Here is my column from the May 23, 2007 Greenhorn Valley View:
There is a new way to borrow and lend money. The website www.prosper.com is an open marketplace for loans. Borrowers and lenders can meet and decide on mutually agreeable terms. Borrowers can typically get loans funded that wouldn’t fund elsewhere, and at a better rate than they would get from a credit card. Lenders can typically get a better return for their money than they could get from their bank.
If you want to borrow money, you create a listing including how much you want to borrow, what you’re going to do with the money, and what rate you’re willing to pay. Then potential lenders will bid on your loan, much like bidders on eBay. If you want to lend money, you peruse the various online listings and bid on ones that make sense for you. You’ll be able to see details from the borrower’s credit file, as well as ask specific questions of the borrower. All loans have three-year terms, although there is no penalty for prepayment.
This can be a lot of fun. I’ve been a lender for almost a year, and I’ve enjoyed discovering and chasing down the best loans. I’ve enjoyed weighing the borrower’s ability to repay against my own risk-aversion instinct. Like the stock market, there are seemingly limitless choices. I can look for people with high credit ratings, or low debt-to-income ratios. I can look for listings under a certain dollar amount, or over a certain rate.
There is also an element of danger. Like the stock market, plunging values can be right around the corner. I currently have one delinquent loan, and it has made my expected total return drop significantly.
But it’s a fun market to dabble in, providing a decent return, with a little bit of the stock market’s roller coaster action just to make things interesting. Just use your head, be smart, and understand your risks.