A new way to borrow

Prosper.com is a new service from Chris Larsen, the founder of E-Loan and a long-time consumer advocate.

This article has a good overview of what Prosper.com is; individuals and groups organized like popular social networking sites lend to and borrow from each other. The loans are unsecured. Lenders choose to whom they will lend based on "credit grades" and a borrower profile, which includes the borrower's debt/income ration, describes the purpose of the loan and can include pictures of the borrower and his/her family.

I can't decide if this is brilliant or not. Navigating the site feels just like ebay, and the social networking aspects are pure genius. I particularly like the idea of letting any investor lend money at competitive rates; why earn >2% in a savings account when you can lend to someone and earn 10%? Finally any consumer can earn the same return on his/her money as a credit card company.

And take the same risks.

My big sticking point here is the collection process; most Prosper.com borrowers so far have marginal credit and would be high-risk borrowers. Many of these loans may enter default. (The referenced article says that a similar British service has not had any defaults after a year in business.) The service provides collections for the lenders (at what cost I don't know). There's a possibility the lenders may end up gaining (gasp) sympathy for those evil creditors who loan money in the sub-prime market.

And what if a prosper.com borrower offers a settlement? The lenders may well recognize that getting a portion of their money back is better than losing everything. Maybe then settlement negotiators won't get such a bad rap. I won't even get started on how credit counselors could help this kind of delinquent borrower.

But I'm getting way ahead of myself. Delinquency may end up not being that big an issue here. Time will tell.

Comments

[John Witchel]

Hi,

I'm the CTO here at Prosper.com. You raise excellent points. Here is the detail of exactly what we do regarding collections.
http://www.prosper.com/public/help/topics/borrower-payments_delinquency_fees.aspx

When the collection agency has to become involved, the agency will do everything on behalf of the lenders they would do if they were contracted with a bank or credit card agency.

The key is that they are knowledgeable in federal and state laws, and have well-established processes that protect both the lender and borrower from legal risk associated with inappropriate collection-related activities.

When a loan does finally go to a collection agency, there is a servicing fee (which we detail here):

http://www.prosper.com/public/help/topics/lender-collection_agencies.aspx

So that fee will impact lenders' ultimate returns. But it's worth noting that we do not profit from the collection agency fees in any way.

Hope this helps.
-john

[Jeff Michael]

Thanks for posting, John! I look forward to seeing how Prosper.com works out. One hopes the lenders at your site will rarely have to take advantage of your collection services. I bring it up because, as you can imagine, we spend a fair amount of time here moaning about how evil those creditors and collection agencies are.

I think Prosper might just teach people that creditors and collectors aren't necessarily evil, provided they follow the rules (federal and state laws you mention) and in fact, provide a valuable service.

[John Taylor]

Thanks for writing this as I was researching P2P loans and how that works for an article. Great resources you have for them. A little dated, but good for the history behind how it works.