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.'"

Comments

Existing Finance

[foundme]

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.

Re:Existing Finance

[rvw14]

Peer to Peer financing has been around for decades. It is called a Credit Union.

Re:Existing Finance

[Damathon]

These businesses may be entering a market that's already full of competition but I think the main idea is that regular people can loan small amounts of money, together effectively becoming as large a business as the existing businesses -- although the profits may be smaller, people aren't doing it for a living. Each person is giving a little, but they can effectively compete with large companies. (And losing $100 or so won't hurt the types of people who will invest money into P2P loans).

Although it might not be as large a benefit to investors, it could increase competition in an already competitive market and help borrowers to secure better loan terms. Hopefully, this could also help out people with poor credit ratings as there are more potential businesses to loan them money.

Re:Existing Finance

[cinnamoninja]

I can't imagine how this is able to compete with existing financial providers.

Yay, venture capitalists!

First of all, how many bad debts can these peers handle? Large corporations have enough cash to handle bad or delayed debts.

They are trying to spread risks around. They also are assuming a 4% default rate. I don't know if that is a feasible goal, but they are claiming that the "community" they are building, combined with off-line credit inquiries, will get them to that number.

Unlike other successful P2P services, this model is entering a market where existing businesses are making a living out of it.

In theory, they could take away a lot of bureaucracry, and do it cheaper. In practice, it looks like they are attracting crazy investors, who don't trust banks. (I suppose this is better than putting money under the mattress?) Here's a fun quote from the article:

"I am fascinated by the concept, [and] hate big corporate banks..." writes one user. Such sentiment baffles the more commerce-minded forum participants, who have posted complaints about Zopa's "uncompetitive" returns to lenders.

Hey, if you can find the people who prefer more risk for less return, why not take advantage of them?

Re:Existing Finance

[DragonWriter]

I can't imagine how this is able to compete with existing financial providers.

If you aren't completely risk-intolerant, it looks far better a place to put money than a bank for a small investor.

For a borrower, I don't see much advantage, though the terms may be slightly better. I think the lenders are what will drive its success, since having the money to lend will, itself, make it attractive to borrowers.

First of all, how many bad debts can these peers handle?

Zopa lets you limit your exposure to any given borrower to as little as 10 pounds, Prosper does something similar with a a minimum of US$50. Automated aggregation allows spreading the risk.

Unlike other successful P2P services, this model is entering a market where existing businesses are making a living out of it.

Successful P2P services have done that, too. "Buying and selling goods" is, after all, something business were making a living at (even using auction models) long before eBay.

In a sense this is an eBay system for buying and selling money, which actually can work far better since its a uniform, fungible commodity that allows spreading the risk. (Its a little bit different, since the auction service here also covers fulfillment, which isn't necessarily the case with eBay, but that's better for users, since it offloads much of the risk of dealing with a difficult person at the other end.)

Re:Existing Finance

[LionKimbro]

Hmm...

Speaking as someone who is committing money to a community bank with roughly $2,000 in it, I think the thing is that people trust their own culture, and are more willing to accept risks and lend money within their own culture. People tell each other things amongst themselves, that they do not necessarily tell the banks.

If you lose, it was "for the cause," anyways. If you win, you've aided the cause.

The bank might not even be willing to talk with you.

I know a girl, she's going to college. She needs $50,000 for 4 years of loans. The banks aren't talking with her, and her parents are opposed to her going to college out-of-state. (Read: The parents want to keep her near, to better control her.)

If my culture were just a wee bit more organized, I'm sure we'd have her in her preferred college. (UCSD, I believe.) As it is, we only have $2,000 amongst ourselves.

If only she were going to college in 4 years...

You may also want to check out the concept of Internet Bonding. Basically, if you can look at all the things a person does online, says online, follow the ups & downs in their life, and so on: You can do interesting things with that. You can better evaluate risk. So, if you're operating within your culture, things get a lot easier on you.

In the case of this girl, she has an easy time explaining to us who she is, where she's coming from, and so on: You can see her last few years of work online. "Trustworthy!" we say, "Get that woman her CS degree!"

Re:Existing Finance

[iminplaya]

But it's a credit union using a computer (patent pending).

Re:Existing Finance

[Anonymous Coward]

>I know a girl

You lost me there.

Re:Existing Finance

[ostehaps]

In a sense this is an eBay system for buying and selling money, which actually can work far better since its a uniform, fungible commodity that allows spreading the risk.

While money itself is a uniform commodity, that's not actually what's being bought and sold here. What's really being traded is risk, and that's nothing near a commodity. Essentially with this kind of system it seems it would be exceedingly difficult to assess the risk profile. To the extent that interest rates would be lower here (not sure why that would be the case), it just means that these individual lenders are exposing themselves to the same risk at a lower premium than the bank. In fact, for reasons of adverse selection and moral hazard they're quite likely going to expose themselves to more risk for a lower premium.

I'm really not sure about the intuition that individual lenders should be better or even equally able to assess such deals as compared to bankers, who do it for a living.

If only you can book those loans as revenue...

[Anonymous Coward]

that's how Enron worked.

• CEO makes new subsidiary -
• parent and subsidiary loan each other a couple billion - book them as revenue
• profit
• go to jail

Re:If only you can book those loans as revenue...

[AuMatar]

Unfortunately, step 4 seems to have been skipped.

Amazing!

[Toby The Economist]

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.

Re:Amazing!

[ornil]

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.

Re:Amazing!

[DigiShaman]

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.

Re:Amazing!

[AuMatar]

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.

Re:Amazing!

[geekpowa]

Totally Agree. I am currently living in a country where the banks are not strictly regulated. There are over 70 banks operating here some of them are practically mum and dad affairs. Even one of the telcos is permitted to act as a bank - you can store money with them and shift it around using SMS. Whenever I need to move money into the country the heart-rate quickens. Burned nearly over a grand in dodgy 'fees' and outright errors with little avenue for recourse over the past 12 months.

Welcome Back

[Camel Racer]

With this announcement, we are now officially in an economic bubble.

I wouldn't want

[rsilvergun]

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.

Re:I wouldn't want

[foundme]

I think this P2P Finance will only work if P2P Muscle is also implemented at the same time.

Imagine if you can log on to BeatTorrent, hook up with a few peers living near your debtor, and get them to show your debtor some muscles.

credit checks?

[chicken_tonight]

Unless there are credit checks people will use this borrow money when they're desperate. Sounds like a recipe for disaster to me.

Re:credit checks?

[BridgeBum]

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.

Re:credit checks?

[DragonWriter]

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.

It's not new, just a different slant...

[Anonymous Coward]

... a bank, but without the legal security, This is exactly how a bank works, but in a different source. A bank can affoard to lend you money because it indemnifies those loans with invested money from other companies.

Not new, but different. Interesting idea nonetheless.

Similar to Angel investors vs VCs

[Anonymous Coward]

There are plenty of rich guys willing to study "small" deals that existing financial providers won't deal with.
Two obvious examples are

• Angel Investors that fund many companies that VCs and Investment Banks don't. They make their money because they're willing to study complex opportunities that may be close to their area of expertise, and
• the other obvious example is the mob, who gets higher interest rates and can afford to take on riskier loans because they have a more effective collection agency.
  

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.

Re:Similar to Angel investors vs VCs

[narcolepticjim]

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.

End-run around anti-discrimination statutes

[Ph33r th3 g(O)at]

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.

Re:End-run around anti-discrimination statutes

[patio11]

If (and this is a *very big if*) this idea were actually doable, then you wouldn't have to worry about discrimination because peers who were non-discriminatory would be able to make boatloads of cash lending to clients who were not risky but being discriminated against by the marketplace. In the real world, if there are only 3 banks in your neighborhood and you need a home loan, but all 3 lending officers don't like you for whatever reason, you're sort of screwed. If, however, you have zillions of banking providers competing for your business then even if zillion - 1 say "We care more about discrimination than making a profit, neener neener" you only need one profit-maximizer to give you a loan.

In the real world, by the way, you see banks adopting the same strategy -- Bank of America invests boatloads of cash in getting its name out in the various Hispanic communities, which are typically underserved when it comes to banking services.

Re:End-run around anti-discrimination statutes

[Jah-Wren Ryel]

http://www.economist.com/finance/displaystory.cfm? story_id=6889252

OMG!

[Ph33r th3 g(O)at]

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.'"

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.

look at numbers...

[Sean5033]

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.

Re:look at numbers...

[DragonWriter]

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.

Re:look at numbers...

[DragonWriter]

Assuming the amount of effort in the initial investment is the same between propser and a CD, you get better returns and better security with the CD.

I dunno. Zopa, maybe, given the rates some people have quoted from their. There seems to be little on prosper below 10% and lots up to 20%+. Even adjusting for the expected default rates in the various credit categories and the fees, Prosper allows you to realize far better returns than any CD rates I've seen quoted recently, though your personal risk tolerance may affect whether the risk is worth it. Since you can diversify automatically with no additional effort using the standing order system on Prosper, I don't see much justification for the claim that "you have to spend more time diversifying with prosper" to get "low returns".

To invest $1000 into either of the above banks, you simply send in a deposit. To invest $1000 into prosper, you have to diversify to spread your risk. So, maybe you break it up into $100 chunks. Now you have to find 10 people who you want to lend the money to.

Or you have to set up a standing order based on credit grade and other criteria, splitting it into as small as $50 chunks without about the same amount of work as making one manual bid. Nothing restricts you to making only manual bids on Prosper.

Re:Adverse Selection

[Ph33r th3 g(O)at]

The fine print on those credit card offers allows the lender to change the terms for various reasons:

• you're late on a payment with a different lender
• your credit score decreases even if you've made no late payments
• you look at funny
• they just feel like it

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.

Clueless about what drives p2p

[redelm]

P2P financing is called "disintermediation" and actually has been going on in the finance world for 20+ years as borrowers approach lenders directly, rather than through banks. The commercial paper market. There are problems, mostly around collections and default. Not economically solvable for small loans.

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!

Re:Not as good as it sounds for lenders...

[DragonWriter]

What happens if there is a large-scale disaster like hurricaine Katrina? Or an economic crash? Suddenly the number of people defaulting could skyrocket.

This is no different than the risks you are exposed to in a non-insured (money market, etc.) investment account (though the variability in those accounts is probably greater; they face the same catastrophic risks), or even a regular insured bank account once you are beyond the FDIC insurance amount (though there you face only the catastrophic risk, with the variability day-to-day only where the account has a variable rate).

Natural evolution of loan sharks

[i am kman]

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).

Re:Natural evolution of loan sharks

[DragonWriter]

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.

I don't see why you claim this is obvious; since there is credit rating information available to the "lenders", I don't see why bad credit would be favored (this presumes that the "lenders" will have a preference for return that makes them more risk tolerant, or that good credit borrowers will avoid the site for some reason. Neither assumption seems justified.)

New, completely unregulated financing options are really recipes for disaster and abuse - particularly in this day and age.

This isn't completely unregulated. All of the usual lending regulations apply to lending here (the lender being, in Prosper's case, Prosper).

Re:Okay... right

[DragonWriter]

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.

members have to make at least £25,000

[BadassJesus]

$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

Re:members have to make at least £25,000

[DragonWriter]

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.

GlobalGiving.com

[daigu]

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.

Re:GlobalGiving.com

[FleaPlus]

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.

It's a great idea!

[Marsmensch]

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!

risk attitude

[AtomicBomb]

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%.

Re:Lock down your mailboxes

[DragonWriter]

Because identity theft is going to SKYROCKET if this catches on.

Er, why? Its certainly no easier to scam money with identity theft from this system than traditional lenders working through the mail or the net; you might convince people to give you better rates this way, but that doesn't matter if you are using identity theft to skip out on payments. I can't see any way this is more vulnerable to identity theft then traditional lending. Its certainly more vulnerable to exploiting gullibility in other ways, though the information providing by the various ratings limits the prospect of that.

Re:Spam/Scam

[Alfred, Lord Tennyso]

Depressing, I'm afraid, but probably true. Identity theft makes it easy to apply for a loan and then skip town. Except if you've stolen the identity of somebody already out of town, you don't even have to rent a moving van.

And it takes relatively few people to poison that well. If an investor charges 6% and could get 5% elsewhere, there's only a 1% margin keeping him in the game at all. If only 1% of the applications are scams, the entire enterprise falls to the ground.

It may be working today for the same reason that email used to work: until there is a critical mass of people involved, the scammers have better ways to spend their time. These are comparatively small loans. So past success is not necessarily an indication of future performance.

If we're very lucky we'll find that throwing many minds at the problem will solve it. Perhaps a network of trust would work; say, cheaper loan rates to people recommended by others who have paid back their loans, or even co-signing. The scammers would then escalate (form into clumps to take loans, pay them back, recommend each other, take another loan, and all default at once) and maybe the collective minds would solve that problem (the way Google tries to weed out search engine cheaters).

Or a wholly different tack, where lenders pay money directly to merchants (say, the owner of a house being sold, or a car dealer) so that the customer has goods rather than money, which are harder to simply pack up and move with. There are ways for scammers and counter-scammers to escalate that game, too.

It would be interesting to find out if an open-source/P2P type hive mind can keep ahead of the scammers.

I'm a lender on Prosper.com

[atlantageek]

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./

Re:This is a disaster

[noknownpurpose]

So I assume you never invest in stocks or corporate bonds then, because they have risk and you don't know the people you're giving money to?

There is a clear risk/reward relationship here. The highest 3 year CD rate I can find is 5.4% APY. I have $1000 into Prosper at an average rate of 16%. That is far higher than any bank or CD rate (because the risk is greater). Is it a good investment? Depends on whether or not all my loans get paid back in full. At $50 a loan I can afford for a couple to default and still come out ahead of the CD option (once I've scaled to a large enough number of loans).

Additionally, I get monthly cash flow (albeit not a lot of money on $1000 investment). I can either reinvest it or take the cash. Should I need the cash immediately (which I doubt, I have other, more liquid reserves for that) I could always take out a loan (on Prosper) at a lower interest rate than my average (because I have good credit). The loan could then be paid off from the proceeds of loans I've made.

In truth, the larger risk of Prosper is in the amount of time needed to discover and research new loans on a regular basis.

I've written up a longer post on my experience with Prosper on my personal finance blog.

This is better because it's more democratic

[Anonymous Coward]

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.

Re:Prosper wants your SSN for authentication

[Buradorii]

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.

Islamic Rules Against Usury: It Already Does Work

[Anonymous Coward]

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.

Re:This is a disaster

[Thing 1]

Sounds like, with good credit to start with, you could snowball your way into some serious earning power.

Start with $1,000. Loan it out at 16%. Start getting monthly checks.

Take a loan for $1,000, at 8%. Loan it out at 16%. Get more monthly checks.

Repeat.

The limit is when your credit rating goes so low because of the outstanding loans that you cannot qualify for another loan to reinvest. Or, when scammers take the whole system down through massive defaulting.

Still, seems like a good business model at this moment...

Re:This is a disaster

[vidarh]

Yes, it's a good business model. It's called being a bank.

We're doing this

[hcgpragt]

Our company http://www.capitool.com/ is doing this. We've started the company 4 years ago to finance accounts receivables for companies as a marketplace.

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

Re:Islamic Rules Against Usury: It Already Does Wo

[Ph33r th3 g(O)at]

Usury is against Sharia law, and Islam finds excellent and workable ways around it.

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.

Please be careful!

[lorcha]

I checked out the site, and these were my reactions to it:

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!