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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
With this announcement, we are now officially in an economic bubble.
Anybody can work under ideal circumstances. -- Jeff K. (January 4, 2001)
Unless there are credit checks people will use this borrow money when they're desperate. Sounds like a recipe for disaster to me.
Unfortunately, step 4 seems to have been skipped.
I still have more fans than freaks. WTF is wrong with you people?
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.
There's good reason why there's so much regulation of banking & finance. It used to be a free-for-all, with rampant fraud on both sides: borrowers and lenders. Do you really feel confident enough not to be fooled by fraudsters of various sorts? It's sort of like phishing, only imagine you are computer-incompetent, because I doubt your (and my, and most people's) understanding of finance is good enough to detect the more sophisticated financial fraud out there. This is like a honeypot for thieves of the worst sort, because there's no tangible goods involved anywhere, it's just money - numbers in people's accounts.
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.
So while prosper.com is devoid of teaser rates, I can see why someone with good credit would choose a fixed-rate, fixed-term installment loan from there over a teaser 0% offer that could become 30+% for the cost of a lost piece of mail or one two many credit pulls when shopping for a car loan.
I too have felt the cold finger of injustice.
That's kind of an apples-and-oranges comparison. Since you get the money in your account as soon as the payments come in, unless you re-issue new loans, its equivalent to withdrawing part of the interest from a bank savings account every month and letting it sit around as cash.
Yes, CDs feature automatic reinvestment, and with Prosper you have to manually reinvest. But comparing the two without comparing them at full reinvestment is not especially useful.
My fear is that the State will barge in and regulate this to its death
That's no fear. It's a FACT! Through the IRS, they will get their cut at gunpoint.
Life is not for the lazy.
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).
To be honest, I know well I can trust the main banks
Study history. The ONLY reason you can ay that is because of regulations. Look back at the 30s- respected banks went out of buisness as much as anyone else.
I'm not competent to tell what banks are trustworthy. I'm not competent to tell what food won't give me botulism. I'm not competent to tell what products will do what they're supposed to and what won't. I'm not competent to understand cutting edge medicine. I may be able to pick up 1 of these, but there's a limited number of hours in the day- I need to keep up on my primary profession as well. And I'm at the high end of the intelligence curve, I'm far more capable than the average person. The average man would be completely and utterly fucked.
The government regulations are the only thing that enables me to go down to the store and have faith in my purchases. Without that, the economy falls apart. Government regulations are a good thing. Regulations on banks are a damn good thing, they ensure my life savings are safe. There's a reason why prior to regulation most people kept their money under their mattress or someplace similar- they couldn't trust banks. The world is a better place for these changes.
I still have more fans than freaks. WTF is wrong with you people?
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./
Visit Savagenumber.com
Yes, it's a good business model. It's called being a bank.
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
Car title loans and payday loan places often get higher interest rates than loan sharks. And while I certainly don't want to hang a smiley face on loan sharks, it isn't unusual for a shark to have a regular, reliable customer for whom a lower rate is given.
The difference: our governments say it's okay for the payday/car title people to fleece people, while loan sharks (rightly) operate illegally.
Oh, and most payday loan shops won't break your hip.