1.31.2007

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.

6 comments:

OneHungMan said...

Do you think any of them are interested in lending OneHung about 200K for the place down south he so desperately wants?

That One Guy said...

that's kinda funny, I was thinking about that as I was writing it... unfortunately, their loan limit at this time is only $20K.... which is also why I don't feel threatened...

Although, $20K DOES represent a 10% downpayment on $200K, and with that, you would DEFINITELY get a better rate on the first lien mortgage with that in place...

and the rate you would be paying on that $20K would probably be at or a little better than what you would get from a second lien mortgagor with a concurrent closing... if you get any of that drivel...

Just sayin.

CVF said...

The guy who sent you the link must know what he's talking about or at least who to e-mail it to...:-)

That One Guy said...

Just another smart guy whose friendship I value!

:)

OneHungMan said...

OneHung has another question for you, being the real estate guru that you are. As you're aware, he's jonesing for that little spot down in Ponte Vedra Beach, and while he doesn't mind talking occasionally with a realtor, especially if she's got nice tits, there are times when he wants information without being asked when he's expecting to make a purchase.

In OneHung's fair city, the assessor's office has a website that will allow him to see the purchase price of all home sales. Obviously, this can come in handy. However, there is no such place down south. OHM has spoken with both a realtor and a member of the Chamber of Commerce and they both tell him there is no such website.

Naturally, the realtor can send me listings of the recent sales, but thus starts the questions of "when" all over again.

Are you aware of any ways to get this information for oneself? It becomes a matter of public record in Indiana, and OHM can't understand why it would be different in Florida.

That One Guy said...

see your email, sent you some links. Bottom line - call the county recorder's office. If you need more guidance, call a title company there and explain your needs - they will be able to direct you where you need to go.