Prosper : Smart Money Magazine An Ebay of Loans

Such peer-to-peer Web sites cut out the middlemen -- the banks -- by connecting borrowers with people willing to lend. Despite deadbeats, lenders say they're making money.
Smart Money Magazine

Greg Bequette, a slow-speaking man with a sly sense of humor, is an accounting specialist with the University of California, a volunteer firefighter, an amateur genealogist and not-so-born-to-be-wild biker. As if that's not enough, he recently added a fifth avocation to his repertoire: banker.

Since last summer, Bequette has lent $750,000 of his personal cash to 157 strangers around the country, including $1,338 to a goatee-wearing salesman to buy an engagement ring, $6,211 to a California woman looking to market her "all natural" skin and nail supplement, and $3,000 to a Kansas City, Mo., couple to upgrade their tanning salon.

His clients call him "Pensioner" -- that's his handle on <>, a Web site that serves as a sort of eBay for loans. On Prosper, folks ranging from teenage moms to CEOs post listings on the site explaining why they need to borrow money; consumers looking to make loans bid with interest-rate offers as high as 30%.

More fun than Picking Stocks

Bequette fell hard for the concept when a co-worker showed him the site last summer. He loves analyzing borrowers' credit data and reading their colorful essays. "It's even more fun than picking stocks," he says.

By fall, he'd cashed in his mutual funds and lent half a million dollars, including $4,800 to a beef-jerky maker and $12,000 to an Alabama pet groomer. When that stash was gone, he got a $250,000 second mortgage and lent that out, too.

At first, everyone thought he'd lost his mind: "My wife was almost angry," he says. "But now she sees the money rolling in."

His interest rates are high -- 24.5% on average -- and he's earning a 15% return after accounting for bad loans. If all goes well, Bequette, 55, hopes to retire on his pension and Prosper earnings -- he imagines himself lounging on a cruise-ship deck with his laptop, managing his online loan portfolio.
Bequette's investment strategy may sound odd, but he has lots of company. Since Prosper launched a year ago, it has attracted 150,000 members who have done $36 million in loan deals. And no wonder: With no bank playing middleman, lenders earn higher interest rates than they'd get on a bank deposit; the sitewide return, after accounting for loan losses, is reportedly 7.5%.

Most lenders fund $50 and $100 portions of larger loans, so if a few of those loans go bad, it's not the end of the world. Then there's the sheer entertainment value of the site. Not only do would-be borrowers post detailed credit and income data, many include photos of themselves surrounded by grinning children, floppy pets, American flags and, in the case of one biology student seeking help with tuition, a dissected lab rat. Some write long essays detailing their dreams for the future and oh-so-good intentions.

Prosper's mostly male discussion forums, meanwhile, are packed with gossip, analysis, tips on female borrowers with hot photos ("her credit information looks amazing!") and sarcastic screeds ridiculing the day's most absurd loan requests.

The man behind all this is Chris Larsen, a 46-year-old entrepreneur with the low-key confidence and pleasant visage of an airline pilot. He dreamed up Prosper in the late 1990s, when he was running E-Loan, a consumer-friendly online mortgage outfit (it was the first to give customers a peek at their credit scores).
With Prosper, Larsen hopes to combine the efficiency of data-based lending markets with the social pressure found in informal, trust-based Asian lending networks. Will it take off? Not surprisingly, banks say consumers are happy with the wide selection of loan products already on the market.

Though Dan Schatt, a banking analyst with financial-services research firm Celent, predicts peer-to-peer lending sites will account for $5 billion by 2010, that's little more than a rounding error in the $2 trillion U.S. consumer-loan market. But Larsen, never one for excessive modesty, says outfits like his may someday displace banks as the middleman in personal loans

He's sharply critical of the banking industry and thinks consumers are hungry for an alternative. "You should be able to sell your money directly to people who want to buy your money," he says.
Many people agree that it's a clever idea. "The basic concept is appealing," says Jack Guttentag, a professor of finance emeritus at the Wharton School. "It brings lenders and borrowers together and takes the hassle out of it."

But the first year has been bumpy. Lenders testing new strategies often suffer disappointing results; some have been shocked by borrowers who've never made a single payment. Critics say borrowers don't seem to feel especially beholden to lenders they've met online. And just about everyone complains that there aren't enough decent loans to fund. So far, Prosper is more of a giant banking petri dish than a threat to conventional lenders. "It's an experiment," Bequette acknowledges.

Still, Larsen may be on to something with his anti-bank-industry bent. More than a few Prosper lenders say they have a dual goal in making direct loans: They want to a) make money and b) stick it to the banks. Charlie O'Keefe, a 26-year-old software engineer who's lent more than $1,600 through Prosper, is still smarting from the seemingly unavoidable $30 late fees and random rate increases he incurred on his credit cards. "I just thought the banks needed some competition," he says.

Srinivas Gazula, a prosperous 40-year-old from India, says he will never forget the trouble he had getting his first bank loan as a new immigrant in the 1980s. Now an information-technology director for a big Minneapolis insurer, he has invested $190,000 on Prosper, and his favorite loans are those made to strapped college students with no credit histories. "I've been there," he says.

When Gazula first encountered Prosper, he trod carefully, investing just a few thousand dollars in a series of small loans. But as he studied the ins and outs, he became convinced that it was a legitimate way to diversify his million-dollar portfolio of stocks and mutual funds.

"It's great, provided you know how to play and understand the risks," Gazula says. Over time, he has developed a strategy that he says earns a steady 12% return: Using Prosper's screening tools, he finds high-risk borrowers who have few prior delinquencies. Then, usually during his lunch break or just before he turns in for the night, Gazula spends 20 minutes sifting through those listings to find folks looking to build a credit history or consolidate high-interest loans. "Once you get into it, you start to see patterns," he says. "It gets very easy."
Tools Help Lenders Assess Risk

Many Prosper lenders are the first to admit they have no special knack for credit analysis. But that doesn't mean they're winging it. Prosper has lots of tools and charts to help lenders assess risk, including a performance table showing how loans to different types of borrowers fare over time.

The Web site also caters to data geeks by making a complete file of all Prosper transactions available for a free download; amateur credit wonks have gone to town slicing and dicing the numbers to uncover new lending strategies and trends. Already, a sort of online ecosystem has sprouted around the site: There are dozens of blogs, stat sites and online calculators developed by and for Prosper lenders.

But other lenders are in it just for kicks. Half have lent less than $1,000, and more than a few compare Prosper lending to a game of online poker or consider it a quirky social experiment. One is 25-year-old Nick Page, an Oberlin College history student in Ohio who made a small fortune in real estate and sports betting. Last fall, he lent $350,000 to a seemingly random series of high-risk borrowers at low rates, sparking amused speculation within the Prosper community that he was lending while intoxicated.

Page, who goes by the handle "MuleShoes," says he was simply satisfying his curiosity. "I just wanted to jump in and see how it worked out," he says. In some cases, he even gave borrowers extra money with the caveat that they use it to become Prosper lenders themselves. The results, not surprisingly, have been awful. Page says he'd be pleased at this point just to break even. "But I've learned a fair amount about human nature," he says.

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