"person To Person" Lending Via The Web

[JonnieB]

I have been investigating the phenomenon of person to person lending on the web. This is where individuals borrow relatively small amounts of money on a short-term basis from each other, with the website acting as the intermediary. Basically, people take out unsecured loans and offer an interest rate they are willing to pay. As a "lender" or investor on such a site, you can pick who you want to lend to and the rate you will offer. The rates are much higher than one could get from a bank deposit or CD. You can also diversify your lending among as many borrowers as you want. The website company actually acts as the bank for the borrowers and then sells the loans to the lenders. They also act as the servicing agent for the loan...collecting payments from borrowers and forwarding interest and principle to lenders. They also dunn delinquent borrowers.

Has anyone used any of these web based sites to invest some of their money? What do you think of the general idea of such sites? I have also heard that recently, R. Branson of Virgin fame thinks this business model is so novel (and profitable for the site (acting again more or less as a loan broker) that he has purchased one of the larger such sites. Sorta validating the whole concept of net-based personal lending.

Here is one of the sites: Prosper.com http://www.prosper.com/

Edited November 4, 2007 by JonnieB

[Kruang]

If a borrower defaults, how much of the principal do you get back? If the loan site sells the bad loan to a debt buyer, how many cents on the dollar does the debt buyer pay you? Even if your loans are diversified, it looks like one bad loan could eat up all your profits.

It's fair to assume that the rates of interest people are willing to pay on these sites is an indication of their creditworthiness. If a bank doesn't want to lend to these these borrowers, do you? Presumably the bank's lending is many times more diversified than yours could possibly be, so if they don't want the risk, why do you?

Still it's an interesting idea, and would be good to hear how lenders have done over an extended period.

[jonniebkk]

If a borrower defaults and the debt goes to collection, you ,as a lender, would get your prorata share of what the collection agency paid to buy the borrower's bad loan.

As to risks, sure they are there as in any investment...the question is are they manageable and is the rate of return enough to justify the risk one is taking. The origination websites charge loan origination fees of 1-2% to both borrowers and lenders. As a part of this fee, they also run standard credit reports on all applicants and this data is available for lenders to review. (?It is not just people self-verifying their credit standing.) The site also verify if the borrowers is a homeowner or not. However, I don't believe income and total outstanding debt amounts are verified. In these instances, it is just "stated income and debt" amounts.

It seems that many of the borrowers are trying to get out from under high credit card debt (18-22%) so even if they offer around 12% it is way above market but still much less than they are currently paying and therefore easier on their monthly budgets. The incentive to pay back is that if they don't, they will have another debt collection agency on their ass and their credit ratings will get another ding. Also, some of the borrowers have a "history" on the sites so you can see if they have borrowed before and if they paid it all back (sorta like an ebay's sellers rating).

Most of the amounts borrowed are small $25,000 or less (sometimes much less) and the loan period is 3 years (or less). These loans are syndicated very widely and as a lender you can take as much (the whole loan) or as little ($50 minimum I think) of a loan. Therefore, you can spread out your loan portfolio literally among dozens or hundreds of borrowers. In this way, I think you risk of defaults would be very low. Sure, you may have a few but with such so many loans (and the relatively high rates on the paying loans), it should not hurt your overall return.

It's sorta like a real bank or credit card operation (or casino), sure, there are some losses (or wins by punters) but in the end, the bank/casino makes money.

I can see how this type of lending could really take off. The market could be huge. Sure, such informal lending appeals to a generally lower social economic demographic but they need loans too and up until now, have not had too many options. Even they would likely rather borrow small amounts at 10-15% interest than take out payday loans or pawn-shop loans at 200-300% per year.

[sonicdragon]

Are jonniebkk and JonnieB the same person ? I thought that was forbidden ?

Anyway, peer to peer lending is a great idea. I hope it takes off. I'm sure that the banking industry will lobby hard against it and I'm sure there are some legal/regulatory issues that stand in the way.

[Firefan]

Like the idea - looks like for Americans only though as request SSN no.?

Cheers!

[sonicdragon]

There is also www.zopa.com in the UK

[LaoPo]

Sub Prime loans-in-the-small...

LaoPo