Help Strangers, Earn a Cool 15%
Net lending pioneer Chris Larsen will let you be the banker at his "eBay for money"
(MONEY Magazine) – How would you like to get in on the ground floor of...some guy in Maine who needs $500 to fix his car? The latest venture from Chris Larsen, 45, co-founder of online loan giant E-Loan, lets you do that and, if all goes well, make money in the process. At his nine-month-old site Prosper.com, borrowers and savers meet to swap cash directly, bypassing the bank.
Q What's the idea behind Prosper.com?
A Say you have $1,000 in the bank earning 5%, and you're living next door to someone who's paying 19% on his credit card. You're thinking, he's a good guy. Why can't you take your $1,000 and lend it to him at 15%? There's a lot of money in the consumer credit market, about a trillion dollars in all. The credit-card companies enjoy huge profit margins, and individuals should be able to enjoy those returns as well.
Q Why would anyone want to lend money to strangers?
A You can earn more than you would in a money-market fund. High-risk loans on Prosper.com trade as high as 29%.
Q If I want to lend money, what do I do?
A After you register and we validate your identity, you're free to bid on loans. You can view the credit score, but also a story. You can offer the maximum rate the borrower is willing to pay or go lower. It's a classic reverse auction: The borrower gets the lowest rate it takes to complete the loan. Typically you take a small portion of a loan to spread your risk. One thing that surprised us is that people enjoy screening listings. You can lend $10,000 to a hundred prescreened borrowers. But most people prefer to browse, bidding $50 here, $100 there.
Q How do I know that the guy isn't just going to skip town?
A We report to the credit bureaus if a borrower is late with payments; after 30 days we will send the account to a collection agency. We use the same mechanisms that the credit-card companies do and should get the same results.
Q If I want to borrow money on Prosper.com, what do I do?
A Give us the same information you'd give a credit-card company. We look at credit scores and assign a credit grade. You can put up a picture with your pitch or stay anonymous. You pay us a 1% fee when the loan match is made.
Q So you don't think much of Shakespeare's maxim "Neither a borrower nor a lender be"?
A No. Credit is an essential part of the social fabric in America.
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