Lending money has become easier with the emerging popularity of Internet Web sites that help administer person-to-person loans.
Among the sites gaining popularity are prosper.com, launched in February 2006 in San Francisco, and zopa.com, a London-based company that recently entered the U.S. and Italy markets.
How it works
At prosper.com, those wanting to borrow money create a profile, where they may post pictures of their family or business and explain why they need the money.
prosper does a credit check on the borrower.
The borrower sets the maximum interest rate he or she is willing to pay. The site limits the amount a person can borrow to $25,000.
Lenders bid on your loan in an online auction. Once the auction ends, prosper takes the bids with the lowest rates and combines them into one simple loan to the borrower.
prosper handles all ongoing loan administration tasks, including loan repayment and collections on behalf of the matched borrowers and lenders.
The term on every Prosper loan is three years, with no pre-payment penalty. Funding for each loan usually comes from multiple lenders.
People who register as Prosper lenders set the minimum interest rate they are willing to earn and bid in increments of $50 to $25,000 on loan listings they select, said Tiffany Fox, communications director for prosper.com.
A lender, for example, may reduce risk by lending $1,000 to 20 different borrowers who have strong credit scores.
"We see this as next generation of online lending sites," Fox said.
Risky business?
Some traditional bankers are skeptical of the person-to-person lending sites.
John Hall, spokesman for the American Bankers Association, said there always has been a need for "this risky type of lending."
"But," he said, "we feel it's most appropriate to go to a federally examined or audited lender when it comes to making a loan or making a deposit. Banks have the strength and credit of federal government that deposits are protected up to $100,000 by Federal Deposit Insurance Corp."
Fox said so far, the overall default rate for loans at Prosper is 3 percent, but she said that figure will tick higher. There is no guarantee borrowers will pay back the loans, she said.
Lenders may minimize risk by spreading out their loans to only prime borrowers, Fox said.
Blogs about prosper.com show favorable reviews by borrowers, but some lenders have complained about the timeliness of collections.
"Their collections process is a mess, and most lenders with established loan portfolios are either losing money or barely making more than they would in a savings account," one reviewer wrote at techcrunch.com.
Online lending is regulated by state and federal agencies. In Kansas, the interest rate cap is 21 percent, but in some states, interest rates may go as high as 36 percent.
Guest post by Michael Hooper. Mr. Hooper is a columnist for the Topeka Capital Journal, in Topeka, KS. The opinions of Mr. Hooper are his own and not necessarily those of the owner of this blog who may or may not agree with them.
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