By circumventing the established bank and finance company establishment, Prosper Marketplace Inc. (www.prosper.com) acts as a clearinghouse for people who need to borrow money and those who are willing to lend it to them.
In most cases, the borrowers will pay lower rates than they would at the bank while the lenders will earn a higher interest rate than they would on their savings account, company officials said.
Chris Larsen, the founder and chief executive officer of Pleasanton-based E-Loan Inc. until it was sold to Puerto Rico-based Popular Inc., launched Prosper in February. Since then, Prosper has helped generate hundreds of loans amounting to almost $31 million, the company said.
Access for everyone
Speaking of all the money sloshing around the world and ready to be lent, Larsen said, "It's an enormous market with huge spreads between the rates people are borrowing at. Everybody should have access to that market."
There are no fees to list your loan requirements on Prosper's site. Lenders, however, pay a fee to Prosper depending on the particulars of the loan.
Richard Cataldo, a Walnut Creek eBay seller, borrowed $2,200 on Prosper in order to take advantage of a quick investment opportunity. He was successful getting the Prosper loan and successful in his investment.
"I made three times my money back," Cataldo said.
Meeting human needs
But if you log on to http://www.prosper.com, you see many of the borrowers have pressing, human needs. Especially numerous are those who want to pay off their credit card debt or medical bills. There are appeals for money to take advantage of a foreclosure on the market, for plastic surgery or to start a business.
The site allows lenders to become familiar with the prospective borrower through photographs, as well as a personal description of why the money is needed.
Borrowers are rated for risk by their credit score and debt-to-income ratio. Prosper screens them for their authentic identity and credit record. Borrowers set the rate of interest they are willing to pay. Not every listing for loan draws investors immediately. Some would-be borrowers have listed their appeals more than once.
Borrowers can ask for a three-year fully amortized loan up to $25,000. However, they can repay the full amount at any time without early payment penalties. Interest rates range from 0 percent (if the borrower is a charity) to 29 percent for borrowers with poor credit.
Larsen is introducing community conferences, Prosper Days, that he expects will draw borrowers and lenders from across the nation all in the interest of increasing the sense of community and enthusiasm for Prosper's service.
The first event, which is being planned as an annual occurance, will take place Feb. 12 and 13 at The Argent Hotel in San Francisco. Visit http://www.prosper.com for information.
Larsen also has injected a social networking format on the site that is voluntary but apparently efficient. A Prosper member may become a member of a group of borrowers and lenders. The group has a credit score separate from the individual but reflecting the average risk of all the individuals in it. Members of groups generally can demand a lower interest rate than people who list themselves as individuals.
Harnessing peer pressure
Larsen said the group structure was meant to add peer pressure to borrowers to dissuade them from being delinquent on their loans. He calls it the "shame, accountability and reputation" factor. The borrowers know that if they are delinquent, they pull down the credit rating of the entire group.
"We're like an eBay for money. We will allow anybody to be the person who's providing money," Larsen said. "In our thinking, that's a real breakthrough."
JupiterResearch analyst Asaf Buchner was generally positive about Prosper and said it was certainly "convenient for borrowers."
However, the analyst noted that lenders have to wait for three years before their investment is entirely repaid since there's no mechanism to trade loans.
He also observed that Prosper does not educate lenders about diversifying their risk. Buchner himself invested $2,000 across 20 listings and has so far suffered one default. Prosper tries to collect from defaulters but, if unsuccessful, it sells the loan to a third party. Buchner got 15 cents on the dollar for that single bad loan, but the rest of this investment will bring him back more than a CD, even accounting for that loss, he reported.
Bhaskar Molakalapalli, a software engineer who lives in San Ramon, is the leader for one group, called Bay Area Techies. On joining Prosper, Molakalapalli took out a $3,000 loan "just for testing purposes," he said, "and it worked quite well." But his real interest was in investing in order to accrue healthy payback. So far his group has invested in 13 loans and has never had a default.
"We are a small group in Silicon Valley and we want to help each other, so we are acting as a small venture-capital group for each others' ideas," Molakalapalli said. "Prosper is a wonderful platform for startups and investors to meet each other."
So far, the Bay Area Techies group has funded a startup software company and is looking for other high-tech ventures.
"On average, I have gained between 13 and 14 percent net on my total Prosper portfolio," Molakalapalli said. "That is good. That is why I like it."
Larsen tried to create a balance between a simple, user-friendly site and one that is secure.
"We need to make the market safe, building new tools for safety, ID theft and more trading tools," he said. "On the other hand, we want to make it a free market without too many stop signs."
Prosper has raised about $20 million in funding, with investors including Accel Partners, Benchmark Capital, Fidelity Ventures and Omidyar Network.
Prosper's lending marketplace is similar to Grameen Bank, the Nobel Prize-winning micro-lending effort in Bangladesh. But Larsen said the Bangladeshi effort requires a structure of five people lending to each other, while Prosper has no such requirement.
Another person-to-person lending site is Massachusetts-based CircleLending (www.circledlending.com), which administers loans between people who already know each other, such as friends and family.
A U.K. outfit, Zopa.com, offers a service similar to Prosper, but it is not yet available in the United States. Last year, Zopa raised $15 million in Series B funding, with investors including Bessemer Venture Partners, Benchmark Capital and Wellington Partners, to support the company's intended California launch.
While there have been rumors of Zopa opening up an office in San Francisco, the company's U.K. headquarters did not respond to queries about its intentions.
Contact Francine Brevetti at firstname.lastname@example.org or (510) 208-6416.