New Lender: You

First you were Time Magazine's Person of the Year, now you're a leader in a new online person to person finance system - you're now a lender. Let me explain.

A friend of mine sent me a link a while back about a site called prosper.com. He noted that it sounded like a good idea, but that I, as a mortgage lender, wouldn't be too happy about it. Here's the thing in a nutshell: It's eBay for money.

If you are looking to borrow money, but want more favorable terms than would otherwise be available to you, or if you want the money for something for which you could not obtain financing in other venues, you go to Prosper.com and enter your details, and what terms you are willing to live by. Sounds easy, right? Well, it is.

The site is driven by people who are willing to lend you money from their private funds. You "compete" for these funds by writing a profile or your need, and the (thousands of) lenders agree to contribute money to your project. For any one borrower's project, there may be several individuals who agree to give you money. Say you wanted $10,000 to start a business - you outline your plan, make your case, and people can contribute as little as $50 to your cause. Once you have garnered enough "bids" to fund your request, the loan is made to you, and you close. You are then expected to make the agreed upon regular monthly payments on that debt until it is paid, just like any other loan.

But here's where it gets interesting. As a lender, if you have say, $5000 at your disposal, you could do lots of things with it. You could put it in a 12 month Certificate of Deposit, making about 4% upon its maturity. Or you could put it in your savings account, and make 2-4% for the year. Or you could go to Prosper, and spread your money (and your risk) across perhaps 100 different little loans, some of them conservative, with a return of 5% or so, and some with a much higher rate of return, say 10-13%. Because you spread your risk among several borrowers, your aggregate rate of return will be much higher than other things you might choose to do.

Prosper is structured just like any other lending institution - the confirm the borrower's identity, his credit score, assign risk factors, and disclose them to you, the ultimate lender. They report payments to credit bureaus, just like banks and credit card companies, and bad debt is assigned to collectors as well, just like other lenders. Because your risk is spread across as many borrowers as you choose, the loss of your money is minimized, and generally offset by the rates of return paid by borrowers. Borrowers like it because the program can help them build a credit score, with credit terms better than high-risk specialty credit card lenders, whose rates are astronomical.

They've been going for almost a year, and they had a nice spot on NPR yesterday as well. Microlending goes tech - freakin' brilliant.