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Friday, February 17, 2006

Prosper.Com - An Easy Way To Become A Hard Money Lender?

The Savvy Saver blog has a post about a new web service - Prosper.com. This site matches people who needs loans with people who want to lend money. If you need money, you post the amount you need and what you want it for. If you are lending money, you scan the listings of people needing money and, when you find one you like, you can offer to loan a certain dollar amount at whatever interest rate you want. The site will pool money from different people for those wanting to borrow large amounts. Loan lengths are three years and payment amounts are amortized over that period. Loans can be paid off early with no penalty. Payments are made electronically.

I've not spent much time looking into this, but it seems like you are basically making an unsecured loan to people. The site does claim to run credit checks on potential borrowers and assigns them a credit rating but, as Savvy Saver pointed out, their credit checks seem to miss a lot of outstanding debts.

Additionally, if you make a loan and it is not repaid, you may not even be able to track down who borrowed your money! From Prosper.com's FAQs:

Will the lenders know my identity?
There is never a need for lender and borrower to contact each other and it is entirely up to the lender and borrower to choose how much information they wish to share about themselves.

So how does Prosper.com make money? They charge both the borrower and the lender. The borrower pays a 1% closing fee (or $25, whichever is greater). If you choose not make payments electronically, the borrower is also charged an additional 0.25% interest. The lender, on the other hand, is charged a 0.5% annual servicing fee, accrued daily, based on outstanding loan principal.
Because the servicing fee is based on a daily outstanding principal balance, which is an amortized amount, the servicing fee will vary for each loan based on its interest rate and length. As an example, the site says on a $5,000 loan at 10% interest, the fee would be $40.40 over its full 3 year length.

Prosper.com was started by the founder of E-LOAN.

I'm somewhat interested in this. I'm not sure about making unsecured loans, but you can start lending with as little as $50, so the risk is low. (The maximum amount you can lend is $25,000.) I prefer hard money lending with property as collateral. The returns are generally higher and you get to keep any loan origination fees. (Prosper.com will collect late fees and pass them on to the lenders.) But this looks like a relatively easy way to get some extra cash.

To share some of my own personal paranoia with you, I will not give any company permission to electronically withdraw money from my bank accounts. (Now electronically depositing is another matter!) If you are interested in using Propser.com, I would suggest opening a separate checking account and deposit only an amount you are willing to lend.

11 comments:

Tiredbuthappy said...

This is a good, clear explanation of Prosper. I've decided to jump in, lending only to people with good credit and good debt-to-income ratios at first. I need to do some looking into 3-year CDs first to see what interest rate I'll need to make on Prosper to make it worth my while. Gotta think this through a little more.

savvy saver said...

thanks for the link! I posted a follow-up today with a few potential problems I uncovered.

http://savvysaver.blogspot.com/2006/02/problems-with-prosper.html

Clifford said...

Shaun, I'd like to link to this article if that's alright. I'm also starting to think about this a bit myself. I'd like to get rolling on my next investment property and this might give me the funds I need to make that happen.

Shaun said...

Link away! :-) The maximum amount Prosper.com will lend is $25,000. Around here, that isn't enough for some property, but it might be in your area.

jim said...

While the idea is nice, there are a bunch of faults I find with the service that I've blogged about.

link

Shaun said...

Jim - I did some more reading on Prosper's website this weekend and came up with the same problems you mention on your blog. In addition to the issues you list, I found two more that trouble me:

1. You and the borrower give up any right to take legal action to enforce the promissory agreement. So not only might you not be able to find out the real identity of who you loaned money too, even if you did, you still are prohibited from taking legal action should they default.

2. As a lender, your money is withdrawn from your bank account as soon as you place a bid and kept in a non-interest bearing account at Prosper. It will not be returned to your bank account unless you request it - even if you don't win the loan.

So there is a good amount of risk involved. I wouldn't lend lots of money through here, but I might try a few hundred here and there.

I did have problems creating a lender's account. Experian, whom Prosper uses for identity verification and credit checks, for some reason couldn't verify me. I got two different errors - that my information could not be verified and that the verification service wasn't available. Last year, I checked my credit report from Experian and I did find my address and driver's license number were incorrect - two pieces Prosper uses to verify your identity. Supposedly Experian corrected the problems (I have a copy of the response saying they fixed it), but I'm not so sure now.

John said...

Hi All,

I'm the CTO here at Prosper, and since this is *exactly* the kind of tough line of questioning I love, I thought I'd offer a couple of comments.

On Shaun's question of collections.

We detail exactly what happens here.

Each time you bid you select a collection agency to act on your behelf. We have a number to choose from and they are all well established professional agencies who know the legal limits of what's allowed in all 50 states.

IMHO, using a professional collection agency is a better solution than pushing that responsibility onto the lenders themselves.

Shaun also had concerns about money not going back into your original account.

We don't charge for bank transfers so you can move it back and forth at will. If there's real interest in a sweep service we'll add it. (Submit feedback and feature suggestions at feedback@prosper.com). He's right however, it is sub-optimal if money sits in your Prosper account and not in a loan.

Finally, experian is one part of our identity checking process. Small inconsistencies can trip up registration. We've made some changes that are helping with false-positives, but there's still more work to do in this area. We want the process to be smooth but we have to hold a high bar on identity verification or the system just won't work.

Shaun said...

Hey John! Thanks for the input! I was waiting until things were 100% done, but since you mentioned this, I'll talk about it now. As I mentioned in my previous comment, I did have problems getting verified automagically. I called Propser's tech support (it seems the phone number only appears on their site during working hours) and was told I could fax in a copy of my social security card and driver's license. I did that and got a call back the next day saying they received my info and someone from their ID verification department would contact me. The following day, I got an email from that department. They checked their logs and discovered I was being rejected because Experian had a business credit card application from my home address and they therefore thought I was a business and not an individual. They adjusted their rules and I tried again yesterday. This time the application went through. Now I am just waiting to verify some small deposits they attempted to make in my account and then I'll be ready to lend.

I must say I am glad they changed their rules to allow business credit cards at your home address. If they didn't, all people with a home-based business would be ineligible.

Anyway, once everything has been finalized, I'll be making another entry about my experiences with Prosper.

Shaun said...

Oh, I forgot to add that, so far, I have been impressed with Propser's customer service. There's been very good communication and it's been made within a decent time period.

Shawn said...

I have been doing this for a couple of months and so far so good. Everyone is paying on time and getting a very good return on my investment.

I have a personal opinion about Shaun's personal opinion about electronic money transfers. Not sure you if you live in 1952, but I have used electronic transfers for many years and you save so much money not buying stamps and your money is taken out of accounts on a planned basis. To prove my point more, people can make electronis payments with only your bank routing and account number. So if you send actual paper checks...which is so rediculous...people can just take the information from a check. They can't get it electronically...at least the information is not accessible to as many people as it would be to a check. All-in-all you are more at risk than I sending paper checks than I am by sending payments electronically.

Good day.

Shawn

Shaun said...

Shawn - My reason for not allowing anyone to electronically withdraw money from my bank account is not based on security. It is based on control. I have had many instances in that past several years where I have canceled a service, yet continue to get billed for it, sometimes for months afterwards. With electronic payments, I would then have to fight the company to get my money returned to me and to get the bank to stop authorizing the withdrawals. By using checks, I simply never pay the incorrect bills in the first place. The money never leaves my account and I have a whole lot fewer hassles to deal with. As I said, I will allow electronic DEPOSITS to my accounts, but not withdrawals. You may not worry about problems like. Based on my experiences, I do. To each his own.

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