July 28, 2006
Micro-Lending, Internet Style: Prosper Marketplace
Posted by Christine Hurt

Somewhere out there is someone (NeedsCash) who has a short-term need for cash and someone else (HasCash) who would like a place to park some money for a short while.  NeedsCash goes to a bank and finds that a nonrecourse loan will cost him 14.89% (the average this week for personal, two-year loans).  His credit card rate is higher than that.  Meanwhile, HasCash goes to her bank and finds that a two-year CD only guarantees her a rate of 5.00%, but she has to put in at least $10,000.  Treasuries are a little less, but the minimum is $1000.  HasCash considers mutual funds, but needs a guaranteed return.  Stalemate?

Just as the Internet has gotten rid of intermediaries in other industries, Prosper now matches up would-be borrowers and would-be lenders and let's them participate in auctions.  (Hat Tip:  Katie Porter at Credit Slips.)  The borrowers submit themselves to being rated by providing a lot of information and then divulges personal information (and a photo) about why they need to borrow the money and how they will repay it.  Lenders can bid to be part of the syndicate, so lenders may bid $50 or $5000.  There aren't many places that someone with $50 to spare can earn 9% and not that many places where someone who needs $2000 to fill the gap between taking the bar and starting a job can pay a mere 9%.  Sounds promising.

Just as how eBay created professional online merchants, Prosper seems to have created professional online lenders -- some of the auctions are merely to raise money for other Prosper investments.  Cool.  Prosper encourages lenders to spread out their loans across borrowers to diversify.

Some nagging questions:  Here is Prosper's About page.  How will would-be lenders (professional or otherwise) will sort out the borrowers on Prosper?  (Prosper tells lenders to use their own criteria.)  Will their be conscious or unconscious discrimination based on race?  Age?  Beauty? Grammar?  Prosper services the loans and pays the return (minus a transaction fee) to the lenders.  Is Prosper a broker-dealer?  Is Prosper selling bonds, securities, notes?  How does the law describe this, and will it regulate it?  Is this merely an individual getting loans from 10 other individuals, or is this a discount broker-dealer showing would-be investors a portfolio of bond investment choices?    The loans are not insured, but Prosper assures lenders that if they make 10 loans and 2 default, their overall return is still good.  Oh, enough legal suspicions.  Just relax and enjoy the entreprenurship.

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