Villages of Woodland Springs Homeowners Association

Peer-to-Peer Lending

Dec 12, 2007

People lending to people

By Theresa Witham

December 5, 2007

"Prosper is like Match.com and eBay," said Catherine Muriel, chief marketing officer at Prosper Marketplace, during CUES' Directors Conference, Dec. 2-5 in Waikoloa, Hawaii. But instead of matching mates or finding buyers for goods, Prosper matches borrowers to lenders and allows lenders to bid on a prospective borrower's loan. "Basically it's people lending to people," she said. Prosper was the first peer-to-peer lending site, but others have followed, including Zopa.com (Read an article here about CUs working with Zopa). With just $50, you too can be a lender.

This is how it works:

Borrowers list a loan amount, up to $25,000, and set a maximum interest rate they are willing to pay the lender.
Borrowers answer a series of questions and can tell their story of why they need the money. They can even upload a photo to make it more personal.
Then the auction begins as people who lend bid down the interest rate.
Once the auction ends, Prosper takes the bids with the lowest rates and combines them into one simple loan.
Prosper handles all on-going loan administration tasks, including loan repayment and collections on behalf of the matched borrower and lenders.
Prosper generates revenue by collecting a one-time 1 or 2 percent fee on funded loans from borrowers, and assessing a 0.5 or 1 percent per annum loan servicing fee to lenders.
The borrowers range from people with extremely good credit to those with very poor credit. Lenders will get a higher rate of return when they lend to a riskier borrower. The average Prosper loan size is $7,000 and the rates range from 7.7 percent APR to 26 percent APR.

While there are defaults (and Prosper works with collections companies when this happens), it is fairly rare. The concept is similar to a closely knit single SEG credit union, such as a city police CU. Members of such an intimate credit union would rarely default on their loans because of the shame in doing so. They wouldn't want to let the group down. In fact, Prosper's site includes a "community" tab where users can set up and join groups. A few listed on the site include one that lends to teachers in the U.S., various college and university alumni groups, one for Dallas Cowboy fans and a group for families with autistic children.

The borrowers:

are 50/50 male/female,
80 percent under age 55,
have an average household income of $25,000-$50,000.
Debt consolidation is the most popular motivation for borrowers. However, the site has also helped small business owners get their start when they couldn't find financing elsewhere. Borrowers are interested in a lower rate and enjoy paying people directly instead of banks.

The lenders:

are almost always male (90 percent),
are usually under age 45 (80 percent),
have an average household income of $50,000 to $100,000, and
are big users of eBay and online brokerages.
"They are people that have some extra money to play around with right now," Muriel said. They are interested in high returns and in helping fellow Americans. The average lender portfolio size is $2,600. Their risk-adjusted ROI varies between 8 and 12 percent. "Our lenders like to bid on military stories," Muriel said. "We can't advise or recommend," she added. But the site does warn lenders what the default rate is on D and E paper loans. And if a lender is bidding on a loan from such a borrower, the site will ask, "are you sure?"

"We can help those payday loan type people," Muriel said. Prosper helps "people who need a second chance get a second chance. Banks will never give them a second chance, but why can't other people give them a second chance?"