Prosper makes a market for borrowers and lenders online. A U.S. firm, it provides for unsecured loans to individuals up to $25,000 with a maximum three year duration. The website allows individual borrowers to apply, but encourages borrowers to join groups. Prosper conducts a credit check on potential buyers, and makes summary credit worthiness information available online. Groups are formed by leaders, who are encouraged to recruit group members. Group membership provide additional indications of credit worthiness of borrowers to potential lenders, improving the market information.
In requesting a loan, the borrower posts biographical and financial information online as well as information on the purpose to which the loan will be used. The borrowers also identify how much they wish to borrow, and the maximum interest rate they are willing to pay. Lenders bid on making the loan (to the specific borrower), setting a limit on the amount to be loaned and specifying an interest rate. The software then packages the best loan offers sufficient to meet the borrowers loan requirement. Lenders are encouraged to lend small amounts to many borrowers.
Prosper handles the financial transactions, charges a small fee for the overall service, and also pays the group leader his/her fees. According to The Washington Post, "Prosper also deals with defaults. It charges late fees. Any loans that are 30 days late go to a collection agency. Debts at least four months past due are sold to debt buyers." Lenders can get higher rates of returns from this market than from bank deposits, while borrowers can find small loans at lower interest rates than many available sources. WP reports that "Less than 1 percent of its loans have defaulted; close to 3 percent of its loans are at least three months late."
Currently, Prosper lists 182 non-profit groups. As an example, "Medical Benefactors" group describes itself as charging no group borrower fees and helping conquer childhood and third world diseases since the group's leader donates a portion of interest on loans to medical charities. The organization claims 140,000 members and $27 million in loans to date.
The organization, headquartered in San Francisco, was founded by Chris Larsen, who also who founded the online lender E-loan which is involved in real estate lending.
As ICT costs continue to decrease and connectivity continues to improve in developing nations, this may serve as a prototype to be replicated in developing nations. This may also be a means for non-profit organizations to invest endowment resources to gain income through provision of a useful service.
Read more about Prosper in "Want to Loan Me Money? Here's a Picture of My Dog.: Prosper Links People Who Need Money With Those Who Have It to Lend" by Annys Shin in The Washington Post, January 27, 2007.
Saturday, January 27, 2007
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