Prosper! SF based startup creates a new investment vehicle

Note: I wrote this blog before discovering an article from business week that says basically the same thing. If you'd like to read that instead: http://www.businessweek.com/technology/content/feb2006/tc20060213_147523.htm



I stumbled across Prosper.com and found the concept very interesting. Essentially, it's an Ebay type marketplace where individuals can fund and obtain personal loans.

If you're trying to obtain a loan, you write a paragraph about who you are (and can even include a picture), what you're using the money for, etc. The site runs a credit check, rates your credit and lists your debt to income ratio. You then state the maximum interest rate you're willing to pay and the amount of money you'd like to borrow. All this information is posted on Prosper's website where individuals who would like to lend money can browse.

If there is high demand among lenders to fund a loan, lenders bid which drives down the interest rate. For example, if I have a AA credit score (over 720) and put 12% as my interest rate, there will be an onslaught of lenders vying to lend to me (since it's a really good return for a really low risk.) After I receive enough bids to fully fund my loan, every bid thereafter has to be a lower interest rate which bumps the first offer off. This lets the marketplace determine the going interest rates for each kind of risk.

If you're interested in funding loans for individuals, you browse the site, find someone you deem an acceptable risk for the return on your money (the interest rate they've posted) and can give them the money in $50 increments.

Proper charges a .5% annual fee for investors, and a one time 1% fee for borrowers.

I know there's a market for individuals who want to obtain loans but may not qualify for decent rates (or may not qualify for any loan at all) from banks, since their approval process is pretty uniform.

I know there's a demand for an investment vehicle for investors willing to take on risk for a much better return than any investment from a traditional bank, but am not sure whether the risk/reward ratio is worthwhile.

Borrowers give Prosper their bank account information which is verified prior to getting a loan funded. Prosper automatically debits the monthly payment from the borrower's bank account, and transfers the money to the lender. Prosper has an established schedule for delinquent accounts involving late fees (that the lender gets) and automatically sends unpaid loans to collections.

My impression is that investing in the stock market is safer due to the ability to dump your shares if things go wrong... but maybe prosper has addressed this issue?