Prosper.com is a Person-to-Person (P2P) lending site that was founded by Chris Larsen, (who also founded E-loan), and John Witchel, and financed by eBay’s founder, Pierre Omidyar.  P2P lending works in a similar fashion to selling and buying on eBay only for borrowing and lending money.

 

How It Works:

 

Borrowers set up a loan request and lenders* bid on it.  Lenders can bid on the whole loan, (which is not recommended), or on a small portion of the loan - as little as $50.  Many bidders lend somewhere between $50 and $500, so their risk is spread over a number of loans.  When the loan is fully funded, Prosper takes the money you bid from your account, adds it together with the funds of all of the other winning bidders and sends the borrower a check.  The borrower pays the money back to Prosper every month and Prosper divvies it up between all of the lenders.

 

Benefits to Borrowers:

 

Prosper can be a very good deal for borrowers.  If a borrower has no credit rating or a very poor credit rating they can borrow money when no one else may be willing to lend it to them.  Of course the interest rate may be high, but if the money is really needed then this could be a legitimate way to borrow it and at a rate that is probably much less then other places they could go.

 

In the event the borrower’s credit is good, they can often borrow money for reasons that a bank may not lend it or may lend it at a higher rate.  Or, instead of paying 14% - 21% or more on a credit card, the borrower may be able to obtain a loan for 9% or even less on Prosper.  The borrower decides what they want the loan for - home improvements, business, medical expenses, even vacations and more - and if the lenders are willing, the loan could be financed, and quite possibly at a rate less than the borrower expected!

 

Benefits to Lenders:

 

Compounding interest AND compounding principle.  Money put in the bank earns interest.  That interest earns interest and is referred to as compounding interest.  Where the benefit really shows up is in the compounding principle.  As the loan is paid back by the borrower, the lender receives interest and a portion of their original principle back.  This interest AND principle can then be used by the lender to finance another borrower’s loan, which in turn earns interest, and so on and so on.

 

There are other benefits as well, such as the opportunity to help people that need help.  Just about everyone knows someone that has been put in a financial situation due to events that were beyond their control or even just by having made some bad choices.  They need to get back on their feet and lenders can look for a borrower in that type of a situation and help them to do just that.  There are also college students, business startups and expansions, new babies on the way including adoptions, etc..  Lenders get to pick to whom they will lend their money, unlike when it is in the bank and the bank makes the choice for them.

 

Additional Benefits:

 

Prosper has a Referral Program which is currently scheduled to end on June 30, 2008:

 

Refer a Lender - You receive $25 and the new lender receives $25.

 

Refer a Borrower - You receive $35.

 

Here’s how it works:

 

1. You add a special link to Prosper on your website, blog, discussion forum, MySpace page, Facebook Page, in your email signature, and so forth.  Mine is: http://www.prosper.com/join/debugger.
2. The referral clicks on your Prosper link.
3. The referral joins Prosper within 30 days of clicking on your link.
4. Within 90 days of joining Prosper, the referral gets a funded loan, (as a borrower), of funds a loan, (as a lender).
5. As soon as the referrals first monthly payment clears, (as a borrower), or first loan originates, (as a lender), you get cash in your Prosper account.

 

Note: The referral’s browser must accept cookies.

 

Go ahead and join as a lender and Prosper will pay both of us $25 or join as a borrower and get those funds you need plus Prosper will pay me $35: http://www.prosper.com/join/debugger.

 

A Word of Caution:

 

Until you have been lending for a while and are willing to place a portion of your investment into a higher risk situation, stay away from the high risk borrowers.  Although the rewards can be much greater due to the higher interest rates, so is the risk of default.  Start off investing in borrowers with AA, A or B ratings, (you will still get a much higher interest rate than in the bank), but at a far lower risk to your investment.

 

Wrap Up:

 

Try it!  It only takes risking $50, but the rewards can be very much worth it; especially with the referral bonus of $25 currently being offered to new lenders, but remember to use my link so that we both can benefit: http://www.prosper.com/join/debugger.  Or, if you need a loan, check Prosper.com out, and you may actually save some money on the interest rate, again, remembering to use my link so that we both can benefit.

 

 

*Although Prosper refers to you and other individuals as “lenders”, the loans are being made by Prosper and then sold to you, making you a loan purchaser.  The term lender is used for the sake of simplicity.

 

Technically speaking, from the Prosper.com website:

 

Your role as a Prosper “lender” is that of a loan purchaser, and your rights and obligations as a purchaser or prospective purchaser of Prosper loans are set forth in the Lender Registration Agreement.  Although you are referred to on the Prosper website as a “lender,” you are not actually lending your money directly to Prosper Borrowers, but are, instead, purchasing loans form Prosper.  All loans originated through Prosper are made by Prosper Marketplace, Inc. from its own funds, and then sold by Prosper to the winning bidder or bidders on the listing.  Prosper is the originating lender for licensing and regulatory reasons and it licensed in all states where licensing is required.  Prosper uses the term “lender” instead of “loan purchaser” for the sake of brevity and simplicity, and for the convenience of Prosper users who appropriately view Prosper as a marketplace for connecting individuals who wish to borrow money, with people who have money and the desire to fund loans to other individuals.