Slave To The Lender

I have recently been intrigued by a lending site called Prosper.com. The concept is not new–peer to peer lending–but this is the Internet’s first foray into this. I don’t see something like this competing seriously with banks and credit lenders, but I do see this as a serious option for users of payday loan services.

In case you have been living under a rock for the past few years, payday loans are short-term loans most often used by those living paycheck to paycheck. When you don’t have any money saved up and the car breaks down, these become attractive. Unfortunately, they also come at a high cost in terms of interest rates.

Now to be clear, Prosper.com loans are not short term, being amortized over three years, but they are definitely lower cost as far as interest rates go. The minimum amount for a loan is $1,000, and at a three-year term at 20% interest you are looking at a monthly payment just above $37 per month. I can see many people using this service.

Individuals can sign up to be lenders and may lend as little as $50 to any single person. The ability to spread $500 among 10 borrowers lowers the risk significantly. Lenders choose a loan, specify how much they will lend, and the minumum interest rate they will accept. When the loan is fully funded, the auction starts. At this point new lenders bid and the interest rate lowers until the auction is complete. You “win” if you are still in the pool of lenders when the auction ends.

Eric’s Credit Community tracks various stats of Prosper.com. You must take risk into account, but numbers are quite impressive. When I am out of debt, if they are still around, I can see myself investing a few hundred dollars into this venture.