A new way to get a loan

Marketplace Staff Jan 19, 2007

We’ve heard about how well the stock market did last year. The Dow was up 16 percent; a tidy profit if you were investing in some of those stocks. Well, what if you could make more like 25 percent on your investments? But then there’s always the chance you’d lose everything. Well, MARKETPLACE’s Amy Scott tells us about a new way to lend and borrow money, and it’s giving banks a run for theirs.

AMY SCOTT: Tori Shannon is what bankers call a high-risk borrower. She filed for bankruptcy years ago. She owes more than $4,000 in credit card and other debt. Yet last month, more than 30 people with screen names like active retiree and snake loaned her $6,000 on the peer-to-peer lending site, Prosper.com.

TORI SHANNON: For me to go into a bank, they would probably give me 15 minutes of their time, determine that I’m not a good risk, and say, “Sorry, can’t help you.” Whereas on Prosper, it would be a situation well, “Tell me a little bit more about it. What exactly happened? Okay, how are you going to prevent that from happening again?”

Here’s how prosper works. Shannon wrote a profile, posted a smiling photo of herself, and broke down her loan request. She explained that most of her debt stemmed from her husband’s injury as a soldier in Iraq. She described how she would use the money to expand her lingerie business. Most importantly, Shannon said she was willing to pay 22 percent interests. Prosper members then had a chance to bid for the right to lend her the money, in chunks as small as $50. Within a day, Shannon had her loan.

CHRIS LARSON: We can see on this loan, $3,000 has been funded, $6,000 remains. Has 27 people bidding on it. There’s two days left.

In his office in San Francisco, Prosper founder, Chris Larson, shows off the service he launched not quite a year ago. Since then, its members have loaned out $27 million. The UK has a similar site called Zopa. Larson says he wanted to do the same thing for the consumer debt market that eBay had done for commerce.

LARSON:
It’s really kind of giving the power of underwriting, the power of where does capital get allocated directly to individuals.

Individuals like Perry Heinrich (PH). He’s a software engineer in Baltimore. Heinrich had a few hundred dollars to invest. He says he felt a little guilty charging people 20 plus percent interest rates, until he realized some of them were paying 400 and 500 percent on payday loans.

PERRY HEINRICH:
Twenty-nine percent interest, which is the maximum Prosper would offer, was actually a savings for them. And even though I felt like a loan shark loaning money at that rate, it’s actually beneficial for everyone involved.

Heinrich is now a group leader on Prosper, which means he almost adopts borrowers. Tori Shannon is one of his proteges. Belonging to a group with a good reputation can help a high-risk borrower like Shannon get funded. Heinrich says it also adds an important peer pressure element.

HEINRICH:
A group has a rating system so that any members of the group who fall behind on their loan; it effects the rating of the entire group.

Heinrich admits he gets so invested in his members; he’d be pretty crushed if they failed. Carl Waldman, is another lender. He doesn’t even read his borrower’s profiles.

CARL WALDMAN:
Because there’s no way to verify what they put on their Web page. It’s not even worth the time to read it.

Waldman says it’s hard to come by enough borrowers who fit his criteria: bad enough credit to pay above-market interest rates, but good enough to expect repayment. So far, he says out of 55 borrowers, one or two have made late payments. He expects to make about a 15 percent return this year, on par with his other investments.

WALDMAN:
I’ve got a few real estate duplexes and those are frankly more work for about the same return.

SHANNON:
This is made by allure leather.

Back in her dining room/office, Tori Shannon shows off the fruits of her Prosper loan; one of the adult products she sells on her lingerie Web site.

SHANNON:
This is a cupless corset. There’s no coverage in certain areas if you catch my drift.

Shannon has just opened a retail store and spiffed up her website. She keeps in touch with some of her lenders, but it’s too soon to tell whether their bet on her will pay off. Shannon’s first payment of $323 is due at the end of the month. I’m Amy Scott for Marketplace Money.

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