How to bypass the bank and get a loan
Websites are allowing person-to-person loans, cutting out the middleman.
By Simone Baribeau | Contributor to The Christian Science Monitorfrom the April 30, 2007 edition
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New York - A man dressed as the animated movie hero Mr. Incredible presents himself before a group of lenders. He wants a new gaming system, new wakeboard bindings, and maybe a vacation. Or, as he puts it, "$6,000 to blow for fun." And he's willing to pay 10 percent annual interest for a three-year loan.
Conservative financial institutions might have found his outfit off-putting, but members of the social lending website Prosper seemed to appreciate the borrower's photograph and AA credit rating posted on the site. Over the course of a week, 180 lenders offer to buy small chunks of the loan, bidding the interest rate down to 8.99 percent. By the time the online auction ended, almost 90 lenders had divvied up the loan.
"I think a bit of emotion kicked in with Mr. Incredible. [He was] kind of like an alter ego," says Mike Beer, an airline pilot who lent $50 toward the $6,000 loan. "It was like, 'you go,' because I could never borrow money to buy toys. Not my thing."
Prosper, open to the general public since February 2006, is the United States' first – and only – online marketplace where anyone with $50 can receive interest on money they lend. Although the market is small – the website only recently surpassed $56 million in loans – opportunities for people interested in investing in personal debt are growing. Over the past six months, the amount of money Prosper members lent out almost doubled from the previous six months.
Social lending removes the middleman, allowing both lenders and borrowers to get better rates, contends Chris Larsen, CEO and cofounder of San Francisco-based Prosper. "A bank is coming to you and saying, 'I'll take your money – it's worth 4 percent' and literally lending it out at 19 percent," he says. Instead, he suggests that maybe you and your neighbor could come to an agreement on a loan at 12 percent.
Prosper makes its money by charging its members fees on loans, which range from 0.5 to 1 percent for lenders and 1 to 2 percent for borrowers, depending on the credit grade of the borrower. Mr. Larsen estimates that borrowers can get rates 3 to 5 percent lower on Prosper than they would with a credit card.
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