If you’ve read Radical Congruency for a while, you know I’m a big fan of Kiva, the nonprofit that lets you improve the lives of others by loaning them money to start or expand small businesses. It’s a revolutionary concept (pioneered by the Grameen Bank), but was known only in developing nations until recently.
Daniel (co-blogger here at Radical Congruency) told me a few weeks ago about Prosper, an American company that lets you loan or borrow money, getting better rates than you could through a bank.
A borrower can create a loan listing page (kind of like an eBay auction), specifying how much they want to borrow, what interest rate they’re willing to pay, what they’ll use it for, and why they’ll be able to pay it back. Prosper verifies and displays a variety of important financial information, such as credit rating, debt-to-income ratio, and home ownership status.
A lender can browse loan listings and contribute to listings that meet their criteria - for example, people with a credit rating of B or higher who own their homes and are willing to pay 16% or more in interest. Lenders can also create standing orders, so that when a new listing is posted that meets their criteria, they automatically bid a certain amount on it. Higher-risk loans tend to be at higher interest rates, and you can reduce your risk by loaning in amounts as small as $50 to multiple borrowers rather than loaning the full amount you’re investing to one borrower.
Most loans have interest rates in the 10-20% range. Prosper charges a 1% origination fee to borrowers, and a 1% fee to lenders. Payments are made by ACH bank draft. All loans are on a fixed 3-year repayment schedule, and each payment is laid out very clearly, with the principal and interest clearly specified. There is no prepayment penalty. Check out the loan calculator to see the specifics.
Why would you want to borrow from Prosper?
- To consolidate higher-interest credit card debt
- To give yourself a 3-year fixed repayment period, rather than open-ended minimum payments
- To finance a project or purchase at a better rate than your bank or credit card would
- To fund a business
Borrowers and lenders can also organize themselves into groups, with the group leader taking additional responsibility for the loans taken by group members. Groups with a strong reputation can negotiate better rates, and if a group member defaults on a loan, the group’s reputation suffers, so there’s a bit of a ratings system built in that way.
Obviously, people could misuse Prosper like any other financial system can be misused. High-interest debt is a bad thing. However, considering the amount that many people are currently paying to credit card companies, the opportunity to pay a lower rate, plus the opportunity to pay individuals rather than a predatory lending corporation, is a winning combination.
For lenders, the opportunity to get a 15%+ return on your money (unheard of with CDs or normal short-term investments) is simply amazing. Yes, there is risk, but again, you reduce it by diversifying and only investing in borrowers you’re comfortable with.
I am attempting to get a loan to consolidate some credit card debt, which will save me over $10,000 in interest and substantially reduce my payoff period. I’m offering to pay 10% interest, and I have the highest credit rating (AA). If you are interested in lending to me, sign up for Prosper and contact me, and I’ll send you a link to the loan.
While few people would be able to lend on Prosper as their sole occupation, like eBay, it is possible to use this system to earn a healthy side income. Once you have it set up, you can use standing orders to automatically reinvest your money as you receive payments each month.
Check out the help section or take a tour to learn more, and again, let me know if you’re interested in funding my loan. Disclosure: the links above are referral links, which get me paid if you join and borrow or lend.
Democracy in lending. Take that, Wilmington, Delaware! Seriously, I like the idea of borrowing from another person, even if I’m paying nearly the same rate, just because I object to the marketing tactics that credit card companies use. They send us checks with the amount already filled in, begging us to cash them and accept the transaction fees and exorbitant rates. Yes, it’s our fault if we do, but I think we have a national problem here, considering how many otherwise-smart people (like me) get trapped behind a pile of high-interest debt, making only minimum payments month after month. Prosper offers total transparency - everyone knows what they’re getting - and a way out of debt.
