Several years ago my wife and I wanted to setup a little shop similar to these check cashing places that are on every corner. Except, instead of only loaning a couple hundred dollars for a few days at an outrageously high interest rate, we wanted to offer short term loans in amounts up to $5,000. What we liked about these payday loan places is that it only takes a few minutes to process the application. We had envisioned a place where people could come in a borrow the money they needed for their child’s braces or to get their car fixed so they could get to work. This idea never made it off the ground though. For one, we never could decide on how to make it work. The only thing we knew for sure was that it had to be convenient and personal. A place where someone’s situation mattered just as much, if not more, than their credit score.
Why am I sharing an old dusty dream? Well, a colleague of mine sent me an email a couple of days ago about a company that has created something similar to what my wife and I dreamed about. Granted they went about it in a totally different (and better) way, but the end result is the same. A place to borrow money where the lenders actually care about your story. Welcome to Prosper.com (gotta love the name, too).
Co-Founded by Chris Larson of E-Loan fame and veteran entrepreneur John Witchel, Prosper is a combination of LendingTree and MySpace. A place where everyday Joe’s can go a borrow from $1,000 up to $25,000 with terms up to 3 years with no collateral. And the lenders with the lowest interest rates win the deals. And if you’re own credit history is in need of some help you can find a group of people you know and join with them allowing their past payment history to help you get your loan. The flip side is, if you miss a payment the group knows it and it reflects poorly on the entire group.
So now you’re wondering, why borrow such small amounts when you could use other avenues such as your bank or even credit cards? Credit cards are nice and convenient, but the interest rates are horrid. Getting a personal loan from your bank may be possible, but it’s anything but convenient. And because of the bidding format Prosper uses, there’s a good chance that your bank can’t even match the interest rate available.
There are plenty of people wanting to borrow money, but who would want to loan it out under these conditions? From looking through the bids it seems there are plenty of people willing to lend. And why not? It only takes only a $1,000 deposit into a Proper holding account to get started and you don’t have to fund an entire loan by yourself. Prosper allows you to offer a certain amount and a minimum interest rate. Once the bidding is over, the money is automatically collected from the winning bidders and transferred to the borrower. Prosper handles all the paper work, funds transfer, receipt of payments, assess late fees, etc. You even get to pick a collection agency in case the borrower defaults on the loan. Tell me that doesn’t sound better than letting all you savings just sit in that Orange Savings account that’s all the rage these days.
I was given the opportunity to interview one of the founders, John Witchel, via email. Below is an excerpt:
weiss: Where did the inspiration for Prosper come from?
witchel: People-to-People lending has actually been around for thousands of years. It’s credit cards and the modern banking system that are the new kid on the block.
From our website: “for centuries small groups of people all over the world have been coming together to lend each other money. The names may be different, but the idea is the same. In China it’s called Lun-hui, in Egypt it’s called Gameya, and in Mexico the Spanish word is Tanda. … The world’s oldest central bank, Sveriges Riksbank (AKA the Swedish National Bank), wasn’t founded until 1668—almost 1,400 years after the first recorded Lun-hui! And the first credit card wasn’t issued until 1950. Can you guess which one? Here’s a hint: American Express and Visa didn’t come along until 1958. It was Diners Club.”
Here’s a little more background on it: http://www.prosper.com/public/welcome/history_and_tradition.aspx. It’s actually a pretty interesting read.
weiss: What plans do you have for future growth?
witchel: We plan to really just get out there with what we hope is a straight-forward transparent product offering that stands on its own merits. So we don’t have any plans for Super Bowl ads or the like. We think if lenders get a fair rate of return and borrowers get a loan at a decent rate, word will get around.weiss: There’s talk of another player moving into the US market from overseas. Any concerns about the competition?
witchel: We have a lot of respect for Zopa. They did great work at Egg and they’ve gathered a lot of experience in the past year. I think both Zopa and Prosper share a more serious threat in finding widespread market acceptance than in each other. Toward that end, another serious hard working honest company working to show why people-to-people lending makes sense for all parties is a good thing for Prosper. That said, Entrepreneurship is a competitive sport and it wouldn’t be much fun if we didn’t have a competitor.weiss: Will there come a point when borrowers can choose their own term rather than a set 3 year term?
witchel: Yes. In fact, today borrowers can pay-off their loans at any rate they want. So if you have a monthly payment of $100 and you want to make regular payments of $200 to drive that debt down, there are no penalties. That’s not always true with bank loans. Here’s a link on the details: http://www.prosper.com/public/help/topics/borrower-manage_loan.aspxweiss: I’ve seen many people complaining about the fact that their credit rating is based on info from a single credit report. Are there plans of pulling a tri-merge report to provide a more rounded view of people?
witchel: No.weiss: What steps are being taken to ensure that the site isn’t flooded with “unsavory” loan requests and scaring away potential investors?
witchel: Well, there are two issues in the word unsavory as I think you mean it:: undesirable and fraudulent. What’s desirable is entirely up to the lender. What seems high risk to you may in fact be a great loan to someone else. Prosper doesn’t judge what is and is not a desirable loan anymore than E-Bay says whether an IPod is fairly priced. But like EBay, Prosper is very involved in fraud. We have a vigorous process of vetting each borrower. By the time you’re allowed to list, we’ve confirmed your identity from numerous data sources. We’ve confirmed a bank account, we’ve pulled your credit score, you’ve been asked personal questions, and in most cases you’ve been admitted to a group that has exchanged emails with you. In the end, ensuring that people who are they say they are is a very important part of what we do. Here’s some more data on what we do: http://www.prosper.com/public/help/topics/start-faq.aspx#idverification
Some of you are looking for a catch. Well, if there is one, it’s not in the fees. Prosper charges the borrower a 1% closing fee and they charge the lender .5% annual servicing fee. Not a bad deal from my perspective.
Call me old fashioned, but I really like the stories my grandparents tell of friends helping friends and neighbors helping neighbors. With Prosper, those days might just be making a comeback.
In closing I’d like to thank Majal Mirasol, Tiffany Fox, and John Witchel for their time and effort.
