, things get a lot easier on you.
In the case of this girl, she has an easy time explaining to us who she is, where she's coming from, and so on: You can see her last few years of work online. "Trustworthy!" we say, "Get that woman her CS degree!"
Re:Not as good as it sounds for lenders... (Score:3, Interesting)
members have to make at least £25,000 (Score:2, Interesting)
GlobalGiving.com (Score:4, Interesting)
Hey, why lend when you can give?
Global Giving [globalgiving.com] is the charitable expression of the same idea. Instead of giving at the office to some anonymous organization, why not fund: Renewable Energy to 20 Peruvian Communities [globalgiving.com], Improving Computer Literacy in Afghanistan [globalgiving.com], Information Technology for Uganda Medical Students [globalgiving.com], or whatever else floats your boat [globalgiving.com].
risk attitude (Score:3, Interesting)
I would rather lend my money to HSBC. For one of the first standard online saving
account [hsbc.co.uk], you can earn 4.75% AER (and it is not even fixed for 6 months).
The interest rate setting mechanism is kind of a double auction market. You, as either lender or borrower, can set your offer rate. The "market" rate is the one when both meeting somewhere in the middle. I mean most lenders are not really serious at this moment. They are likely to throw £10 in order to test how the system work. But, causually, you can see how people evaluate risk. For this type of unsecured loan via a potentially run-away-overnight "bank", my risk premium is way higher than 10%. Even if I trust the whole system, given a default rate of 3% quoted somewhere in their website, a risk-neutral lender will at least demand an interest rate of the "risk-less" rate (the return that you deposit in a reputable regular bank) + the default rate + their annual handling fee, which means at least 4.5+3+0.5=8%.
Re:Natural evolution of loan sharks (Score:3, Interesting)
Re:End-run around anti-discrimination statutes (Score:3, Interesting)
Re:Spam/Scam (Score:2, Interesting)
And it takes relatively few people to poison that well. If an investor charges 6% and could get 5% elsewhere, there's only a 1% margin keeping him in the game at all. If only 1% of the applications are scams, the entire enterprise falls to the ground.
It may be working today for the same reason that email used to work: until there is a critical mass of people involved, the scammers have better ways to spend their time. These are comparatively small loans. So past success is not necessarily an indication of future performance.
If we're very lucky we'll find that throwing many minds at the problem will solve it. Perhaps a network of trust would work; say, cheaper loan rates to people recommended by others who have paid back their loans, or even co-signing. The scammers would then escalate (form into clumps to take loans, pay them back, recommend each other, take another loan, and all default at once) and maybe the collective minds would solve that problem (the way Google tries to weed out search engine cheaters).
Or a wholly different tack, where lenders pay money directly to merchants (say, the owner of a house being sold, or a car dealer) so that the customer has goods rather than money, which are harder to simply pack up and move with. There are ways for scammers and counter-scammers to escalate that game, too.
It would be interesting to find out if an open-source/P2P type hive mind can keep ahead of the scammers.
Re:Amazing! (Score:2, Interesting)
Re:This is a disaster (Score:3, Interesting)
There is a clear risk/reward relationship here. The highest 3 year CD rate I can find is 5.4% APY. I have $1000 into Prosper at an average rate of 16%. That is far higher than any bank or CD rate (because the risk is greater). Is it a good investment? Depends on whether or not all my loans get paid back in full. At $50 a loan I can afford for a couple to default and still come out ahead of the CD option (once I've scaled to a large enough number of loans).
Additionally, I get monthly cash flow (albeit not a lot of money on $1000 investment). I can either reinvest it or take the cash. Should I need the cash immediately (which I doubt, I have other, more liquid reserves for that) I could always take out a loan (on Prosper) at a lower interest rate than my average (because I have good credit). The loan could then be paid off from the proceeds of loans I've made.
In truth, the larger risk of Prosper is in the amount of time needed to discover and research new loans on a regular basis.
I've written up a longer post on my experience with Prosper on my personal finance blog [my-persona...e-blog.com].
This is better because it's more democratic (Score:2, Interesting)
This system is a better way to invest not just because the rates of return are probably higher. (I note a lot of people pointing out interest bearing bank accounts and CDs, but the average prosper loan is three times those interest rates. The default rate will only be known with time, of course.) This way of investing is better because your money is less likely to be the tool of some manipulation of society or even direct attack against you.
The centrally controlled and big-institution finance industry had been defined by three massively costly disasters in decent decades:
1) Greenspan's decision to use the Federal Reserve to back W politically, by encouraging deficit spending and manipulating interest rates to make it -- for a short time -- affordable. By now it is clear even to knee-jerk conservatives like myself that the result will be the impovishment of our government, the loss of our influence overseas, and heavy damage to our military institutions.
2) China's decision to extend massive credit to the rest of the work to buy their low-quality manufactured goods, through manipulation of their exchange rate. (This would not have been possible if there wasn't so much US debt for them to buy, see 1 above)
3) The big US Financial Institutions' decision to massively expend the availability of consumer credit, resulting in the current sad fact that more people know their "credit score" than know how much they paid in taxes last year.
If the next president is unpopular with the Federal Reserve chairman, I can counteract his politically motivated money-tightening by extending more $100 loans to small businesses on prosper.
Experian can punish you for shopping around for a good rate on your mortgage by reducing your credit score. They can reward you for missing occasional payments and thus generating late fees, and raise your credit score, thus rewarding bad and punishing good and poisoning society. However, I can treat shopping as a sign of a thrifty, careful individual and raise your estimation on prosper, and look at late payments as sign of poor organization and lower it.
These big guys just haven't worked out that well as gaurdians of the financial system. They've been fucking shit up pretty badly for a while now. It's about time we quit letting them use our money to do it.
Islamic Rules Against Usury: It Already Does Work (Score:2, Interesting)
Re:This is a disaster (Score:3, Interesting)
Start with $1,000. Loan it out at 16%. Start getting monthly checks.
Take a loan for $1,000, at 8%. Loan it out at 16%. Get more monthly checks.
Repeat.
The limit is when your credit rating goes so low because of the outstanding loans that you cannot qualify for another loan to reinvest. Or, when scammers take the whole system down through massive defaulting.
Still, seems like a good business model at this moment...
The Redcoats are Coming!! (Score:1, Interesting)
Re:Islamic Rules Against Usury: It Already Does Wo (Score:2, Interesting)
Ways around it is a good way to put it--"Islamic banking" charges interest but figures out a way to not call it that. For example, instead of buying a car for $10,000 at 5% interest over three years with a payment of $299.71 including principal and intrest, an "Islamic bank" will buy the car for $10,000, sell it to a borrower for $10,800 with fixed payments over three years of $300.00 with "no interest." The effect is the same. Seems like an awful lot of trouble to go to in order to pretend to comply with Sharia.