Peer to peer lending may be the new trend in finance

The payday loan industry is a profitable one for one good reason - people who borrow from cash advance stores usually have credit problems that prevent them from borrowing elsewhere. That makes offering loans at 400% per year a pretty profitable venture. So profitable, in fact, that all stores in a given geographic area charge the same interest rates. There is little or no price competition; the stores just open their doors and the customers walk in.

That doesn’t mean that customers are eager to borrow money at such high rates. It’s just that they feel that they have little or no alternative. If you have bad or poor credit, you may have trouble borrowing money anywhere else. If these customers could borrow money from a bank or credit union, they would. A new Website may offer a viable alternative to payday loans. Prosper.com is a new site that offers what is essentially peer to peer lending. It’s sort of a Napster for money.

How does it work? Prosper is set up in some ways to function like eBay, the online auction site. People who are interested in a loan sign up for the service, providing personal and financial information. They create a profile that lenders can view. Borrowers then indicate how much money they want to borrow and how high an interest rate they are willing to pay to obtain it. Lenders, in turn, view the borrower’s profile and decide if they want to lend to that person. If they do, they indicate how much they are willing to lend and at what rate.

The lenders bid to offer the money; the borrower will get the money from the person or persons that offer money at the lowest rate. Borrowers may request up to $25,000; lenders may offer funds ranging from $50-25,000. Most lenders spread the money around to minimize their risk. A lender with $1000 to lend may offer it in ten lots of $100 to ten different borrowers. Prosper.com handles the actual transaction and collection of the payments, which are paid over three years. The site collects a small fee from both borrower and lender as their payment for facilitating the transaction. Transactions are reported to the credit bureaus so that borrowers can build good credit from their transactions.

The ideal of lenders and borrowers getting together to work out the best terms for each is a great idea. It completely changes the way the system works now, where lenders set a price and borrowers can either take it or leave it. With the new system from Prosper, each side can negotiate until a price that is agreeable to both parties is reached. It seems like a great idea, and one that could help wean the public from expensive cash advance lending.

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