Recently, I came across this new start-up company, Prosper. It is a platform for individual lenders and borrowers to lend/borrow money from one another, thus, bypassing the banks. Harnessing the power of web technology, it managed to link up borrowers and lenders together and allow them to decide who to lend to or borrow from. This is definitely different from what our banks usually do. Since lenders can get better interest rates and borrowers can get their loans, it seems like a good deal for all. There are a few similar companies like Lending Club, Zopa and Kiva but Prosper seems like the biggest, with $96.4 million exchanged hands between the period from inception till 31 Oct 07 (according to Techcrunch).
It may sound a bit risky as ordinary folks like us may not be as knowledgeable in the field of risk assessment. Moreover, people who turn to Prosper for help would most likely had unsuccessful loan applications from banks. Thus, their credit rating should be pretty low. However, Prosper sees this as a money making chance to offer these people loans, who would never have been able to borrow money for dire situations like medical surgery, education, business start-ups etc. Prosper has a credit rating system in place and it also tracks the number of delinquencies a borrower had. It was also stressed in their website that diversification can further reduce lending risk. Let’s say I have $1000 to lend to 10 people, and if any 1 or 2 of them default the loan, I would not suffer a loss as much as compared to lending solely to 1 person who defaults.
Would Prosper really prosper?
The way I see it is this is a typical long tail business model where the power is given to every individual in Prosper – unlike our conventional banks where they have the power. Earning 1% from borrowers and 0.5% from lenders seems lucrative as well. It is really exciting to see the rise of the 2nd dotcom wave with many internet start-ups with new business ideas. However, I hope that we better learn and avoid the mistakes we made in the dotcom bust so that we would not need to experience another. Do share with me your experience if you ever lend or borrow money through Prosper.
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