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Banks and Creditors: Removed from the Equation

CasholaMeet Prosper, the site that is stripping banks and credit card companies of all their power, and putting it squarely in the hands of the people. The concept is simple. Your credit report provides only a number, not a full profile of the kind of borrower you are, and the true likelihood that you will pay back a loan. Instead, potential borrowers post their credit score, which is generated by the site, in addition to full contact information, requested loan amount, interest rate they are willing to pay, and a short narrative describing how the funds will be used. Then, members of the community “bid” on that loan, in small amounts. For example, someone may request a $1,000 loan, and be willing to pay a 10% interest rate. Ten people each bid $100 dollars on that loan, and then equally share the 10% interest rate.

This provides an amazing opportunity for people on both sides. Borrowers can appeal to the heart of the community, and aren’t simply stuck with a label, like “high risk” or “bankruptcy.” Lenders can invest in the site’s members through a series of micro-loans, and enjoy a much higher return than they would in, say, the stock market.

Sound like a big scam? It’s not. In fact, the rate of default on loans made through the Prosper system is exactly the same as that made through traditional channels, with the difference being that you can spread your risk out over many micro-loans. For example, if you make 100 loans to B-rated borrowers at 8%, and B-rated borrowers have an expected default rate of 1.8%, then you might have 2 borrowers default, which would lower your return by 2%. After annual lending fees of 0.5%, this would give you an annual 5.5% return overall.

Prosper.com represents the new generation of lenders. Peer-to-peer loans are low risk, high return for lenders, and a great way for ordinary people to get the money they need to start a business. In the future, there won’t be the same kind of large-scale lending institutions…not when the people are taking matters into their own hands. Check out Prosper.com right now!

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