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Peer-to-Peer
lending on the Internet |
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Obtaining a loan
for a mortgage or any other type of expense
can be a long and arduous process. There are many
steps and financial factors that must be looked
at when trying to obtain any type of loan. The traditional
methods for finding
a loan have been to go to your bank, credit
union or financing company and apply for a loan.
But times have changed. Since we are in the midst
of the “age of the internet,” just about
anything ca be done online, and this now includes
getting a loan.
According to a July 24, 2006 article in The Wall
Street Journal, “Want to bid on a loan? A
San Francisco start-up looks to create a marketplace
in peer-to-peer lending,” by Mylene Mangalindan,
there are internet sites popping up that make it
possible for individuals to lend money to one another
without ever even meeting. The article focuses on
the new company, Prosper Marketplace Inc., which
matches potential borrowers to lenders who have
the money to finance their loans.
“Such
peer-to-peer lending, analysts and Prosper
lenders and borrowers say, is useful for individuals
who have bad credit or have a hard time getting
loans through traditional means like banks and credit
unions. But it is also for people who are interested
in an alternative way to get
a fast loan, for, say, developing a small business
or joining a poker tournament. For lenders, the
attraction is the returns from interest rates as
high as 29% - if they can handle the risk of lending
money to strangers. And some say they like the ideas
of helping a person get out of a financial jam or
get a project of the ground,” according to
the article.
This alternative to traditional methods seem like
it could be the new future in lending. But the company
has only been up in running since February, so it
is hard to tell how successful it will be. There
is not quite anything like Prosper in the United
States, but similar companies are already up and
running in the United Kingdom.
The method of Prosper’s loan process is actually
quite simple. Borrowers must answer simple background
and personal information questions about themselves,
and then create a profile with their requested loan
amount and the reason for the loan. They are given
a rating based on their credit score and their interest
rates will be set accordingly. After this, lenders
can go on and browse the site, and bid on which
loan they would like to finance.
“After
the account is open, lenders can start bidding to
finance all or part of a loan and submit the rate
at which they’re willing to lend. Bidding
lasts three to 10 days; the borrower determines
how long the bidding will last. All loans are for
three years with monthly payments. But a borrower
can pay more than the minimum each month or pay
off the loan early.”
The site has been attracting borrowers and lenders
because of the human interest aspect to it all.
They get to find out a little bit about each person
they are loaning money to, while also gaining a
profit from the interest rate. The borrowers and
lenders each pay one-time fees to the company and
the lenders are actually “buying” the
loans from Prosper.
“Borrowers pay
Prosper a one-time fee of 1% of the loan amount.
Lenders pay an annual servicing fee of 0.5% on each
loan. Technically, the bidders aren’t lending
the money directly to the borrowers. Instead, Prosper
makes all of the loans from its own funds, and the
lenders are then purchasing the loans from the company
using the money they’ve deposited to their
Prosper accounts. So, since Prosper is doing the
actual lending, the bidder doesn’t require
a lending license.”
Only time will tell if Prosper Marketplace Inc.,
will indeed prosper. The idea behind it is smart
and is pretty much a win-win situation for everyone
involved. High risk borrowers can obtain a loan
they probably wouldn’t have gotten by using
traditional methods, and lenders gain larger than
normal profits from the high interest rates. |
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