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Friday, January 26, 2007

Prosper.com 
Sorry for the light posting this week. It's been kinda busy with work madness, plus I spent a couple of nights this week playing music and otherwise enjoying life, and cooking. This week's Manic Cooking Project of the Week (TM) was homemade chili. It worked. :)

What internet time I have had I've been spending over at Prosper.com. Yes, it's my new addiction.

What's Prosper? Well, it's sort of an E-Bay, but for borrowers. Need to consolidate credit cards? Bust up your payday loan cycle of death? Need capital for a startup business? Ongoing business? Down payment on real estate? Remodeling your house? Whatever the need, you can borrow up to 25k on Prosper.com. You name your interest rate and amount, post your story, some credit data from Experian (Credit rating from AA to E, then High Risk (HR) and NC (No Credit History), number of current delinquencies, number of court actions, number of accounts open, number of delinquencies from past few years), you tell your story, sell your story, and Prosper publishes your listing.

From there, the community of suckers lenders will bid on the loan, if the interest rate is high enough and the perception of risk is low enough. If enough people bid (minimum bid is 50 dollars or more), then the loan is funded. Prosper does some verification, lends the money, and the loan is sold in pieces to the bidders, who get their money back as the borrower pays off the three year loan, which can be at interest rates as high as 29% for high-risk borrowers.

If not enough people bid, then the loan doesn't get funded, and the borrower has to give up or come back asking for a smaller loan amount and/or offer a higher interest rate.

It's the coolest thing in the world. It's addicting. It's a great little microcosm of capitalism. The lenders are the stupidest people I've ever seen!!!

Why?

Default rates are already, like TWICE what Experian data leads them to believe. Most veteran lenders are underwater. New lenders who haven't learned a thing, but are chasing the illusion of 29% returns are bidding interest rates way down. Lots of borrowers aren't even making it through 3 months without paying late. Lenders are sinking hours into researching trying to beat the odds, but don't seem to be paying themselves a salary to compensate for the time spent in research. There's so many idiots bidding to lend that they're bidding loans down to less than their default rates for a given class of borrowers. There is a shortage of good borrowers.

And the entertainment value is endless.

No, I don't think I'll be lending there any time soon. I do like the idea of putting some money in an asset class that has, like, NOTHING to do with the S&P 500 or the stock market. And I don't have enough cash to buy a worthwhile interest in, say, a pub (even though I know they make money, because everyone I know who owns a pub is trying to find reliable help so they can open another one).

But diversifying into a long-term loser doesn't make much sense to me.

I might be a group leader, though - not for profit, but to open up other relationships.

Interesting find - but the money supply there is grossly exceeding quality demand, and the data is bad. Well, it's not bad, it's just that the time period is too short.

I hope it works out. I LOVE knowing that Prosper lenders can stick it to the Payday Loan bastards by stripping customers out from under them with consolidation loans - even at 29%.

Splash, out

Jason

Comments:
Spent some time looking at it.
Kinda cool.
I think I might give it a shot at borrowing money.

I can get 40k credit lines with my signature at the bank for about 9%. but it can still be a bit of a hastle. This seems faster.
There seems to be people funding loans in the 5-7% range. These people are idiots. Its better they loan the money to me and not loss it (saving me a few points) than to someone else who will not repay.
I would never loan money this cheap. Hell, I get 10% from my own brother.
 
http://www.kiva.org is a non-profit doing micro-lending in a similarly paypal-centric way. The difference in the Kiva case is that they partner with local micro-lending institutions that do the loan management.

Pretty neat, and certainly more interesting than helping some schmuck repay his credit card debt...

=darwin
 
Interesting.

The loans in this case, are interest-free to the lender. So you aren't doing it to make money. I can see how you can make a big difference in someone's life.

The cynical view is that the lenders are making a profit - why aren't they passing it on to the backers? (though 25 bucks a pop won't cut it, because of fixed costs)

I also wonder if there is some buying of shelf space going on behind the scenes.

Still, I like it more than a simple donation. Pity there's no way to take a tax write-off until the loan defaults. They could attract more money if there was a tax deduction on the amount contributed, all payments were taxed as ordinary income.
 
They do mention in their FAQ that their local partners do take a cut for their cost of doing business. Who knows how honest or corrupt they are, but it seems like a pretty safe bet they're more honest than the local governments, banks and so forth. I think their FAQ also explains why they don't try to do the payments as a tax writeoff, but I'm not sure.

I think Kiva is a pretty neat way to recycle a few hundred dollars of "giving" as many times as I can. I'm sure it's not the idealized vision in all aspects but it seems a damn sight better than the traditional-charity-like alternatives.. :)

=darwin
 
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