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Can Peer-To-Peer Finance Work?
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.'"
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.
Please stop entering code 2,2,7,6,6,4
I, for one welcome our p2p lending overlords.
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 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.
With this announcement, we are now officially in an economic bubble.
Anybody can work under ideal circumstances. -- Jeff K. (January 4, 2001)
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.
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Yes, your loan will be approved as soon as you log on at www.BankuvAmerica.com or www.AmericanExpresso.com with all of your info, and our Nigerian Banker-trained associates will take REAL good care of you!
Yeah, sounds like a real good way of doing finances to me, hehehe.
Down With Slashdot BETA!!! I've been around the corner and seen the oliphant; you can only abuse me from your perspecti
Unless there are credit checks people will use this borrow money when they're desperate. Sounds like a recipe for disaster to me.
Not new, but different. Interesting idea nonetheless.
The article discusses two different lending assocations. Only one of them actually claim to use credit reports!
From the article:
Prosper says it conducts anti-fraud and identity checks using data from credit reporting agencies and other sources. Users must provide their name, date of birth, Social Security number, address, telephone number, and a U.S. bank account number.
Both are aiming to hit default rates of 3%, which seems low to me given that, well, this is the internet. They think they can make a real community on the internet, and are using as an analogy the way villages once functioned. Let us ignore the fact that people are much nicer in person than on the internet (you can't be cruel to a person you can't see, right?). Having a community relies on repeat transactions! If you need your consumer debts financed multiple times by strangers, I gotta think you're doing something wrong.
But the online communities growing at both Prosper and Zopa, at least in theory, should function as a sort of immune system against such risks. Because the personal identifying information required for financial transactions isn't infinitely changeable like an E-mail address, scammers can't conceal themselves as easily as they can elsewhere.
Because, you know, it's really hard for those scammers to use other people's identities.
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.
So... on a scale of 1 to 10... how legal is this?
My wife and I get credit card offers daily. Many have all sorts of low initial interest rates or other incentives. If we wanted to borrow a couple thousand dollars, we'd be crazy not to just apply for an additional card. So, those who are willing to pay "market" (based on Prosper's market) rates for a small loan must not have the best credit. In fact, they probably have pretty bad credit. If they applied for a credit card, they'd probably end up getting charged 10%+ in interest. So, why on earth would I throw my good money at one of these loans? And, since I wouldn't hold the paper directly, I would have to rely on the loan middleman to attempt to collect on a debt. I couldn't hire a collections agent, sell off the debt for pennies on the dollar, or anything of the sort. This is nuts.
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.
I too have felt the cold finger of injustice.
What happens if there is a large-scale disaster like hurricaine Katrina? Or an economic crash? Suddenly the number of people defaulting could skyrocket. When you take such risks into consideration, your expected rate of return could actually be less than what you'd get from a savings account.
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.
I too have felt the cold finger of injustice.
This seems like it could have a potential for a LOT of abuse. Will the traditional fraud protection methods employed by people whose identities have been compromised by Data Theft of a large corporate database still work to protect them from this?
I can see 2 very bad things happening here.
1) All those stolen identities will be used to cash in, with a bubble effect of baby boomers trying to make a quick buck on speculative lending, meaning lots of people lose a lot of money like when the tech bubble burst.
2) Another large segment of the population will have their credit ruined by scammers who manage to offshore the money before anyone realizing this has occurred.
3) No Banks to eat the loss are involved so when these P2P Lending Places go bankrupt, the people who invested are left with nothing.
But hey, I'm cynical. This may work really well, Banks manage to make boatloads of money from this.
If this works will we see P2P Insurance next?
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.
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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!
----- Politicians prefer unarmed peasants. So I'm armed.
Knowing Google's lust for data collection, the Soviet Union is still alive and well inside the psyche of Sergey Brin....
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).
I think this is great! So, how do I start leeching money from the torrents? ;)
Try to hack my 31337 firewall!
$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
... is because they can lend out 10x the amount of money they actually have. Hence the term "fractional reserve banking system".
So the bank might be lending to you at a 10% APR, but they are lending out the same money 10 times, in effect getting a 100% APR return on their investment. Even with this kind of profit, they are very picky about who they lend money out to - a single bad loan cancels out the profit from 9 other similar loans.
It is lawless lending in UNKNOWN territory. Why would anyone believe people would sink money into this when the Internet is full of scams, and also full of clever hackers and organized influences whose only motive is to extort money?
I wonder if this will open some new doors for me as a loan enforcer? Now to get a loan on guns and ammunition.
Hey, why lend when you can give?
Global Giving 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, Improving Computer Literacy in Afghanistan, Information Technology for Uganda Medical Students, or whatever else floats your boat.
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 on the scale these sites envision.
..mork
I would love to give a logical and detailed attack against such a loan service.
But I'm not going to bother. I'll just say this is just stupid.
All the hell people gave paypal for letting people getting paid without using a check, credit card or bank.
That was a good idea.
Here we are 5 years later and someone thinks letting a company do unregulated cash loans is a good Idea.
This is a bad Idea.
omfg.
zbeast
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!
Slashdot: news from nerds.
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.
There are 10 types of people in this world, those who can count in binary and those who can't.
Wouldn't this be the next logical step? Trade cash for money used online by services like iTunes. Neither Apple nor the user need to deal with a bank.
return;
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 rate or even getting into a credit counseling program.
Founding 800 Lenders Ask to Borrow Money
Just because we use email, or IRC or the phone to communicate does not really change anything.
Engineering is the art of compromise.
What happens if prosper goes under?
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, 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%.
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 out at high 5s to low 6 percent, depending on the type of loan. They make money on the spread. Until the P2P plan can provide me with a comparable rate of return, and loan people money at comparable rates, they ain't gettin deposits from me, and I'm not borrowing from them. Worse yet, for consumer devices like an iPod, retailers often provide the loans as loss-leaders at 0%. There doesn't seem to be much room for an upstart here, but I'm willing to be persuaded, if you've got hard figures.
So. Sell me.
For all intensive purposes, "whom" is no longer a word. That begs the question, "who cares"?
Has anyone patented the concept of a Peeramid-to-Peeramid scheme yet?
People who have subpar credit scores. If they were to go to a regular creditor for a LOC they could easily approach 30%.
Geez, my Sears card is drifting up, on average a quarter point a month. Of course with a zero balance on it (I pay in full every month) they're not making any money off of me. I did have a balance on Sears at one point and it pissed me off to be paying 26.24% one month, 26.49% the month after that.
And go ahead and call them and ask for a rate reduction. No matter how high you go in the food chain, the answer is always "No."
But back on topic; if people align themselves with an affitity group in Prosper, they have a fighting chance at maybe swapping some 29% money for some 15% money. That can save them some cash. At least more of a fighting chance than going to a regular banker...
Mit der Dummheit kämpfen Götter selbst vergebens.
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 rate are small)? A risk-neutral lender, by definition, is looking only at expected return, so wants an expected return to match or exceed the risk free return. That seems to mean that the rate should be found by:
(risk-free rate) = (target rate - handling fee) * [1 - (default rate)]
which reduces to:
(target rate) = ((risk-free rate)/[1 - (default rate)])+(handling fee)
or, with your assumptions:
(target rate) = ((1.0475)/[1 - (0.03)])+0.005 or
(target rate) = (approx) 8.49%
FYI: Its worth noting that the rates on Prosper seem to be a lot higher; it might reflect the relative maturity of the sites (or it might reflect something completely different.)
Unfortunately the gov't doesn't like the idea of citizens syndicating and trading debt as a commodity on an exchange without regulation.
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 brooklyn if you are interested. Hmm... what could I call it? How about bidirectional high bandwidth geo-bus? Anybody interested in a geo-bus in brooklyn?
Anyone know of a Canadian service?
$_.=["a".."z"," "]->[rand 27] while !/just another perl hacker$/;
If you owe a significant amount of money at 29%, and feel you need more, the last thing you need is another loan. What you need is either 1) credit counselling, 2) a budget, and/or 3) a bankruptcy lawyer.
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. government (who employs millions of people), the HR department of every company I've ever worked for, and you lost me.
SSNs are NOT authenicators, and never will be.
Yeah, it does have some problems with identity, but Prosper has done a pretty good job of rooting out the scammers. I've made about $1,000 in loans (in $50 increments to spread out the risk), and not one has been late. Will people default? Yes, you can read about the defaults on their discussion boards. But if you're looking to make more than just 4.75% at Amboy Direct, then Prosper deserves a look (if you're willing to accept some risk ;-).
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./
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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 it is like a diversified portfolio of an indexed fund of all the liens they had out there. While the rates of 24.04% sounds sexy that's still probably a very rare rate and it is at the high risk threshold for max dollars.
Also wonder how the amortization schedules are set up.
Bah. I'm happy just putting my money into REITs.
What is music when you despise all sound?
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 get that money back early in an emergency, for zero benefit? There is no ROI.
Go put your money in an ordinary savings account or CD, or if you want some more risk look into some funds where you'll likely recieve an even higher rate of return.
Big ones, small ones, some as big as yer 'ead!
Give 'em a twist, a flick o' the wrist...
With no real collateral for the loan from the borrower, and the lack of a need to sell the loan to Wall St., you'll likely see a lot of defaults on questionable credit and no recourse.
Great!
The borrower takes on even more debt they can't afford.
The lender loses their "small" investment.
The market makes 1-3% on every loan with no risk.
Why cut IT when your office space costs $3/sf? gibso
Lots of crooks are using buggy P2P software or Trojan horses to "borrow" money from their "friends", all 500 million of them.
Honestly, you are a twat.
Peer-to-peer finance provides an opportunity to lend money with an expectation of lower profits. In other words, if effective, P2P$ would be a source of cheaper money for America.
Is a new source of cheaper money good for America's economy right now?
barack to the future?
Umm... You may well have caught this since posting your comment, but... I'm pretty sure the idea is to move the existing 30%-rate debt to new 15%-rate debt which'll be easier to pay off. Not so much to add more debt.
Check out these: https://www.billmonk.com/, http://ripple.sourceforge.net/, http://p2pay.net/ http://www.altruists.org/ideas/economics/altruisti c/ http://infoeng.sourceforge.net/
A separate online community as incentive to pay back - That's not how it works:
If all your co-workers and clients (or co-students) will know if you bust your loan, you do care. The same thing goes for a village you are born into and will never leave, or for your relatives. In general, any encompassing group you will depend on and stay in touch with in person.
However, you can always pull out of designated community, even more easily if it exists only behind your screen.
If this buisness model might work, it definitely is not community-secured. Side note: community-based lending really does work, just think of the stereotype Chinese immigrant clan, village microcredit projects in developement aid or how our grandparents got by.
-- up-modding policy: make a good point, write self-contained.
First of all, how many bad debts can these peers handle? Large corporations have enough cash to handle bad or delayed debts.
From the Article The charge-off rate--the percentage of loans written off as uncollectible--for consumer loans, including credit cards, hovered between 2.3% and 3.2% in 2005, according to the Federal Reserve. Though Zopa assumes a bad debt rate of 3.4% for its higher risk borrowers and a 1.3% rate on average, its actual bad debt rate to date is 0.05%.
Unlike other successful P2P services, this model is entering a market where existing businesses are making a living out of it.
Exactly
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.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
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 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.
I don't think there would be any russian clients at Zopa...
Hopefully, this could also help out people with poor credit ratings as there are more potential businesses to loan them money. (Emphasis mine)
Why, why, why do people with poor credit ratings need loans for money in the first place? I don't get it. US economy will go down the shitter with this kind of behaviour: just take more loans to pay your debts to get more loans to pay your debts.
In the place where you make $3500 a year, your costs of living are way, way below that place where you get paid $40k. For example, let's say the person who gets $40k has to pay $25 for a barber. You, in the place where you make $3500, might get it for $3.
I'd like my barber to cost $3 too. In that sense, the world is weirdly unbalanced.
If the authorities approve of such a plan I guess we can trust them with our money, cant'we..
Ill pay it back
really i will
The entire US monetary system (or racket as I prefer) is based on perpetual debt, with the monetary units themselves being debt instruments called "notes". Even when you RECEIVE a so-called dollar, you are ASSUMING a debt from someone else, and said debt perpetuates up the food chain until it disappears into the coffers of some pretty powerful and wealthy concerns, well beyond normal elected politics and definetly mostly out of the public spotlight..
Even when you THINK you "bought" something, later on some authority figure, based on some of the racket's "laws" which you may run afoul of if they determine you have, can "arrest" that property back, or commonly reposess it, because it is already theirs, because 100% of whatever you paid is in the form of a DEBT to basically them. For example, you do not "own" you car,even if you are assuming it is "paid off", if you did you would have title, what the state gives you is a certificate of title, THEY retain the real title, and those are two different things.
It is more complex than that obviously, but that is an example of how this game is rigged, totally and completely against you.
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.
Any economist knows that financial markets are special because they suffer from more severe problems of asymmetric information that goods markets. The financial markets have come up with ways of dealing with these information asymmetries (for example intermediation in the form of banks, and the legal and accounting systems). This sort of loan market will fall down due to the joint effects of moral hazard and averse selection.
This sounds like prime feeding grounds for loan sharks. We already have more than enough of that, thank you.
To answer the question of bad debt: We calculate the risk on every receivable so the borrower knows exactly what he is getting into.
On one side accounts receivables go into our system, on the other side anonymized loans (with precise risk assesements) come out. Let the bidding commence...Hugo
ps. maiden speech
capitalism
it does not make them happy
Interesting that Benchmark capital is funding both Prosper and Zopa (UK's Zopa appears headed for our shores soon). Perhaps Benchmark is trying to hedge their bets?
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.
I too have felt the cold finger of injustice.
Ok, not so much, actually about $4.50 in a bar but you get the point. Eventually the exchange rates will even it all out as the money flows round the world.
Deleted
Another way of looking at this , from a competitive standpoint, is as a vote aggregation market (think "Wisdom of Crowds" or Google's internal voting market), one of the problems with lending and borrowing (in fact the biggest problem) is assessing the creditworthiness of the borrower, in some sense what Zopa and Prosper are both doing is disaggregating the voting, no longer is it one banker on a credit committee or a single FICO model, it has the chance of being a startling efficient way of aggregating individual opinions on a borrowers credit risk, at a minimum it is a very interesting experiment to determine which model is the smarter one.
Does that exist in Canada? I sure would like to lend a few bucks to a canadian junkie.
printf($randomline(sigs.txt) \n "-- "$randomline(authors.txt));
-- myself
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 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!
"Avoid employing unlucky people - throw half of the pile of CVs in the bin without reading them." -- David Brent
Credit Unions are not p2p financing.
CU's are essentially banks which are cooperatively owned by their customers, at least in the USA. They are CO-OP's --cooperative businesses-- with special federally mandated rules, because they are banks. Like most co-ops: Each member is a share holder. Each member can only hold one share. Share's can only be held by members.
LINKS:
http://www.creditunionsonline.com/
http://www.ncua.gov/
and these Wikipedia entries are pretty nice and accurate:
http://en.wikipedia.org/wiki/Credit_Union
http://en.wikipedia.org/wiki/Co-operative
jz (Je-Tze)
This is a great way to help your fellow man or bypass the hassles of a bank.
http://www.greateratlfin.com/
My brother seems to think this peer-to-peer financing thing is working out well. Sure wish he would get a job.
#%%#%%#
What's so new about this except for the internet part? We've had this kind of self-help group financing for ages in South Asia.
It's a reaallly big industry out there. It's most commonly called a "chit fund" (a "kurie" in parts of South India) This is how it works -
A group of people with x members (a "chit group") agree to contribute "y" rupees every month for x months. So, each month, the chit group collects xy rupees.
Now, the chit members begin to bid for this xy rupees.Let the winning bid be "z" rupees. The winner takes xy-z rupees as a loan. The remaining z rupees is distributed among the others as a "bonus".
So, every month, one person gets a loan from the group and the others get "bonus" as a return for thier investment.
Generally, the group is arranged by a finance company which takes a commission on the "bonus" amount each month. The finance company also offers some protection from default on part of the borrowers.
If this is not peer to peer financing, what else is it?
Being able to loan money to and from people you don't even know is not that much different from buying and selling anything from people you don't know (see eBay). It's a sign of healthy financial markets, and at the very least it may force banks to lower their interest rates: applaud it!
This is a shining example of the beauty of the internet. We are able to pool the resources of the intelligent masses and are allowing them to benefit financially to help others. The concept of taking cash out of peoples bank accounts and making it available to other random private folks I find amazing. This idea will work...whether or not in this incantation I think has no relevance. This is an amazing idea simply.
People have been attacking it due to the potential losses by private people and how cna they handle these losses...well the intelligent ones will properly build a portfolio which takes advantage of the strong credit ratings to get consistent low grade interest payments and then compliment that package with payments from high risk but also high gain payments. And since there is a peer to peer system going on here I have a feeling the rates of default will be lesser than those of the traditional institutions...of course that has to be back by real data over a long time frame.
I am going to take out a loan simply so I can continue to build my credit (I was going to buy a few things anyways) and so I can support this community. And I am going to stick a few thousand of my own money in there just to watch what happens with it.
The group intelligence of the world will come back to re-route all things we consider traditional and make them efficient and clean.
Wow....sorry for my foolish fanboyism...but I really love this concept.
Mad, adj : Affected with a high degree of intellectual independence. Ambrose Bierce - The Deveil's Dictionsary
As a newspaper reporter in the midwest, I covered a semi-governmental organization (chartered by a group of cities and counties to handle issues such as running a landfill, etc) Most of the organization's funding was state and federal grants; the director's bonus plan was based on the organization's annual revenue. One year, the organization issued something like $20 million in bonds (debt), and the director was able to convince his board of directors that that borrowed money was revenue -- his bonus that year was HUGE!
is more of a true peer to peer loan system than this is.
I'm in my early 20's, have 0 credit because I buy everything in cash. Until recently I haven't ever needed to go into debt and have, for fundamental reasons, avoided it like the plauge. Now, however, I need more reliable and safer means of transportation which on my income is unaffordable to pay for in cash and unaffordable to lease or finance because insurance is just to much for full coverage for a male my age. I consider myself very thrifty, and good about saving money and don't have the appetitie for spending most american's do. Now, if I want to up my credit, I don't have to wait a year for bank of america to report my secured visa. If I want to find a 3 year 6000 dollar loan to cover what I can't on a new car, I can and won't get stuck paying for full coverage (insurance is a scam). Since I'm dealing with people, they may be more likely to listen when they see "No Credit" as opposed to a bank who will automaticly shut me down.
Both Prosper and Zopa (with USD 50 and GBP 10, respectively, quantum increments) seem to allow this automatically with automated bids ("standing orders" on Prosper, with Zopa it seems from a quick read through of their docs to be the main [only?] way of lending), so they don't seem to need anything new for this. Also, you don't need to spread to 1,000 to get reasonably close to risk free. While people selling investment products with hundreds of different investments in one general area (like, say, many mutual funds) like to pretend that such wide diversification is necessary to manage risk, usually you'll have essentially eliminated specific risk with a couple dozen holdings of one type, and then be exposed almost exclusively to market risk that affects the entire category, and cannot be affected by diversification within the category.
Unfortunately here in South America people have "learned better" than to trust a bank.
In Argentina and Uruguay, banks defaulted as recently as 2002, leaving lots of people without their savings, pensions and paychecks, in a recession we're just getting out of.
I hope your government's regulations are good enough, in Argentina the government was the first to jump ship - of course all the corrupt politicians took their money out, even the current Argentinean president's province moved its money to Switzerland all the time asking people to trust the local banking system.
There are three kinds of lies: lies, damned lies, and statistics.
Ah, but there is a difference! In the interest-based case, if you miss a payment, you end up owing an additional $100 or so because of the extra interest. In the Sharia case, you are ONLY ever obligated for the $10,800. That's why Sharia condemns loaning-at-interest - because it's theoretically possible to cause someone to be infinitely indebted to you, if their capacity to pay ever falls below the interest rate.
-Hentai [in vita non pacem est]
Now they will simply borrow money through the system !!!
Took me a bit to see your point--but that would mean, then, that these contracts would have to have no penalty for late payment as well.
I too have felt the cold finger of injustice.