Person-to-Person Lending Lets You Be the Bank!
by Jason Dean
Why is it that the bank only pays you 2% interest on your savings account, and yet lends money at 6% on mortgages, or even 10% or higher on car loans? Obviously, the bank has to make a profit and there’s certainly nothing wrong with profits. But there is something wrong with banks’ monopoly status as money lenders. Person-to-person lending threatens that monopolistic status.
Person-to-person (p2p) lending works like this: Instead of putting your money in a bank and letting the bank make loans using your money, you make the loans directly to borrowers. This allows you to collect a higher interest rate and lets borrowers pay lower interest at the same time — you’re cutting out the middle man, so you both profit!
Of course, one of the valuable services a bank provides is determining the credit-worthiness of borrowers. When you lend p2p, you are responsible for the loan. Luckily, the most popular p2p lending site on the web, Prosper.com, provides a credit score and other financial data for you to base your lending decisions on. But more importantly, you are able to read the borrower’s loan request and make a decision on exactly who you lend to.
Another great thing about Prosper is it allows you to diversify your lending across many borrowers. You can contribute as little as $50 to each individual loan. Loans range from $1,000 to $25,000, and thus a borrower may have as many as five hundred lenders or as few as one. Prosper — a low-cost middle man — does the job of collecting payments and depositing them into the lenders’ accounts. They take a small, 0.5% or 1% servicing fee (depending on the borrower’s credit) for doing so. That’s it!
From the borrower’s perspective, Prosper charges a 1% (good or average credit) or 2% (bad credit) closing fee, with a minimum fee of $50. This means if you borrow $6,000 and you have good credit, your closing fee will be $60 — you’ll receive $5,940 instead of $6,000. Other than that, fees are assessed by groups you can join voluntarily to help you with your loan listing and add credibility to your profile. Some groups have no fees at all, and you don’t have to join a group if you don’t want to.
If you’re interested in trying out Prosper as either a lender or borrower, here are some articles that have been written about the company and its business model:
- Rolling the Dice with Online Lending at Prosper.com (Part I)
- Rolling the Dice with Online Lending at Prosper.com (Part II)
- Need a Loan? Usury for Beginners