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New Investment Opportunity? Person to Person Lending

By , February 7th, 2006 | 17 Comments »

Prosper.com how it works

When I first read about this in the UK, I knew it was only a matter of time before something like it started here in the US. I stumbled across a new site that has started to do person to person lending in the US the other day. The site is called Prosper.com and it came out of beta testing a couple of days ago.

The concept is quite unique and is based on a person to person lending strategy that takes banks out of the middle. In theory, those who need to borrow money will be able to do so at rates lower than a bank would charge while people lending money can earn rates higher than banks would be willing to pay. A win-win situation for everyone.

Currently the site has a limited number of people seeking loans which is to be expected since it has only been out of beta testing a few days, but this causes some problems for those that are interested in lending. Unlike zopa where there is no one on one lending (to lessen the risk to those lending money in zopa, the lender’s funds are spread among a minimum of 50 different borrowers) Prosper has no such risk management policy. The lending is one to one meaning you take the full risk if a person defaults. One way to combat this would be to lend small amounts to a lot of different borrowers, but with so few borrowers currently in the system, it’s impossible to spread this risk in this way at the moment.

For people that have money to lend, they sign-up at the site and indicate the amount money they are prepared to lend to other people and for what period of time. The funds must be transferred to a Prosper account before they are able to bid on lending rates with a $1,000 minimum on the transfer (prosper.com left a comment that this was a typo in their information that is being removed). The borrowers are given a credit score which is obtained from Experian ScoreX Plus (SM) credit score from your credit report, and assigns one of eight credit grades depending on the results:

Credit Grade Credit Score
AA 760 and up
A 720-759
B 680-719
C 640-679
D 600-639
E 540-599
High Risk (HR) Up to 539
NC No Credit

In theory, the better grade your credit score is, the lower the interest rate you’ll have to pay because lenders will see it as a lower risk than those with lower credit scores. The borrowers debt to income is also shown to give a better feel of how well they can repay. The borrowers exact credit score is never displayed. The site says that getting requesting your score will not affect your credit score:

Having Prosper obtain your credit grade won’t affect your credit score! Although we are making a request for your credit score, we’re doing so at your instruction so no inquiries viewable by subsequent users of your credit report will be placed in your credit file. That means your credit score won’t be affected when you register or post a listing. Only if you obtain a loan through Prosper will an inquiry that others can see be placed in your credit file.

If enough people bid to cover the loan wanted, the money is taken out of the lender’s funds and deposited directly into the bank of the borrower. It then becomes a loan in every sense of the term and the borrow is required to make monthly payments over the term. It is at this point reported to the credit agencies and would also be reported it defaulted upon. If a borrow defaults, it will eventually be sent to a collection agency.

Taking a look at the people currently looking to borrow money, it doesn’t give a lot of confidence in those saving for the things they want before purchasing them (my entire approach to personal finances). Some of the current requests for money include $2,700 needed for getting a new wardrobe, $3,000 needed for a vacation and $5,000 needed for a car “fun project.” There is one listing where the person has 0% credit card expiring and he is trying to lock in a better rate than his cards are going to give him which seems to be a more responsible approach to getting the most out of the system if you are a borrower.

This will certainly be well worth the time to keep an eye on to see how it develops. If the borrow base increases so that you can spread the risk of the money you’re lending out, it could be a way to earn some premium rates (if they continue to stay relative high compared to other investments). There also seems to be possible opportunities for those who need to borrow money to do so at lower rates than they may be able to obtain elsewhere.

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  • davis says:

    What do you think about this as a way of building damaged credit?

  • Bill says:

    My personal risk-tolerance level falls way short of what would be needed to be a lender in this program. You’re right on the money about needing to spread the default risk out. That’s how securitization of mortgages, car loans, etc. works so well.

  • John says:

    I like the concept, but I think they will have a lot of hurdles to overcome to make the system work. Identity thieves must be drooling over something like this and if they get into the system, nobody will want to lend. I hope that is succeeds as I think banks rip people off too much, but they will have a tough time.

  • pfadvice says:

    “What do you think about this as a way of building damaged credit?”

    There are fees for borrowing meaning it will cost you a minimum of $25. I suppose that if there are no other alternatives to building credit, it is one choice where you can do so without the hassles of going through the banking approval process. It is a loan and will show up in your credit report so if you pay it off without late payments, it should benefit your credit score.

  • jeff covey says:

    this isn’t new; circle lending
    has been doing it for six years.

  • frank says:

    That’s for family and friends. Prosper is more for perfect strangers.

  • We (Zopa) think that Prosper is interesting, but as you say, potentially risky for lenders. We think that one of Zopa’s strengths is that it is very safe for lenders – after 12 months, we’ve had zero bad debt – and when we get some, it will have minimal impact on individual lenders due to our 50 way spreading of loan money. There is probably space for Zopa to move slightly towards a higher risk:return model in the Prosper vein, but we don’t want to go as far as they have.

    We’ll get the chance to go head to head soon as we’re planning our US launch at the moment – it’ll be interesting to see who wins!!

  • Caitlin says:

    Hm. I don’t really see how loaning money to folks so they can buy new clothes and mod their cars will lead them to “prosperity”…just seems like a disconnect between the name of the company and how it’s being used in it’s infancy.

  • Loi Tran says:

    I think the risks are too high for the lenders.

  • Jeff says:

    Lenders are working their own little miracles there at Prosper and making a difference! Thanks for the info pfadvice! The risk is no different than placing it in a mutual fund and letting them pillage you with fees and uncontrollable risk exposures. I, personally, would like to be able to select my risk tolerance and earn a predictable rate of return… Prosper might achieve that for me.


  • Andrew says:

    Hi Jeffrey,

    Andrew from Prosper here. There is actually no $1000 minimum for lending on Prosper – there is a misprint in our current lender agreement, but this is a relic of a prior strategy, and is being removed later this week. Just thought I should clear that up. Thanks for the writeup.

  • James says:


    Thanks for your detailed info on prosper.com. My fiancee have decided to try it out and will check your website periodically for updates!


  • Dan says:

    Greetings, I’ve been using prosper for a few months now and I’m quite pleased with the results. I have over 20 loans out with an avg rate of over 13%. All loans that have existed for a few weeks are current with their payments, so my true ROI at this point is over 13%; great diversification tool with this market that’s on fire and could crash at any moment (esp. internationals). Good luck!

  • PeerLend says:

    A minor update on this space:

    Prosper has originated over $100mm in loans, with over 500k+ members, and parked about $20mm more in VC not long ago.

    Zopa (who, at the time of this article, operated only in the UK) has launched a US version in partnership with six US credit unions. The model is not quite “P2P”, as lenders are asked to purchase a guaranteed CD (~5%), the purchase proceeds of which Zopa will lend out to borrowers (presumably pocketing the spread).

    LendingClub.com, a completely new player, launched via the FaceBook social networking platform, and has just recently opened to the non-facebook public. Their platform is P2P, but it differs from Prosper’s more laissez faire implementation in that LendingClub underwrites the loans, bucketing them into different grades at different rates – doing away with the typical auction process.

    Two more market entrants are apparently ramping up for launch, as well: GlobeFunder & Loanio. The former is in limited testing in a handful of states, the latter in stealth mode, but supposedly scheduled for launch sometime in January ’08.

    In addition to the US for-profit players, there are also are several non-US focused, more “social finance” oriented, services: Kiva.org has seen continued success (especially in getting its CEO into AmEx commercials!), and eBay has made a recent investment in MicroPlace.com, a social-microlending venture that allows Westerners to invest into individual borrowers in developing nations.


  • Carnival of the Capitalists » The Small Business Buzz says:

    […] • Copyright Tutorial • New Investment Opportunity? Person to Person Lending • Is Sweden Moving From Socialism to Capitalism? • Mortgage Pre-Payments at Slowest Pace Since 2003 • Effective Interest • Business problems: Seek them out […]

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