People-to-People Lending: Cashing In On the Borrowing Boom?

Lenders have made a lot of money in the past decade. If you have ever looked at your credit card statement and reviewed the interest you have paid, you may wish you were the lender instead of the borrower. Now you can be.

A service called Prosper.com has made a splash recently with the opportunity to make small loans to private borrowers. It is also quickly gaining popularity with borrowers who can’t qualify for traditional loans, or who don’t like the terms they are being offered.

Prosper.com allows borrowers to post loan requests, along with as many details as they choose about their loan request. A picture is optional, or they can remain anonymous. A credit check will result in a “credit grade” ranging from “AA” (for a high credit score of at least 760) to HR (credit score below 539) or even NC for those with no credit history. The borrowers debt-to-income radio is also posted. Identity verification helps to make sure the service doesn’t facilitate phony loans.

In addition, borrowers are typically part of a group – which could be social, ethnic, cultural, athletic, religious, etc. The group’s repayment rate is affected if an individual in that group defaults. The idea is to bring some social pressure into play. While many of us would probably lose sleep if we can’t pay back any type of loan, in the long run we might not feel as much remorse if we can’t pay the bank vs. individuals who took a chance on us when we needed help.

Lenders bid on individual loan requests, or they can enter “standing loan bids” for borrowers who meet certain criteria, such as credit grade, group affiliation, and/or loan amount. The best bids are pooled to fund a loan, and Prosper.com handles collecting the monthly payments and sending lenders their money. For these services, Prosper.com collects a funding fee of 1% along with a monthly fee of .5%.

Lenders can get their feet wet without sinking a lot of money into a loan. The maximum loan amount is $25,000, but many are in the $2,000 -- $5,000 range. A fixed three-year repayment period assures the loan will be paid off fairly quickly. There are no “interest-only, ten-year balloon” loans here. As a lender, you can bid on loan amounts in increments as small as $50, and you don’t have to fund one person’s entire loan request. Ten lenders, for example, can lend a borrower $200 each, for a total of $2,000. That means each lender is only on the hook for a small amount.

Whether Prosper.com – and its lenders – will prosper remains to be seen. But for borrowers who are tired of just being a number, and for those who would like to cash in on the lending boom as lenders, Prosper.com may offer the missing link.