Sunday, March 05, 2006

Micro-lending marketplace Prosper has $750,000 available to borrow!

Prosper is the eBay of micro-lending, a person-to-person lending marketplace launched in January 2006. Not since junk bonds has there been such a brilliant and potentially impactful new credit product. Deployed in the US (and by UK competitor Zopa), possibly to the chagrin of the $750,000 of lender funds apparently deposited with the site, it is not the romantic notion of the Grameen Bank, sponsoring female entrepreneurs in developing nations, but rather reflects the need to pay off or consolidate credit card debt as the biggest loan category.

Mechanics of the Prosper lending marketplace:
Loans are unsecured and have a maximum amount of $25,000 (typically much lower) and a term of three years. Borrowers post their loans, confidentially specifying their maximum interest rate. If the loan is funded, Prosper takes 1% of the proceeds from the borrower, it is free to list loans. Borrower credit ratings are pulled from Experian and posted on the site (an interesting victory for transparency, self-approved public posting of credit scores). If the borrower defaults, it is reported to credit agencies and Prosper hires a collections agency on behalf of the lender group, but that is all the recourse to the lenders. Lenders must also agree to a credit check and pay a 0.5% annual servicing fee to Prosper on funded loans. Monthly loan payments are electronically withdrawn from the borrowers' bank accounts and deposited into the lenders' bank accounts.

Community is another interesting and important aspect of the person-to-person micro-lending marketplace, affinity groups can borrow and lend amongst members (Porsche drivers, libertarians, etc.). Trust relationships improve repayment and willingness to lend and lenders can fund causes they would like to support. Various flavors of directed and socially-responsible lending movements can easily arise.

Potential criticisms are obvious, the risk of naive lenders extending credit, fraud, and most importantly default per the unfavorable macroeconomics of individual fiscal management. Savings rates continue to be at an all-time low, interests rates and credit card debt averages continue to rise, together with the pressure of cyclic mortgage defaults (particularly on interest-onlys) potentially commencing and the pressure of the November 2005 bankruptcy law revisions.

Still, the person-to-person micro-credit marketplace is an important means of increasing the efficiency of lending (i.e.; decrease bank spreads), allowing a new tier of investors to provide credit, providing credit to traditionally-disenfranchised yet typically low-defaulting borrowers and sponsoring cause-supported lending.