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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 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.
My UID is the product of 2 primes.
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.
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.
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!
Initially, I thought "not very", but reading through Prospers agreements (Zopa is based in the UK where my limited knowledge of law is even less applicable), I think its probably competently set up. You aren't legally lending money to the borrowers, you are agreeing to purchase loans Prosper makes, and then having Prosper continue to do the work involved in getting payment, which offloads a lot of the compliance burden, as I understand it, to them. I can't say its for-sure legal, but it passes the sniff test.
As of 2003, the median income for a 4-person family in the United States was $65,093 (source. Median household income in the United States was $43,318 (source).
I'm failing to quickly find comparable figures for the UK.
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, which enables individuals to make such loans. Worldchanging has a neat article 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 last three decades, microfinance has proven to be an effective tool in raising the standard of living in impoverished communities. Up to now, there has not existed a way for individuals in developed countries to participate directly in this exciting movement. Kiva believes individuals in developed countries will find loaning to be a more rewarding and sustainable form of involvement in international development than traditional giving. In other words, when you receive your original loan amount back, you are more likely to loan again than if you simply made a donation.
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.
You can live your life in a thousand ways, but it call comes down to that single day...
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