Ugh. Another lost post. This time it was firefox that crashed on me.
I like the idea behind Prosper.com quite a bit. Like HedgeStreet it provides an innovative person-to-person financial service, in this case personal lending. Prosper.com will handle all of the loan servicing, including credit checks, payment schedule, and potentially getting a collection agency to make sure debtors make good.
For borrowers, you request a loan and provide some information including your credit history and then tell the system how much interest you are willing to pay.
Then lenders bid down the amount and price they are willing to loan to you. If a borrower with an excellent credity history requests $10k at %6, you might have a dozen lenders offer $1k each at %5. Then the system would take the lenders and potentially consolidate them into a single loan at the highest rate required to satisfy the sum total of the loan. eg. If the bids were $5k at %3, $2k at %4, $3k at %5, and $7k at %6, then the first three bids would be accepted because they have the best rate(for the borrower). The rate would be %5(highest of the bids) if I understand it correctly.
There are a couple cool things. First you can(and definitely should) diversify your lending power to mitigate the risk of a single bad borrower. And on the borrowing side there is a reputation system(defined by joining a member of a group) which helps lower the borrowing rates that people might have to endure otherwise due to bad credit or something like that. I’m still a bit fuzzy on the borrowing group system.
Anyways, this business model is great. Completely scalable, highly leveragable, no marginal cost. Prosper.com charges a %1 loan origination fee. They also currently limit loans to 3 years and $25k, but I’m sure they’d expand that if they are successful.
It also presents interesting opportunities for enterprising individuals. Borrowing and lending currently require a person who is a U.S. resident with a bank account and a social security number. However I could see some Chinese kid getting his cousin who is a US resident to set him up an account with a few hundred dollars and then start arbitraging loans. Of course the %1 commission is going to eat into it, but it can’t be that hard to make sure you’re doing better than that. Reminds me of the old banker’s 3-6-3 rule. Borrow at %3, lend at %6, golf at 3. I admit I’m tempted to leverage my good credit to try doing some trading here, but I’m too lazy to actually follow through on it.