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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.'"
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Can Peer-To-Peer Finance Work?

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  • Existing Finance (Score:5, Insightful)

    by foundme ( 897346 ) on Tuesday May 16, 2006 @07:40PM (#15346717) Homepage
    I can't imagine how this is able to compete with existing financial providers.

    First of all, how many bad debts can these peers handle? Large corporations have enough cash to handle bad or delayed debts.

    Unlike other successful P2P services, this model is entering a market where existing businesses are making a living out of it.
    • by rvw14 ( 733613 ) on Tuesday May 16, 2006 @07:47PM (#15346758)
      Peer to Peer financing has been around for decades. It is called a Credit Union.
      • But it's a credit union using a computer (patent pending).
      • Your right, Credit Unions are a good example of individuals aggregating. But isn't a bond a form of "peer-to-peer" financing without a bank as well? The company issues a bond, you buy the bond from them thereby loaning them money directly. Ofcourse, with a bond (in modern financial system) you get a credit rating for the company from S&P, Moody, et al.

        How about some C or D rated bonds? We'll just add a 21st century buzzword "Peer-to-Peer" to make it sound cool and catchy. I also have a bridge in b
      • Peer to Peer financing has been around for decades. It is called a Credit Union.

        That's a good start, but I'd look more at the shared-ownership mortgage for a model -- this is where a broker puts a house buyer in touch with an investor who's willing to finance (usually) half of the cost of the house, in exchange for the ability to collect rent from him on half its value for some period of time afterwards. There are some brokers who will arrange this kind of scheme with individual investors, matching investo
    • Re:Existing Finance (Score:5, Interesting)

      by Damathon ( 912183 ) on Tuesday May 16, 2006 @07:48PM (#15346766)
      These businesses may be entering a market that's already full of competition but I think the main idea is that regular people can loan small amounts of money, together effectively becoming as large a business as the existing businesses -- although the profits may be smaller, people aren't doing it for a living. Each person is giving a little, but they can effectively compete with large companies. (And losing $100 or so won't hurt the types of people who will invest money into P2P loans).

      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.
    • by Anonymous Coward on Tuesday May 16, 2006 @07:56PM (#15346820)
      There are plenty of rich guys willing to study "small" deals that existing financial providers won't deal with.
      Two obvious examples are
      • Angel Investors that fund many companies that VCs and Investment Banks don't. They make their money because they're willing to study complex opportunities that may be close to their area of expertise, and
      • the other obvious example is the mob, who gets higher interest rates and can afford to take on riskier loans because they have a more effective collection agency.

      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.

    • I can't imagine how this is able to compete with existing financial providers.

      Yay, venture capitalists!

      First of all, how many bad debts can these peers handle? Large corporations have enough cash to handle bad or delayed debts.

      They are trying to spread risks around. They also are assuming a 4% default rate. I don't know if that is a feasible goal, but they are claiming that the "community" they are building, combined with off-line credit inquiries, will get them to that number.

      Unlike other successful P2P
    • by DragonWriter ( 970822 ) on Tuesday May 16, 2006 @08:03PM (#15346869)
      I can't imagine how this is able to compete with existing financial providers.

      If you aren't completely risk-intolerant, it looks far better a place to put money than a bank for a small investor.

      For a borrower, I don't see much advantage, though the terms may be slightly better. I think the lenders are what will drive its success, since having the money to lend will, itself, make it attractive to borrowers.

      First of all, how many bad debts can these peers handle?

      Zopa lets you limit your exposure to any given borrower to as little as 10 pounds, Prosper does something similar with a a minimum of US$50. Automated aggregation allows spreading the risk.

      Unlike other successful P2P services, this model is entering a market where existing businesses are making a living out of it.

      Successful P2P services have done that, too. "Buying and selling goods" is, after all, something business were making a living at (even using auction models) long before eBay.

      In a sense this is an eBay system for buying and selling money, which actually can work far better since its a uniform, fungible commodity that allows spreading the risk. (Its a little bit different, since the auction service here also covers fulfillment, which isn't necessarily the case with eBay, but that's better for users, since it offloads much of the risk of dealing with a difficult person at the other end.)
      • > For a borrower, I don't see much advantage, though the terms may be slightly better.
        3 words, "Line of Credit" once upon a time many (more) credit cards gave interest on positive balances. I would be very interested in a single account that I could get close to the same rate for money to loan and borrow. But also directly building credibility for borrowing from my loaning history (ok you build credit history allowing Credit Cards.)

        Because I have a house, I do have a line of credit NOW that lets me ge
    • Also unlike other successful P2P services, this model is trading in scarce resources from an economics point of view.

    • Re:Existing Finance (Score:4, Interesting)

      by LionKimbro ( 200000 ) on Tuesday May 16, 2006 @08:07PM (#15346904) Homepage

      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!"
      • by Anonymous Coward
        >I know a girl

        You lost me there.
    • Naaah! It would never work.

      Just because we use email, or IRC or the phone to communicate does not really change anything.

      • Hm,..

        Would it make any difference if you could see the person's last 5 years of activity online, as well as place of residence and information about where they work, can see all the forums they post too, know that you can hound them on said forums, and have given them a lengthy legal contract to sign?

        Would that [communitywiki.org] make a difference?
  • by Anonymous Coward on Tuesday May 16, 2006 @07:41PM (#15346719)
    that's how Enron worked.
    • CEO makes new subsidiary -
    • parent and subsidiary loan each other a couple billion - book them as revenue
    • profit
    • go to jail
  • Amazing! (Score:2, Interesting)

    Sounds amazing!

    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 regu
    • Re:Amazing! (Score:4, Insightful)

      by ornil ( 33732 ) on Tuesday May 16, 2006 @08:07PM (#15346900)
      There's good reason why there's so much regulation of banking & finance. It used to be a free-for-all, with rampant fraud on both sides: borrowers and lenders. Do you really feel confident enough not to be fooled by fraudsters of various sorts? It's sort of like phishing, only imagine you are computer-incompetent, because I doubt your (and my, and most people's) understanding of finance is good enough to detect the more sophisticated financial fraud out there. This is like a honeypot for thieves of the worst sort, because there's no tangible goods involved anywhere, it's just money - numbers in people's accounts.
      • The thing is, who is to decide if I'm competent?

        Me or someone else? and if it's someone else, and they get to decide whether or not I can borrow money from another person, isn't my personal freedom being reduced? "for my own good", of course!

        To be honest, I know well I can trust the main banks, and I am aware I take an increasing risk if I go elsewhere. If I've got half a brain, I'll turn to independent specialists for advice, just as for example I recently had to buy a fridge-freezer and bought a group
        • Re:Amazing! (Score:5, Insightful)

          by AuMatar ( 183847 ) on Tuesday May 16, 2006 @09:05PM (#15347326)
          To be honest, I know well I can trust the main banks

          Study history. The ONLY reason you can ay that is because of regulations. Look back at the 30s- respected banks went out of buisness as much as anyone else.

          I'm not competent to tell what banks are trustworthy. I'm not competent to tell what food won't give me botulism. I'm not competent to tell what products will do what they're supposed to and what won't. I'm not competent to understand cutting edge medicine. I may be able to pick up 1 of these, but there's a limited number of hours in the day- I need to keep up on my primary profession as well. And I'm at the high end of the intelligence curve, I'm far more capable than the average person. The average man would be completely and utterly fucked.

          The government regulations are the only thing that enables me to go down to the store and have faith in my purchases. Without that, the economy falls apart. Government regulations are a good thing. Regulations on banks are a damn good thing, they ensure my life savings are safe. There's a reason why prior to regulation most people kept their money under their mattress or someplace similar- they couldn't trust banks. The world is a better place for these changes.
          • Re:Amazing! (Score:2, Interesting)

            by geekpowa ( 916089 )
            Totally Agree. I am currently living in a country where the banks are not strictly regulated. There are over 70 banks operating here some of them are practically mum and dad affairs. Even one of the telcos is permitted to act as a bank - you can store money with them and shift it around using SMS. Whenever I need to move money into the country the heart-rate quickens. Burned nearly over a grand in dodgy 'fees' and outright errors with little avenue for recourse over the past 12 months.
          • What's depressing is that in 2006 your observations are insightful and not embarrasingly obvious to everyone.
          • Not true. You may not be competent enough to tell what product will or won't work for you, but a bureaucrat is even less qualified to make those decisions for you. Government regulation in markets gives the illusion of safety but opens the door for corporate rent seeking and blocking competition in business more than it offers safety. The truth is isthat USA has grown the be a wealthy and safe place IN SPITE OF all the regulations we throw on business.

            The smallest set of components you need to insure tha
            • Not true. You may not be competent enough to tell what product will or won't work for you, but a bureaucrat is even less qualified to make those decisions for you.

              Not at all. The beauracrats consult with biologists, economists, etc. They are far MORE qualified. WHen it comes to the FDA, most decisions are made by actual scientists. They're one hell of a lot more qualified.

              The smallest set of components you need to insure that food won't give you botulism is (1) you having the ability to sue a store that
    • Re:Amazing! (Score:3, Insightful)

      by DigiShaman ( 671371 )
      My fear is that the State will barge in and regulate this to its death

      That's no fear. It's a FACT! Through the IRS, they will get their cut at gunpoint.
    • It also gives people a chance to browse speculatively (bit like you do on Ebay)

      seems like this will lead to loan-sharking on the lender's side and Nigerian 419 scams on the other end. I just need a small loan to get started on big $$$. Either way, they break your knee-caps.
    • 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.

      Right, because not regulating the banking industry back in the 1980s worked out so well for the all the Savings and Loans...

  • Welcome Back (Score:5, Insightful)

    by Camel Racer ( 134168 ) on Tuesday May 16, 2006 @07:42PM (#15346727)
    With this announcement, we are now officially in an economic bubble.
  • I wouldn't want (Score:3, Interesting)

    by rsilvergun ( 571051 ) on Tuesday May 16, 2006 @07:45PM (#15346741)
    to just jump into the lending business. It only works if you've got the legal muscle to force people to pay out. What goods it do to have a million dollars in assets if it's all money owed to you by deadbeats who know you can't take them to court. Then again, if you could lend the money out at high interest and then sell the notes to debt collection agencys who _did_ have the legal muscle, that might work.
  • credit checks? (Score:4, Insightful)

    by chicken_tonight ( 786398 ) on Tuesday May 16, 2006 @07:46PM (#15346752)
    Unless there are credit checks people will use this borrow money when they're desperate. Sounds like a recipe for disaster to me.
    • Re:credit checks? (Score:5, Informative)

      by BridgeBum ( 11413 ) on Tuesday May 16, 2006 @08:05PM (#15346887)
      I can't speak for Zopa, but I've been looking into Prosper. It's quite interesting actually.

      There are indeed credit checks. Users have their credit scores checked, and their 'ebay applications' show their rating, broken down into AA, A, B, C, etc. Users also attach checking/savings account when they create their accounts, and monthly collections are automatic. Obviously that doesn't preclude the possibility of defaulting on the loans, but it helps.

      Also, there are affiliated collection agencies for defaulted loans. Just as banks outsource collections to agencies, so can you. I've actually recently signed up as a lender, and will be trying things out with a small amount of money in the next week or so.
      • Please be careful! (Score:4, Insightful)

        by lorcha ( 464930 ) on Wednesday May 17, 2006 @08:51AM (#15349931)
        I checked out the site, and these were my reactions to it:

        The borrowers post what they need the money for, and their stories are identical to the stories I hear every day about why a tenant's rent money is unavaiable/late/whatever. There are some people out there who actually will come up with the rent money. There are some who really intend to come up with it, and believe that they can come up with it, but are unable. There are some who never intend to pay for what they consume and are just good at making up stories. Please, please be careful!

        Be sure to spread your risk across many borrowers. When (not "if") one defaults, you won't lose your entire investment.

        Be careful of people who, within the last few months, just had a major financial hardship (divorce, medical problem, job loss, etc.) I'm not talking about someone who had the problem 2 years ago and has his/her life more or less back on track... but the FICO score isn't up to where it should be yet. I'm talking people who are in he midst of financial turmoil. It's very tempting to take pity on those people because they are in trouble. Just make sure you are playing with money you can afford to lose. Their FICO and D:I may look ok now, but it's possible that their defaults on their obligations haven't caught up with them yet.

        Before you lend any money, please become extra familiar with what the various FICO scores mean and what the debt to income ratio means. Those are the only verified pieces of financial info that you're going to get from the site. A good credit score but high D:I is a very risky loan. Be careful.

        Make sure you're getting a good rate on your loans! You can get a 10% average return with an S&P 500 Index [yahoo.com] investment. What return are you getting on your money that you're lending out, when you factor in the default rate? Remember, these loans are not FDIC insured. Credit cards are charging these folks a minimum of 18%, and credit cards are not stupid. Make sure you're getting a huge return.

        Good luck! I hope it goes well for you!

    • Re:credit checks? (Score:3, Informative)

      Both sites have credit checks. Prosper lets you specified credit levels as a lender in your offers, Zopa from a quick look through the cite doesn't seem to.
  • by Anonymous Coward
    ... a bank, but without the legal security, This is exactly how a bank works, but in a different source. A bank can affoard to lend you money because it indemnifies those loans with invested money from other companies.

    Not new, but different. Interesting idea nonetheless.

  • by Ph33r th3 g(O)at ( 592622 ) on Tuesday May 16, 2006 @08:02PM (#15346858)
    Check out the loan requests at prosper.com -- lots of them include the borrower's age, ethnicity, gender, etc. either outright stated or inferable from the accompanying photographs. While Prosper as the lender of record only provides a credit grade based on an objective score from an Equifax report, the individual lenders are no doubt going to make (or not make) loans according to their own personal prejudices. The very fact that this information is available to prospective "loan buyers" (who are the actual lenders in all but name) will very quickly attract the attention of regulators.
  • OMG! (Score:3, Insightful)

    by Ph33r th3 g(O)at ( 592622 ) on Tuesday May 16, 2006 @08:07PM (#15346902)
    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.'"

    Yes, this is exactly the group I'd lend to -- a bunch of status-seeking wanna-be yuppies who want the cachet of conspicuously consuming an Apple product but need to borrow the money to pay for it. Uh-huh. I'm all over that.

    • Hey, it might be worth it to take over the credit card's role in these idiot's lives. Except, the CC has nifty legal ways of circumventing things like defaults and bankruptcies.
  • look at numbers... (Score:3, Informative)

    by Sean5033 ( 246214 ) on Tuesday May 16, 2006 @08:08PM (#15346917)
    look at the numbers before you decide to invest your money into something like this... You won't be making as much money as you might think.

    If $1000 loan is granted at prosper with a 10% interest rate, it'll make about $153 over three years if everyone pays up. That includes the 0.5% that prosper takes for fees and stuff. It's still lower than I expected. $1000 at 10% over 3 years, and I instantly think $300. I looked into why and it's because the principle is paid off so quickly. The $1000 number is getting smaller every month and there's not much left to earn interest by the start of the 3rd year.

    If that same $1000 sits in a 3 year CD paying 4.75% (ING's current rate on a 3 year cd) it can expect to make about $149 without any of the risk associated with the prosper loans. Interest penalties might apply if it's cashed out early.

    If the $1000 stays in an ING account that has 3.8% interest, you'll stand to make about $120.

    I really like the idea of it, and it has the potential to make some extra $$ if you have some cash laying around not doing anything. But the Risk Factor is huge compared to the alternatives I came up with. The fact the money is still accessible at ING is worth the 33$ IMHO. Even if the money isn't needed for three years, a CD returns a few bucks less, and can still be cashed out in an emergency situation.

    • That's kind of an apples-and-oranges comparison. Since you get the money in your account as soon as the payments come in, unless you re-issue new loans, its equivalent to withdrawing part of the interest from a bank savings account every month and letting it sit around as cash.

      Yes, CDs feature automatic reinvestment, and with Prosper you have to manually reinvest. But comparing the two without comparing them at full reinvestment is not especially useful.
  • I don't know how exactly because I'm not that well-versed in financial matters...but rest assured, this service WILL be spammed/scammed by the same people pushing worthless services and trying to scam you out of your hard earned money.

    • Depressing, I'm afraid, but probably true. Identity theft makes it easy to apply for a loan and then skip town. Except if you've stolen the identity of somebody already out of town, you don't even have to rent a moving van.

      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 r
  • by redelm ( 54142 ) on Tuesday May 16, 2006 @08:15PM (#15346980) Homepage
    P2P financing is called "disintermediation" and actually has been going on in the finance world for 20+ years as borrowers approach lenders directly, rather than through banks. The commercial paper market. There are problems, mostly around collections and default. Not economically solvable for small loans.

    But the very idea ignores what drives P2P: very low costs to the provider of service. Lending money is nothing of the kind -- there's a big default risk. You'd find P2P s3x to be easier!

  • by i am kman ( 972584 ) on Tuesday May 16, 2006 @08:20PM (#15347012)
    Seems pretty obvious this will rapidly devolve into supporting primarily folks with bad credit (or can't get loans from banks) who desparately need money FAST. Well, that and look for major identity theft rings.

    Banks are highly regulated for a reason and offer strong protection to folks on both sides of the fence (investors and borrowers). New, completely unregulated financing options are really recipes for disaster and abuse - particularly in this day and age.

    And, even though pieces of it will be very legitimate and well-intentioned, a few bad apples will bring down the whole scheme. Stay away (unless you want your kneecaps broken).
    • Seems pretty obvious this will rapidly devolve into supporting primarily folks with bad credit (or can't get loans from banks) who desparately need money FAST.

      I don't see why you claim this is obvious; since there is credit rating information available to the "lenders", I don't see why bad credit would be favored (this presumes that the "lenders" will have a preference for return that makes them more risk tolerant, or that good credit borrowers will avoid the site for some reason. Neither assumption seems

  • I think this is great! So, how do I start leeching money from the torrents? ;)
  • $40,000 a year ? that is huge amount of money, so you on the west actually earn this much? we earn about $3,500 a year on average, this world is wierdly unbalanced
  • GlobalGiving.com (Score:4, Interesting)

    by daigu ( 111684 ) on Tuesday May 16, 2006 @08:26PM (#15347056) Journal

    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].

    • Instead of giving at the office to some anonymous organization...

      Uh...the Democratic Party isn't THAT anonymous.
    • Hey, why lend when you can give?

      I would hate to be in your shoes when you retire.
      "Ahh... time to break open the nest egg... these thank you notes must be worth something by now."
    • Re:GlobalGiving.com (Score:3, Informative)

      by FleaPlus ( 6935 )
      Hey, why lend when you can give?

      For a solution which is somewhat in-between, there's organizations which provide low-interest microfinance loans to entrepreneurs in developing countries, helping them towards econmic independence. One neat-looking organization is Kiva.org [kiva.org], which enables individuals to make such loans. Worldchanging has a neat article [worldchanging.com] on organizations like Kiva and how they're helping things in the developing world.

      A relevant item from Kiva's FAQ:

      Why loans and not (just) donations?
      Over the la
  • Not sure if credit unions are popular in other regions or not, but in my area (Saskatchewan, Canada) credit unions are very popular and quite successful. We have general credit unkons, teacher's credit unions, etc.

    I see this as an extension of the same concept - only giving everyone involved more control as the technology (web) permits it. Letting everyone control every nickel and dime within a traditional credit union just isn't feasible.

    Seems to work here.. can't see many reasons why it wouldn't work o
  • by Marsmensch ( 870400 ) on Tuesday May 16, 2006 @08:38PM (#15347138)

    I have personally invested a hefty sum in a Nigerian financial institution run by the daughter of the country's former minister of finance. She contacted me personally (what banks can match that kind of personalized service?) and personally arranged for my account. I sent her my retirement savings and she will soon start sending me my massive returns. I will soon be rolling in obsene amounts of money!

    Nigeria is the future of finance I tell you!

  • Because identity theft is going to SKYROCKET if this catches on.

    Some of this stuff is insane. There are loan requests out there that read like a nigerian 419 scam. But who knows maybe calls to God will give other people better rates.

    And I look at all the poor idiots with credit card debt up they are trying to pay off, locking themselves into loans at high interest rates when they would be much better off either calling up their own credit card company & brokering a deal for payment & a reduced
    • Because identity theft is going to SKYROCKET if this catches on.

      Er, why? Its certainly no easier to scam money with identity theft from this system than traditional lenders working through the mail or the net; you might convince people to give you better rates this way, but that doesn't matter if you are using identity theft to skip out on payments. I can't see any way this is more vulnerable to identity theft then traditional lending. Its certainly more vulnerable to exploiting gullibility in other ways

  • Founding 800 Lenders Ask to Borrow Money
  • What happens if prosper goes under?
  • risk attitude (Score:3, Interesting)

    by AtomicBomb ( 173897 ) on Tuesday May 16, 2006 @09:00PM (#15347298) Homepage
    I have just got some fun logged in to Zopa as a "potential" lender. The agreed lending rate is unrealistically low. Lending to the "A" grade borrowers for 6 months gives you only 4.5% AER (annual equivalent rate) and lending to the "B" grade ones will only give you 5.0%. And you are responsible for all the tax.

    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%.
    • Sounds like the borrows have the upper hand at the moment. You could borrow some money, deposit it with a bank, repay the loan at the end of the deposit term and turn a tiny profit that gets eaten up by tax.
    • 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%.

      Why add the default rate -- is that some kind of conventional "rule of thumb" (intuitively, it seems like it works as a rough approximation so long as both the default rate and the risk-free r

    • Ironically,short term Treasury securities are paying around [treas.gov] those rates recently. And if you want to get something a bit longer than a year, it's there. And the risk is much lower than a 3 percent default rate. You can purchase these as well online from TreasuryDirect. For free. Don't even have to participate in competitive bidding if you have less than like 5 million to invest. Sounds like a crappy deal indeed.
  • I have a credit union where I can deposit into an FDIC insured money market at 4.32%. If I like, I can purchase CDs for upwards of 5% if I'm willing to lock in (which I'm not given the historicly low rates, but that's beside the point). If I'm willing to undertake more risk, I know some funds that deal in mortgage-backed securities. No FDIC insurance, but returns more than 6%. Nevermind those, though. Let's just think about how the credit union works.

    The CU borrows money from me at 4.32% and loans it

  • And that's where they lost me. First, I don't want to give out my SSN. Or my bank account #. Let me put it on a credit card (which I'd pay off immediately) and I'm interested. Tell me I have to give you everything you need to steal my identity so I can lend money and I'm a lot let interested. Tell me you need it for authentication, of all things, because after all, the only people who know my SSN are everyone I've ever had a loan, bank account, credit card, every school I've ever attended, the U.S. gov
    • I'm pretty sure your SSN is linked to your Credit Report from the big 3. That said, an authentication it is not. More like a numerical name.
    • There's no way you will be able to do a credit-based and/or incoming-generating transaction like the ones Prosper does without giving your SSN. The interest earned on the loans you make is fully taxable, and they need your SSN so the IRS knows to come after you.

      From the borrower side, SSN is what links you to your credit report and credit rating, like it or not. For the credit reporting agencies, your SSN is an authenticator.
    • And that's where they lost me. First, I don't want to give out my SSN.

      Without your SSN, Prosper can't look up your credit rating, and can't issue 1099 statements reporting your tax liability for money that you make by lending.

      Prosper isn't using your SSN to authenticate you, they're requesting it because they can't do business with you, practically or legally, without it.

  • by atlantageek ( 166719 ) on Tuesday May 16, 2006 @11:04PM (#15347915) Homepage
    I'm in for $2500 so far and I've had very positive experience. I've already had one loan paid back in full and all but one of 29 (15 of which has had a payment due) loans has not paid. I'm getting an average 14% return.
    Prosper does a lot of the credit checks for each loan. Beyond the credit score they track current lates and 90 day lates in the last 7 years on people's credit report.
    If the loan does turn out to be a deadbeat the loan gets turned over to a collection agency and Prosper handles the paperwork involved to ding the person's credit.
    Prosper also allows you to spread your risk by investing small amounts(no less than $50) into lots of loans.
    Why should banks be the only ones getting 10-15% returns on loans.
    Lenders are also starting to form informal groups (some are invitation only) where they research the borrowers and score them for the high risk high return loans.
    I'm also collecting stats at http://www.savagenumber.com./ [www.savagenumber.com]
  • Hmmm... rates between 7.32% and 24.04%. Of course the 1% off the closing cost and 0.5% annual fee eat into that return on giving the lien. And I just how much the money is in action and being utilized... and that's why I don't trust the 7% gross return (and by gross do they mean before their fees are calculated in? And are there fees for lender as well?)

    This as an investment strategy just seems to be like trying to beat the system. Big banks have all dollars share equally in gains and losses. Basically
  • People are worried these sites will be used for scamming, but the real scam is being run by the site itself. They are taking advantage of those people that really don't understand finances and think they can make money but lending here.

    You can make an equal or greater amount of money in a CD or even savings account with the same money, and have zero risk, AND have access to your money if you need it.

    Why the HELL would anyone give their money out to a stranger at fairly high risk, and have no way to
    • So I assume you never invest in stocks or corporate bonds then, because they have risk and you don't know the people you're giving money to?

      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 a
      • by Thing 1 ( 178996 )
        Sounds like, with good credit to start with, you could snowball your way into some serious earning power.

        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.


        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

  • Lots of crooks are using buggy P2P software or Trojan horses to "borrow" money from their "friends", all 500 million of them.
  • If I'm a company and want to borrow money and avoid the banks, I issue bonds.

    If I want to loan money to a particular company, I buy their newly-issued bonds.

    Personally, I don't see small-scale loans being of interest to most small-scale lenders. The risk of default is just too unknowable. It's a lot less risky to take the already-mentioned credit-union approach, where "lenders" pool their money and borrowers borrow from the common pool.
  • by Anonymous Coward
    I'm a little disappointed in the universally negative reception I see in the comments.

    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 dire
  • by Anonymous Coward
    Check Wikipedia on the topics of Zakat and Riba and Islamic Economics, as well as on alternative currencies (e.g., the HOURS currency). Usury is against Sharia law, and Islam finds excellent and workable ways around it. In short, peer-to-peer finance has been in place for a long, long time already, and it works. Further reading in peer-reviewed economics journals might also prove instructive.
  • This sounds like prime feeding grounds for loan sharks. We already have more than enough of that, thank you.

Money is better than poverty, if only for financial reasons.