Borrowing from strangers
Peer-to-peer lending sites such as Prosper, Zopa and Lending Club have grown in popularity very recently. These sites offer opportunities for borrowers to get loans from complete strangers looking for investment returns. In the U.S. marketplace, the oldest of these, Prosper, was established in February of 2006 and has garnered almost 800,000 members since, according to the firm's market survey results of July 2008.Zopa, a U.K.-grown site, landed on this side of the Atlantic in December 2007, offering borrowers a new way to work with lenders. Also available nationally, Lending Club opened its virtual doors to lenders in December 2007, but has since become mired in regulatory issues. Bankrate's story on peer-to-peer lending providers offers more insights on this emerging industry.
The way they work is simple, though the details differ a bit from company to company. For instance, both Prosper and Zopa require a minimum credit score from borrowers. On Zopa, a FICO score beneath 640 means you aren't eligible for one of its loans. Prosper disallows scores beneath 520 based on an Experian credit score called the Scorex Plus.
Both sites require borrowers to set up a profile and make their case for individual investors to give them a loan.
On Prosper, lenders bid on loan requests. The lowest bid amount is $50 per loan and bids with the lowest interest rates are bundled into one loan, thus mitigating risk. The loans are actually made by WebBank, a partner of Prosper and then sold to individual lenders. Lenders choose the amount they wish to lend and the rate they require, while borrowers list the highest interest rate they're willing to pay.
Zopa uses a different model. Borrowers are granted a loan from a credit union partnered with Zopa; investors purchase CDs from that credit union and choose the best interest rate offered or a lesser rate. The CD purchases help borrowers. Investors can choose the borrowers they'd like to help, based on the written profile, or they may choose someone they already know. The risk to capital is nonexistent, according to the site. And if their primary aim is to help out the borrower, they can do so by choosing a lower rate.
With both Prosper and Zopa, borrowers can get people they know to help them out; it doesn't have to be limited to strangers. The new lending businesses formalize the process of private loans for all parties. If things start to look dicey with respect to repayment, lenders can invoke the threat of a negatively impacted credit report, if necessary.
It's not a threat that can be used in casual arrangements. And it certainly beats the alternatives available to lenders foiled by a closed garage door or other elusive strategies used by borrowers who can't repay a loan.