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Can Peer-To-Peer Finance Work?

ScuttleMonkey posted more than 8 years ago | from the lawsuit-in-3-2-1 dept.

261

Dotnaught writes "Two companies, Prosper and Zopa, appear to be convinced that social networking can be combined with borrowing and lending. They're intent on using eBay as a model for listing and bidding on loans without the involvement of a bank. Call it peer-to-peer finance. There are already some 800 groups on Prosper ready to loan money to specific causes, such as the Apple User Group, 'a lending group for those wishing to purchase either a Macintosh or Apple iPod.'"

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Existing Finance (4, Insightful)

foundme (897346) | more than 8 years ago | (#15346717)

I can't imagine how this is able to compete with existing financial providers.

First of all, how many bad debts can these peers handle? Large corporations have enough cash to handle bad or delayed debts.

Unlike other successful P2P services, this model is entering a market where existing businesses are making a living out of it.

Re:Existing Finance (5, Insightful)

rvw14 (733613) | more than 8 years ago | (#15346758)

Peer to Peer financing has been around for decades. It is called a Credit Union.

Re:Existing Finance (2, Funny)

iminplaya (723125) | more than 8 years ago | (#15347099)

But it's a credit union using a computer (patent pending).

Or a Bond (1)

HighOrbit (631451) | more than 8 years ago | (#15347647)

Your right, Credit Unions are a good example of individuals aggregating. But isn't a bond a form of "peer-to-peer" financing without a bank as well? The company issues a bond, you buy the bond from them thereby loaning them money directly. Ofcourse, with a bond (in modern financial system) you get a credit rating for the company from S&P, Moody, et al.

How about some C or D rated bonds? We'll just add a 21st century buzzword "Peer-to-Peer" to make it sound cool and catchy. I also have a bridge in brooklyn if you are interested. Hmm... what could I call it? How about bidirectional high bandwidth geo-bus? Anybody interested in a geo-bus in brooklyn?

Re:Existing Finance (1)

mrvan (973822) | more than 8 years ago | (#15346759)

Right... so e-bay has nothing to do with retail now does it?

Re:Existing Finance (5, Interesting)

Damathon (912183) | more than 8 years ago | (#15346766)

These businesses may be entering a market that's already full of competition but I think the main idea is that regular people can loan small amounts of money, together effectively becoming as large a business as the existing businesses -- although the profits may be smaller, people aren't doing it for a living. Each person is giving a little, but they can effectively compete with large companies. (And losing $100 or so won't hurt the types of people who will invest money into P2P loans).

Although it might not be as large a benefit to investors, it could increase competition in an already competitive market and help borrowers to secure better loan terms. Hopefully, this could also help out people with poor credit ratings as there are more potential businesses to loan them money.

Uh, not really... (0)

DogDude (805747) | more than 8 years ago | (#15347401)

Honestly, you should check out one of these sites first. At "Prosper", most of the "loans" are for at least 15%! I don't know who this is helping...

Re:Uh, not really... (1)

rah1420 (234198) | more than 8 years ago | (#15347534)

most of the "loans" are for at least 15%! I don't know who this is helping...


People who have subpar credit scores. If they were to go to a regular creditor for a LOC they could easily approach 30%.

Geez, my Sears card is drifting up, on average a quarter point a month. Of course with a zero balance on it (I pay in full every month) they're not making any money off of me. I did have a balance on Sears at one point and it pissed me off to be paying 26.24% one month, 26.49% the month after that.

And go ahead and call them and ask for a rate reduction. No matter how high you go in the food chain, the answer is always "No."

But back on topic; if people align themselves with an affitity group in Prosper, they have a fighting chance at maybe swapping some 29% money for some 15% money. That can save them some cash. At least more of a fighting chance than going to a regular banker...

Re:Uh, not really... (1)

ThreeE (786934) | more than 8 years ago | (#15347740)

If you owe a significant amount of money at 29%, and feel you need more, the last thing you need is another loan. What you need is either 1) credit counselling, 2) a budget, and/or 3) a bankruptcy lawyer.

Similar to Angel investors vs VCs (4, Interesting)

Anonymous Coward | more than 8 years ago | (#15346820)

There are plenty of rich guys willing to study "small" deals that existing financial providers won't deal with.
Two obvious examples are
  • Angel Investors that fund many companies that VCs and Investment Banks don't. They make their money because they're willing to study complex opportunities that may be close to their area of expertise, and
  • the other obvious example is the mob, who gets higher interest rates and can afford to take on riskier loans because they have a more effective collection agency.

And it's hard to underestimate the stupidity of some lenders. I imagine there are plenty of people with a lot of money who will seriously consider lending to a high-school kid to get an XBox in the same way that they consider lending to former Nigerian Royalty to help them get millions out of there.

Re:Similar to Angel investors vs VCs (1)

bobbuck (675253) | more than 8 years ago | (#15347024)

"And it's hard to underestimate the stupidity of some lenders."

Lenders can be very aggressive in the sub-prime (bad credit) market. There's little profit margin on the 800 beacon types. They know they have good credit and they shop for the best rate. The credit criminals are just happy to get a loan and don't care if they get a 20% rate. If the lenders get 30% charge-offs, they still made more on sub-prime.

As the retail loan rates go higher, they get closer the the various states' usury limits. The reduced spread will dry up the lenders for those with the worst credit. Hopefully this peer to peer model can bypass some of the "consumer protections" that keep high risk customer from finding loans.

Re:Existing Finance (3, Funny)

cinnamoninja (958754) | more than 8 years ago | (#15346839)

I can't imagine how this is able to compete with existing financial providers.

Yay, venture capitalists!

First of all, how many bad debts can these peers handle? Large corporations have enough cash to handle bad or delayed debts.

They are trying to spread risks around. They also are assuming a 4% default rate. I don't know if that is a feasible goal, but they are claiming that the "community" they are building, combined with off-line credit inquiries, will get them to that number.

Unlike other successful P2P services, this model is entering a market where existing businesses are making a living out of it.

In theory, they could take away a lot of bureaucracry, and do it cheaper. In practice, it looks like they are attracting crazy investors, who don't trust banks. (I suppose this is better than putting money under the mattress?) Here's a fun quote from the article:

"I am fascinated by the concept, [and] hate big corporate banks..." writes one user. Such sentiment baffles the more commerce-minded forum participants, who have posted complaints about Zopa's "uncompetitive" returns to lenders.

Hey, if you can find the people who prefer more risk for less return, why not take advantage of them?

Re:Existing Finance (4, Insightful)

DragonWriter (970822) | more than 8 years ago | (#15346869)

I can't imagine how this is able to compete with existing financial providers.


If you aren't completely risk-intolerant, it looks far better a place to put money than a bank for a small investor.

For a borrower, I don't see much advantage, though the terms may be slightly better. I think the lenders are what will drive its success, since having the money to lend will, itself, make it attractive to borrowers.

First of all, how many bad debts can these peers handle?


Zopa lets you limit your exposure to any given borrower to as little as 10 pounds, Prosper does something similar with a a minimum of US$50. Automated aggregation allows spreading the risk.

Unlike other successful P2P services, this model is entering a market where existing businesses are making a living out of it.


Successful P2P services have done that, too. "Buying and selling goods" is, after all, something business were making a living at (even using auction models) long before eBay.

In a sense this is an eBay system for buying and selling money, which actually can work far better since its a uniform, fungible commodity that allows spreading the risk. (Its a little bit different, since the auction service here also covers fulfillment, which isn't necessarily the case with eBay, but that's better for users, since it offloads much of the risk of dealing with a difficult person at the other end.)

Re:Existing Finance (1)

Trogre (513942) | more than 8 years ago | (#15346870)

Also unlike other successful P2P services, this model is trading in scarce resources from an economics point of view.

Re:Existing Finance (3, Interesting)

LionKimbro (200000) | more than 8 years ago | (#15346904)

Hmm...

Speaking as someone who is committing money to a community bank [communitywiki.org] with roughly $2,000 in it, I think the thing is that people trust their own culture, and are more willing to accept risks and lend money within their own culture. People tell each other things amongst themselves, that they do not necessarily tell the banks.

If you lose, it was "for the cause," anyways. If you win, you've aided the cause.

The bank might not even be willing to talk with you.

I know a girl, she's going to college. She needs $50,000 for 4 years of loans. The banks aren't talking with her, and her parents are opposed to her going to college out-of-state. (Read: The parents want to keep her near, to better control her.)

If my culture were just a wee bit more organized, [communitywiki.org] I'm sure we'd have her in her preferred college. (UCSD, I believe.) As it is, we only have $2,000 amongst ourselves.

If only she were going to college in 4 years...

You may also want to check out the concept of Internet Bonding. [communitywiki.org] Basically, if you can look at all the things a person does online, says online, follow the ups & downs in their life, and so on: You can do interesting things with that. You can better evaluate risk. So, if you're operating within your culture, things get a lot easier on you.

In the case of this girl, she has an easy time explaining to us who she is, where she's coming from, and so on: You can see her last few years of work online. "Trustworthy!" we say, "Get that woman her CS degree!"

Re:Existing Finance (0)

Anonymous Coward | more than 8 years ago | (#15347108)

the stuff I say online is barely a reflection of my ability to repay While it may help to find borrowers whom you relate to, it has no bearing on credit worthiness.

Re:Existing Finance (2, Funny)

Anonymous Coward | more than 8 years ago | (#15347180)

>I know a girl

You lost me there.

Re:Existing Finance (0)

Anonymous Coward | more than 8 years ago | (#15347397)

Dude, federal loans alone will cover up to 47,000 of an independent undergraduate's student loans over the course of four years. The remainder is quite doable with some other kinds of aid and a part time job.

http://studentaid.ed.gov/students/publications/stu dent_guide/2004_2005/english/types-stafford.htm [ed.gov]

Anybody who can get in can afford to go to college. If she has kids it'd be tougher, she'd probably have to spread it way out over the course of more years so she could work nearly full time too, but it's still doable for anyone.

Ugh..... (1)

IHC Navistar (967161) | more than 8 years ago | (#15347007)

Great... Now there are more records the Ucle Sam can stick his big nose into.

----- Politicians prefer unarmed peasants. So I'm armed.

The only reason banks can afford to lend (0)

Anonymous Coward | more than 8 years ago | (#15347046)

... is because they can lend out 10x the amount of money they actually have. Hence the term "fractional reserve banking system".

So the bank might be lending to you at a 10% APR, but they are lending out the same money 10 times, in effect getting a 100% APR return on their investment. Even with this kind of profit, they are very picky about who they lend money out to - a single bad loan cancels out the profit from 9 other similar loans.

Say buddy spot me a 20? (1)

EmbeddedJanitor (597831) | more than 8 years ago | (#15347268)

Naaah! It would never work.

Just because we use email, or IRC or the phone to communicate does not really change anything.

Re:Existing Finance (1)

daigu (111684) | more than 8 years ago | (#15347294)

For one, it doesn't have to compete with existing providers. But the main thing is that peer-to-peer finance has been around for centuries - perhaps you have heard of mutual aid/benefit societies? Guilds to credit unions to microloans [wikipedia.org] - some concept different implementation.

Re:Existing Finance (0)

Anonymous Coward | more than 8 years ago | (#15347315)

This will never work in a corrupt society like the west, but it does work pretty well in third world in communities where people know each other pretty well. What helps is people still have pride and integrity and very serious about preseving them. This is totaly gone in the "civilized world".

    The world "Check" came from the Arabic word "Saque" which was nothing more than a little IOU. People used to give it in Spain (Andalus back then) and cash it in the Middle East many month later. That was in the 11 century I believe. We sure came a long way, didn't we.

If only you can book those loans as revenue... (5, Funny)

Anonymous Coward | more than 8 years ago | (#15346719)

that's how Enron worked.
  • CEO makes new subsidiary -
  • parent and subsidiary loan each other a couple billion - book them as revenue
  • profit
  • go to jail

Re:If only you can book those loans as revenue... (2, Insightful)

AuMatar (183847) | more than 8 years ago | (#15346821)

Unfortunately, step 4 seems to have been skipped.

I for one,, (1, Funny)

SauroNlord (707570) | more than 8 years ago | (#15346721)

I, for one welcome our p2p lending overlords.

Amazing! (2, Interesting)

Toby The Economist (811138) | more than 8 years ago | (#15346725)

Sounds amazing!

One of the drawbacks with banks et al is the insertion of the thick layer of bureaucracy between the lender and the lendee; its expensive, time consuming and impersonal.

If you have direct contact mechanisms like this, people find information far more accessable and that gives them a chance to take advantage of opportunities they wouldn't even have known about before.

It also gives people a chance to browse speculatively (bit like you do on Ebay).

My fear is that the State will barge in and regulate this to its death, since it's to do with money and lending and there's a LOT of State regulation of such industries, to the harm of everyone who wants to borrow and to the benefit of the banks, since it greatly reduces the competition they have to face.

Re:Amazing! (3, Insightful)

ornil (33732) | more than 8 years ago | (#15346900)

There's good reason why there's so much regulation of banking & finance. It used to be a free-for-all, with rampant fraud on both sides: borrowers and lenders. Do you really feel confident enough not to be fooled by fraudsters of various sorts? It's sort of like phishing, only imagine you are computer-incompetent, because I doubt your (and my, and most people's) understanding of finance is good enough to detect the more sophisticated financial fraud out there. This is like a honeypot for thieves of the worst sort, because there's no tangible goods involved anywhere, it's just money - numbers in people's accounts.

Re:Amazing! (1)

Toby The Economist (811138) | more than 8 years ago | (#15347163)

The thing is, who is to decide if I'm competent?

Me or someone else? and if it's someone else, and they get to decide whether or not I can borrow money from another person, isn't my personal freedom being reduced? "for my own good", of course!

To be honest, I know well I can trust the main banks, and I am aware I take an increasing risk if I go elsewhere. If I've got half a brain, I'll turn to independent specialists for advice, just as for example I recently had to buy a fridge-freezer and bought a group review from Which? magazine, so I made a well-informed choice.

It's not hard for me to take steps to protect myself - but nevertheless, instead, we do in fact have that third person, the State, deciding we're not competent and telling us who we can and cannot borrow from. We lose a lot - a part of our freedom - for a gain which we could just as well obtain by our own actions, and in doing so, liberate the entire banking market, making it cheaper, far more innovative, reducing the cost of State (less bureaucracy) *and* returning our freedom to us.

As ever, though, there are no pressure groups pushing for the general public interest; there are only pressure groups pushing for specific, narrow vested interests.

I suspect the banking groups, when all is said and done, are fully in favour of regulation, because it consoladates and ensures their position in the market. They have passed the enourmous barrier to entry caused by regulation, so they're very happy to see that regulation continue; they do very well out of it indeed.

Re:Amazing! (5, Insightful)

AuMatar (183847) | more than 8 years ago | (#15347326)

To be honest, I know well I can trust the main banks

Study history. The ONLY reason you can ay that is because of regulations. Look back at the 30s- respected banks went out of buisness as much as anyone else.

I'm not competent to tell what banks are trustworthy. I'm not competent to tell what food won't give me botulism. I'm not competent to tell what products will do what they're supposed to and what won't. I'm not competent to understand cutting edge medicine. I may be able to pick up 1 of these, but there's a limited number of hours in the day- I need to keep up on my primary profession as well. And I'm at the high end of the intelligence curve, I'm far more capable than the average person. The average man would be completely and utterly fucked.

The government regulations are the only thing that enables me to go down to the store and have faith in my purchases. Without that, the economy falls apart. Government regulations are a good thing. Regulations on banks are a damn good thing, they ensure my life savings are safe. There's a reason why prior to regulation most people kept their money under their mattress or someplace similar- they couldn't trust banks. The world is a better place for these changes.

Re:Amazing! (2, Insightful)

DigiShaman (671371) | more than 8 years ago | (#15346976)

My fear is that the State will barge in and regulate this to its death

That's no fear. It's a FACT! Through the IRS, they will get their cut at gunpoint.

Re:Amazing! (0)

Anonymous Coward | more than 8 years ago | (#15346979)

well, there already IS a peer-to-peer money system, which has exiscted for centuries, and it is called Hawala

Hawala involves person-to-person transfer of money, with no tokens or receipts given, the entire process apparently based on the "honor" system, and is hence entirely untracable.

http://en.wikipedia.org/wiki/Hawala [wikipedia.org]
http://www.interpol.int/Public/FinancialCrime/Mone yLaundering/hawala/default.asp [interpol.int] (use non-US proxy for second link)

  Because HAWALA is untracable, it is a favorite of terrorists and certain neo-con republicans. Considering Dubai is the de-facto capital of hawala, one cannot help but wonder if Rove/Bush's transfer of US Ports to Dubai (netted to give Dubai circa $2 Bln immediate net profit) is a deposit of sorts...

Remembering how nicely neo-cons benifited from the last 9/11 (a blank check for privacy violation/wiretaps/PATRIOT/Ira(q)n etc.), any "weak and unpatriotic" democrat MUST inquire what exactly such a deposit could buy W the second time around.

isn't this Nigerian 419 (1)

EccentricAnomaly (451326) | more than 8 years ago | (#15347178)

It also gives people a chance to browse speculatively (bit like you do on Ebay)

seems like this will lead to loan-sharking on the lender's side and Nigerian 419 scams on the other end. I just need a small loan to get started on big $$$. Either way, they break your knee-caps.

Re:Amazing! (1)

spike2131 (468840) | more than 8 years ago | (#15347318)

My fear is that the State will barge in and regulate this to its death, since it's to do with money and lending and there's a LOT of State regulation of such industries, to the harm of everyone who wants to borrow and to the benefit of the banks, since it greatly reduces the competition they have to face.

Right, because not regulating the banking industry back in the 1980s worked out so well for the all the Savings and Loans...

Welcome Back (5, Insightful)

Camel Racer (134168) | more than 8 years ago | (#15346727)

With this announcement, we are now officially in an economic bubble.

Re:Welcome Back (1)

zuluechopapa (919551) | more than 8 years ago | (#15347277)

ooo.. and just in time for the pop.

I wouldn't want (2, Interesting)

rsilvergun (571051) | more than 8 years ago | (#15346741)

to just jump into the lending business. It only works if you've got the legal muscle to force people to pay out. What goods it do to have a million dollars in assets if it's all money owed to you by deadbeats who know you can't take them to court. Then again, if you could lend the money out at high interest and then sell the notes to debt collection agencys who _did_ have the legal muscle, that might work.

Re:I wouldn't want (5, Funny)

foundme (897346) | more than 8 years ago | (#15346835)

I think this P2P Finance will only work if P2P Muscle is also implemented at the same time.

Imagine if you can log on to BeatTorrent, hook up with a few peers living near your debtor, and get them to show your debtor some muscles.

Re:I wouldn't want (1)

bobbuck (675253) | more than 8 years ago | (#15346903)

Using a credit rating system like the buyer/seller ratings on eBay could give the lenders as much leverage as collection agencies.

Heck with work, gone phishing! (1)

rts008 (812749) | more than 8 years ago | (#15346742)

Yes, your loan will be approved as soon as you log on at www.BankuvAmerica.com or www.AmericanExpresso.com with all of your info, and our Nigerian Banker-trained associates will take REAL good care of you!

Yeah, sounds like a real good way of doing finances to me, hehehe.

credit checks? (4, Insightful)

chicken_tonight (786398) | more than 8 years ago | (#15346752)

Unless there are credit checks people will use this borrow money when they're desperate. Sounds like a recipe for disaster to me.

Re:credit checks? (4, Informative)

BridgeBum (11413) | more than 8 years ago | (#15346887)

I can't speak for Zopa, but I've been looking into Prosper. It's quite interesting actually.

There are indeed credit checks. Users have their credit scores checked, and their 'ebay applications' show their rating, broken down into AA, A, B, C, etc. Users also attach checking/savings account when they create their accounts, and monthly collections are automatic. Obviously that doesn't preclude the possibility of defaulting on the loans, but it helps.

Also, there are affiliated collection agencies for defaulted loans. Just as banks outsource collections to agencies, so can you. I've actually recently signed up as a lender, and will be trying things out with a small amount of money in the next week or so.

Re:credit checks? (2, Informative)

DragonWriter (970822) | more than 8 years ago | (#15346889)

Both sites have credit checks. Prosper lets you specified credit levels as a lender in your offers, Zopa from a quick look through the cite doesn't seem to.

Banks - yuck (-1, Troll)

hey (83763) | more than 8 years ago | (#15346753)

Sure would be nice to be rid of banks. There's no reason they have to last for ever.

It's not new, just a different slant... (2, Interesting)

Anonymous Coward | more than 8 years ago | (#15346786)

... a bank, but without the legal security, This is exactly how a bank works, but in a different source. A bank can affoard to lend you money because it indemnifies those loans with invested money from other companies.

Not new, but different. Interesting idea nonetheless.

Trustworthiness on the internet (1)

cinnamoninja (958754) | more than 8 years ago | (#15346809)

The article discusses two different lending assocations. Only one of them actually claim to use credit reports!

From the article:

Prosper says it conducts anti-fraud and identity checks using data from credit reporting agencies and other sources. Users must provide their name, date of birth, Social Security number, address, telephone number, and a U.S. bank account number.

Both are aiming to hit default rates of 3%, which seems low to me given that, well, this is the internet. They think they can make a real community on the internet, and are using as an analogy the way villages once functioned. Let us ignore the fact that people are much nicer in person than on the internet (you can't be cruel to a person you can't see, right?). Having a community relies on repeat transactions! If you need your consumer debts financed multiple times by strangers, I gotta think you're doing something wrong.

But the online communities growing at both Prosper and Zopa, at least in theory, should function as a sort of immune system against such risks. Because the personal identifying information required for financial transactions isn't infinitely changeable like an E-mail address, scammers can't conceal themselves as easily as they can elsewhere.

Because, you know, it's really hard for those scammers to use other people's identities.

Finally They Can Cash In (0)

Anonymous Coward | more than 8 years ago | (#15346905)

This seems like it could have a potential for a LOT of abuse. Will the traditional fraud protection methods employed by people whose identities have been compromised by Data Theft of a large corporate database still work to protect them from this?

I can see 2 very bad things happening here.
1) All those stolen identities will be used to cash in, with a bubble effect of baby boomers trying to make a quick buck on speculative lending, meaning lots of people lose a lot of money like when the tech bubble burst.
2) Another large segment of the population will have their credit ruined by scammers who manage to offshore the money before anyone realizing this has occurred.
3) No Banks to eat the loss are involved so when these P2P Lending Places go bankrupt, the people who invested are left with nothing.

But hey, I'm cynical. This may work really well, Banks manage to make boatloads of money from this.

If this works will we see P2P Insurance next?

Re:Trustworthiness on the internet (1)

DragonWriter (970822) | more than 8 years ago | (#15346915)

Both are aiming to hit default rates of 3%, which seems low to me given that, well, this is the internet. They think they can make a real community on the internet, and are using as an analogy the way villages once functioned. Let us ignore the fact that people are much nicer in person than on the internet (you can't be cruel to a person you can't see, right?). Having a community relies on repeat transactions! If you need your consumer debts financed multiple times by strangers, I gotta think you're doing something wrong.
Why? Do you know the people at MBNA or Citibank? Do they make lending decisions based on anything but objective factors, anyway? Most Americans (and I'd expect the British are no different) need their "consumer debts financed multiple times by strangers". Whether they are doing something wrong or not is somewhat beside the point, its a fact of life.

Re:Trustworthiness on the internet (1)

cinnamoninja (958754) | more than 8 years ago | (#15347090)

Why? Do you know the people at MBNA or Citibank? Do they make lending decisions based on anything but objective factors, anyway? Most Americans (and I'd expect the British are no different) need their "consumer debts financed multiple times by strangers". Whether they are doing something wrong or not is somewhat beside the point, its a fact of life.

Well, no, I suppose I don't. I try to only borrow money for 30 days, but I get your point. Hmm.

It still feels different. Like, all credit card debt combined is just one giant loan. The example they used was borrowing money from a neighbor to start a business. That is a reasonable use of credit, which a person on the internet will help you out with. But, if you ask to borrow money from a neighbor to buy a laptop (as one of these groups was financing), the neighbor would certainly turn you down if you asked for yet more money to buy an iPod next month.

A village could built that community, by having repeated transactions of all different varieties. Sure, a guy would lend you money, because he ate dinner at your house last week, and he talks to you as pick up your mail, and his kids play with yours. In that case, trust is earned on small transactions, not necessarily economic. I don't know how these companies can build that.

Re:Trustworthiness on the internet (1)

DragonWriter (970822) | more than 8 years ago | (#15347439)

The article discusses two different lending assocations. Only one of them actually claim to use credit reports!


More correctly, the article only refers to one of them using credit reports. But both Prosper [prosper.com] and Zopa [zopa.com] expressly claim on their own websites to use credit scores (from Experian and Equifax, respectively), though Zopa claims to assign their ratings considering additional factors [zopa.com] in some cases.

Okay... right (0)

Anonymous Coward | more than 8 years ago | (#15346837)

So... on a scale of 1 to 10... how legal is this?

Re:Okay... right (4, Informative)

DragonWriter (970822) | more than 8 years ago | (#15347016)

Initially, I thought "not very", but reading through Prospers agreements (Zopa is based in the UK where my limited knowledge of law is even less applicable), I think its probably competently set up. You aren't legally lending money to the borrowers, you are agreeing to purchase loans Prosper makes, and then having Prosper continue to do the work involved in getting payment, which offloads a lot of the compliance burden, as I understand it, to them. I can't say its for-sure legal, but it passes the sniff test.

Adverse Selection (0)

Anonymous Coward | more than 8 years ago | (#15346842)

My wife and I get credit card offers daily. Many have all sorts of low initial interest rates or other incentives. If we wanted to borrow a couple thousand dollars, we'd be crazy not to just apply for an additional card. So, those who are willing to pay "market" (based on Prosper's market) rates for a small loan must not have the best credit. In fact, they probably have pretty bad credit. If they applied for a credit card, they'd probably end up getting charged 10%+ in interest. So, why on earth would I throw my good money at one of these loans? And, since I wouldn't hold the paper directly, I would have to rely on the loan middleman to attempt to collect on a debt. I couldn't hire a collections agent, sell off the debt for pennies on the dollar, or anything of the sort. This is nuts.

Re:Adverse Selection (4, Insightful)

Ph33r th3 g(O)at (592622) | more than 8 years ago | (#15346948)

The fine print on those credit card offers allows the lender to change the terms for various reasons:

  • you're late on a payment with a different lender
  • your credit score decreases even if you've made no late payments
  • you look at funny
  • they just feel like it

So while prosper.com is devoid of teaser rates, I can see why someone with good credit would choose a fixed-rate, fixed-term installment loan from there over a teaser 0% offer that could become 30+% for the cost of a lost piece of mail or one two many credit pulls when shopping for a car loan.

End-run around anti-discrimination statutes (5, Insightful)

Ph33r th3 g(O)at (592622) | more than 8 years ago | (#15346858)

Check out the loan requests at prosper.com -- lots of them include the borrower's age, ethnicity, gender, etc. either outright stated or inferable from the accompanying photographs. While Prosper as the lender of record only provides a credit grade based on an objective score from an Equifax report, the individual lenders are no doubt going to make (or not make) loans according to their own personal prejudices. The very fact that this information is available to prospective "loan buyers" (who are the actual lenders in all but name) will very quickly attract the attention of regulators.

Re:End-run around anti-discrimination statutes (3, Insightful)

patio11 (857072) | more than 8 years ago | (#15346942)

If (and this is a *very big if*) this idea were actually doable, then you wouldn't have to worry about discrimination because peers who were non-discriminatory would be able to make boatloads of cash lending to clients who were not risky but being discriminated against by the marketplace. In the real world, if there are only 3 banks in your neighborhood and you need a home loan, but all 3 lending officers don't like you for whatever reason, you're sort of screwed. If, however, you have zillions of banking providers competing for your business then even if zillion - 1 say "We care more about discrimination than making a profit, neener neener" you only need one profit-maximizer to give you a loan.

In the real world, by the way, you see banks adopting the same strategy -- Bank of America invests boatloads of cash in getting its name out in the various Hispanic communities, which are typically underserved when it comes to banking services.

Re:End-run around anti-discrimination statutes (1)

Ph33r th3 g(O)at (592622) | more than 8 years ago | (#15346971)

That's a good point--discrimination for characteristics that have no real bearing on creditworthiness creates an opportunity for someone to cherry-pick those borrowers.

Re:End-run around anti-discrimination statutes (1)

artifex2004 (766107) | more than 8 years ago | (#15347241)

In the real world, by the way, you see banks adopting the same strategy -- Bank of America invests boatloads of cash in getting its name out in the various Hispanic communities, which are typically underserved when it comes to banking services.

Nice. Do you have details or references for this?

Not as good as it sounds for lenders... (0)

Anonymous Coward | more than 8 years ago | (#15346862)

What happens if there is a large-scale disaster like hurricaine Katrina? Or an economic crash? Suddenly the number of people defaulting could skyrocket. When you take such risks into consideration, your expected rate of return could actually be less than what you'd get from a savings account.

Re:Not as good as it sounds for lenders... (2, Interesting)

DragonWriter (970822) | more than 8 years ago | (#15346988)

What happens if there is a large-scale disaster like hurricaine Katrina? Or an economic crash? Suddenly the number of people defaulting could skyrocket.
This is no different than the risks you are exposed to in a non-insured (money market, etc.) investment account (though the variability in those accounts is probably greater; they face the same catastrophic risks), or even a regular insured bank account once you are beyond the FDIC insurance amount (though there you face only the catastrophic risk, with the variability day-to-day only where the account has a variable rate).

OMG! (3, Insightful)

Ph33r th3 g(O)at (592622) | more than 8 years ago | (#15346902)

There are already some 800 groups on Prosper ready to loan money to specific causes, such as the Apple User Group, 'a lending group for those wishing to purchase either a Macintosh or Apple iPod.'"

Yes, this is exactly the group I'd lend to -- a bunch of status-seeking wanna-be yuppies who want the cachet of conspicuously consuming an Apple product but need to borrow the money to pay for it. Uh-huh. I'm all over that.

look at numbers... (3, Informative)

Sean5033 (246214) | more than 8 years ago | (#15346917)

look at the numbers before you decide to invest your money into something like this... You won't be making as much money as you might think.

If $1000 loan is granted at prosper with a 10% interest rate, it'll make about $153 over three years if everyone pays up. That includes the 0.5% that prosper takes for fees and stuff. It's still lower than I expected. $1000 at 10% over 3 years, and I instantly think $300. I looked into why and it's because the principle is paid off so quickly. The $1000 number is getting smaller every month and there's not much left to earn interest by the start of the 3rd year.

If that same $1000 sits in a 3 year CD paying 4.75% (ING's current rate on a 3 year cd) it can expect to make about $149 without any of the risk associated with the prosper loans. Interest penalties might apply if it's cashed out early.

If the $1000 stays in an ING account that has 3.8% interest, you'll stand to make about $120.

I really like the idea of it, and it has the potential to make some extra $$ if you have some cash laying around not doing anything. But the Risk Factor is huge compared to the alternatives I came up with. The fact the money is still accessible at ING is worth the 33$ IMHO. Even if the money isn't needed for three years, a CD returns a few bucks less, and can still be cashed out in an emergency situation.
 

Re:look at numbers... (2, Insightful)

DragonWriter (970822) | more than 8 years ago | (#15346955)



That's kind of an apples-and-oranges comparison. Since you get the money in your account as soon as the payments come in, unless you re-issue new loans, its equivalent to withdrawing part of the interest from a bank savings account every month and letting it sit around as cash.

Yes, CDs feature automatic reinvestment, and with Prosper you have to manually reinvest. But comparing the two without comparing them at full reinvestment is not especially useful.

Spam/Scam (1)

Lord_Dweomer (648696) | more than 8 years ago | (#15346922)

I don't know how exactly because I'm not that well-versed in financial matters...but rest assured, this service WILL be spammed/scammed by the same people pushing worthless services and trying to scam you out of your hard earned money.

Re:Spam/Scam (2, Interesting)

Alfred, Lord Tennyso (975342) | more than 8 years ago | (#15347652)

Depressing, I'm afraid, but probably true. Identity theft makes it easy to apply for a loan and then skip town. Except if you've stolen the identity of somebody already out of town, you don't even have to rent a moving van.

And it takes relatively few people to poison that well. If an investor charges 6% and could get 5% elsewhere, there's only a 1% margin keeping him in the game at all. If only 1% of the applications are scams, the entire enterprise falls to the ground.

It may be working today for the same reason that email used to work: until there is a critical mass of people involved, the scammers have better ways to spend their time. These are comparatively small loans. So past success is not necessarily an indication of future performance.

If we're very lucky we'll find that throwing many minds at the problem will solve it. Perhaps a network of trust would work; say, cheaper loan rates to people recommended by others who have paid back their loans, or even co-signing. The scammers would then escalate (form into clumps to take loans, pay them back, recommend each other, take another loan, and all default at once) and maybe the collective minds would solve that problem (the way Google tries to weed out search engine cheaters).

Or a wholly different tack, where lenders pay money directly to merchants (say, the owner of a house being sold, or a car dealer) so that the customer has goods rather than money, which are harder to simply pack up and move with. There are ways for scammers and counter-scammers to escalate that game, too.

It would be interesting to find out if an open-source/P2P type hive mind can keep ahead of the scammers.

Clueless about what drives p2p (5, Informative)

redelm (54142) | more than 8 years ago | (#15346980)

P2P financing is called "disintermediation" and actually has been going on in the finance world for 20+ years as borrowers approach lenders directly, rather than through banks. The commercial paper market. There are problems, mostly around collections and default. Not economically solvable for small loans.

But the very idea ignores what drives P2P: very low costs to the provider of service. Lending money is nothing of the kind -- there's a big default risk. You'd find P2P s3x to be easier!

Re:Clueless about what drives p2p (1)

MrAnnoyanceToYou (654053) | more than 8 years ago | (#15347254)

Funny how people have been managing P2P sex for quite a while without all that paperwork and oversight, though.

Re:Clueless about what drives p2p (1)

errordactyl (925156) | more than 8 years ago | (#15347611)

I'm far, far, far from an economist.

In this scheme, if I understand correctly, a large group of people get together and lend money. Any loss is the same but spread out over a large group. It's like financial leverage. Think about what happens to the force needed to lift a tonne supported by a hundred pulleys (neglect friction). Same thing, different physics.

For example, this guy intends to build a sportscar and is raising $16,000 [prosper.com] . There are currently 65 bids [prosper.com] mostly between $100-200. He defaults, these people lose $100 each while if he doesn't they make a little cash.

Re:Clueless about what drives p2p (1)

redelm (54142) | more than 8 years ago | (#15347718)

Still horribly risk skewed. How much "little cach" would you demand for success?

Human risk preferences have been found to be profoundly asymmetric. That's what makes pooling risks (insurance) so attractive in spite of heavy overheads.

They need to find a way to bundle 1000 of these guys together os it becomes a sure loss of ~3% vs 97% zero loss and 3% total loss.

Natural evolution of loan sharks (2, Insightful)

i am kman (972584) | more than 8 years ago | (#15347012)

Seems pretty obvious this will rapidly devolve into supporting primarily folks with bad credit (or can't get loans from banks) who desparately need money FAST. Well, that and look for major identity theft rings.

Banks are highly regulated for a reason and offer strong protection to folks on both sides of the fence (investors and borrowers). New, completely unregulated financing options are really recipes for disaster and abuse - particularly in this day and age.

And, even though pieces of it will be very legitimate and well-intentioned, a few bad apples will bring down the whole scheme. Stay away (unless you want your kneecaps broken).

Re:Natural evolution of loan sharks (2, Interesting)

DragonWriter (970822) | more than 8 years ago | (#15347357)

Seems pretty obvious this will rapidly devolve into supporting primarily folks with bad credit (or can't get loans from banks) who desparately need money FAST.
I don't see why you claim this is obvious; since there is credit rating information available to the "lenders", I don't see why bad credit would be favored (this presumes that the "lenders" will have a preference for return that makes them more risk tolerant, or that good credit borrowers will avoid the site for some reason. Neither assumption seems justified.)
New, completely unregulated financing options are really recipes for disaster and abuse - particularly in this day and age.
This isn't completely unregulated. All of the usual lending regulations apply to lending here (the lender being, in Prosper's case, Prosper).

Ok so about leechers... (1)

Mr. Flibble (12943) | more than 8 years ago | (#15347039)

I think this is great! So, how do I start leeching money from the torrents? ;)

members have to make at least £25,000 (2, Interesting)

BadassJesus (939844) | more than 8 years ago | (#15347040)

$40,000 a year ? that is huge amount of money, so you on the west actually earn this much? we earn about $3,500 a year on average, this world is wierdly unbalanced

Re:members have to make at least £25,000 (0)

Anonymous Coward | more than 8 years ago | (#15347196)

yes that is a typical professional salary

Re:members have to make at least £25,000 (2, Informative)

DragonWriter (970822) | more than 8 years ago | (#15347395)

As of 2003, the median income for a 4-person family in the United States was $65,093 (source [census.gov] . Median household income in the United States was $43,318 (source [census.gov] ).

I'm failing to quickly find comparable figures for the UK.

Why Do You Even Believe This To Be True? (0)

Anonymous Coward | more than 8 years ago | (#15347052)

It is lawless lending in UNKNOWN territory. Why would anyone believe people would sink money into this when the Internet is full of scams, and also full of clever hackers and organized influences whose only motive is to extort money?

Re:Why Do You Even Believe This To Be True? (1)

DragonWriter (970822) | more than 8 years ago | (#15347586)

Why on earth do you think it is "lawless" lending? There is this whole myth that the the internet is some kind of "law free zone". Its not. These companies are real companies, existing in the real world, and bound by the regular laws governing lending in the countries where they operate. This is no more "lawless" than conventional lending engaged in by banks.

New oppertunities (0)

Anonymous Coward | more than 8 years ago | (#15347053)

I wonder if this will open some new doors for me as a loan enforcer? Now to get a loan on guns and ammunition.

GlobalGiving.com (3, Interesting)

daigu (111684) | more than 8 years ago | (#15347056)

Hey, why lend when you can give?

Global Giving [globalgiving.com] is the charitable expression of the same idea. Instead of giving at the office to some anonymous organization, why not fund: Renewable Energy to 20 Peruvian Communities [globalgiving.com] , Improving Computer Literacy in Afghanistan [globalgiving.com] , Information Technology for Uganda Medical Students [globalgiving.com] , or whatever else floats your boat [globalgiving.com] .

Re:GlobalGiving.com (1)

DigiShaman (671371) | more than 8 years ago | (#15347130)

Instead of giving at the office to some anonymous organization...

Uh...the Democratic Party isn't THAT anonymous.

Re:GlobalGiving.com (1)

JumperCable (673155) | more than 8 years ago | (#15347351)

Hey, why lend when you can give?

I would hate to be in your shoes when you retire.
"Ahh... time to break open the nest egg... these thank you notes must be worth something by now."

Re:GlobalGiving.com (1)

daigu (111684) | more than 8 years ago | (#15347441)

By this logic:

We wouldn't have children. All they are is a cost, right?
Or have pets. Less cost than children, but why do it at all?
Or volunteer. Why work for free?

I could go on. But the bottom line is that I happen to have $19 dollars for an expansion card for some medical students in Uganda, and I'd rather spend it in this way than going out to dinner or adding it to my retirement accounts.

I am sure that that $19 dollars could compound into something if you waited 40 years. Then again, you might get hit by a bus tomorrow. Either way, the sums we are talking about here aren't going to make or break your retirement - and maybe they are a way to diversify your "portfolio".

Re:GlobalGiving.com (2, Informative)

FleaPlus (6935) | more than 8 years ago | (#15347600)

Hey, why lend when you can give?

For a solution which is somewhat in-between, there's organizations which provide low-interest microfinance loans to entrepreneurs in developing countries, helping them towards econmic independence. One neat-looking organization is Kiva.org [kiva.org] , which enables individuals to make such loans. Worldchanging has a neat article [worldchanging.com] on organizations like Kiva and how they're helping things in the developing world.

A relevant item from Kiva's FAQ:

Why loans and not (just) donations?
Over the last three decades, microfinance has proven to be an effective tool in raising the standard of living in impoverished communities. Up to now, there has not existed a way for individuals in developed countries to participate directly in this exciting movement. Kiva believes individuals in developed countries will find loaning to be a more rewarding and sustainable form of involvement in international development than traditional giving. In other words, when you receive your original loan amount back, you are more likely to loan again than if you simply made a donation.

can it work? Works in my home-town.. (1)

doowy (241688) | more than 8 years ago | (#15347080)

Not sure if credit unions are popular in other regions or not, but in my area (Saskatchewan, Canada) credit unions are very popular and quite successful. We have general credit unkons, teacher's credit unions, etc.

I see this as an extension of the same concept - only giving everyone involved more control as the technology (web) permits it. Letting everyone control every nickel and dime within a traditional credit union just isn't feasible.

Seems to work here.. can't see many reasons why it wouldn't work on the scale these sites envision.

So whats wrong with this picture (0)

Anonymous Coward | more than 8 years ago | (#15347113)

I would love to give a logical and detailed attack against such a loan service.
But I'm not going to bother. I'll just say this is just stupid.
All the hell people gave paypal for letting people getting paid without using a check, credit card or bank.
That was a good idea.
Here we are 5 years later and someone thinks letting a company do unregulated cash loans is a good Idea.
This is a bad Idea.
omfg.

zbeast

It's a great idea! (3, Funny)

Marsmensch (870400) | more than 8 years ago | (#15347138)

I have personally invested a hefty sum in a Nigerian financial institution run by the daughter of the country's former minister of finance. She contacted me personally (what banks can match that kind of personalized service?) and personally arranged for my account. I sent her my retirement savings and she will soon start sending me my massive returns. I will soon be rolling in obsene amounts of money!

Nigeria is the future of finance I tell you!

What about a P2P currency exchange? (1)

zestymonkey (78271) | more than 8 years ago | (#15347199)

Wouldn't this be the next logical step? Trade cash for money used online by services like iTunes. Neither Apple nor the user need to deal with a bank.

Lock down your mailboxes (1)

JumperCable (673155) | more than 8 years ago | (#15347223)

Because identity theft is going to SKYROCKET if this catches on.

Some of this stuff is insane. There are loan requests out there that read like a nigerian 419 scam. But who knows maybe calls to God will give other people better rates.

And I look at all the poor idiots with credit card debt up they are trying to pay off, locking themselves into loans at high interest rates when they would be much better off either calling up their own credit card company & brokering a deal for payment & a reduced rate or even getting into a credit counseling program.

Re:Lock down your mailboxes (2, Insightful)

DragonWriter (970822) | more than 8 years ago | (#15347340)

Because identity theft is going to SKYROCKET if this catches on.
Er, why? Its certainly no easier to scam money with identity theft from this system than traditional lenders working through the mail or the net; you might convince people to give you better rates this way, but that doesn't matter if you are using identity theft to skip out on payments. I can't see any way this is more vulnerable to identity theft then traditional lending. Its certainly more vulnerable to exploiting gullibility in other ways, though the information providing by the various ratings limits the prospect of that.

headline in 2 years (1)

moochfish (822730) | more than 8 years ago | (#15347227)

Founding 800 Lenders Ask to Borrow Money

One risk not added in (1)

JumperCable (673155) | more than 8 years ago | (#15347296)

What happens if prosper goes under?

risk attitude (2, Interesting)

AtomicBomb (173897) | more than 8 years ago | (#15347298)

I have just got some fun logged in to Zopa as a "potential" lender. The agreed lending rate is unrealistically low. Lending to the "A" grade borrowers for 6 months gives you only 4.5% AER (annual equivalent rate) and lending to the "B" grade ones will only give you 5.0%. And you are responsible for all the tax.

I would rather lend my money to HSBC. For one of the first standard online saving
account [hsbc.co.uk] , you can earn 4.75% AER (and it is not even fixed for 6 months).

The interest rate setting mechanism is kind of a double auction market. You, as either lender or borrower, can set your offer rate. The "market" rate is the one when both meeting somewhere in the middle. I mean most lenders are not really serious at this moment. They are likely to throw £10 in order to test how the system work. But, causually, you can see how people evaluate risk. For this type of unsecured loan via a potentially run-away-overnight "bank", my risk premium is way higher than 10%. Even if I trust the whole system, given a default rate of 3% quoted somewhere in their website, a risk-neutral lender will at least demand an interest rate of the "risk-less" rate (the return that you deposit in a reputable regular bank) + the default rate + their annual handling fee, which means at least 4.5+3+0.5=8%.

Re:risk attitude (1)

QuantumG (50515) | more than 8 years ago | (#15347386)

Sounds like the borrows have the upper hand at the moment. You could borrow some money, deposit it with a bank, repay the loan at the end of the deposit term and turn a tiny profit that gets eaten up by tax.

Weird Math, but roughly the right answer (1)

DragonWriter (970822) | more than 8 years ago | (#15347539)

Even if I trust the whole system, given a default rate of 3% quoted somewhere in their website, a risk-neutral lender will at least demand an interest rate of the "risk-less" rate (the return that you deposit in a reputable regular bank) + the default rate + their annual handling fee, which means at least 4.5+3+0.5=8%.


Why add the default rate -- is that some kind of conventional "rule of thumb" (intuitively, it seems like it works as a rough approximation so long as both the default rate and the risk-free rate are small)? A risk-neutral lender, by definition, is looking only at expected return, so wants an expected return to match or exceed the risk free return. That seems to mean that the rate should be found by:

(risk-free rate) = (target rate - handling fee) * [1 - (default rate)]

which reduces to:

(target rate) = ((risk-free rate)/[1 - (default rate)])+(handling fee)

or, with your assumptions:

(target rate) = ((1.0475)/[1 - (0.03)])+0.005 or
(target rate) = (approx) 8.49%

FYI: Its worth noting that the rates on Prosper seem to be a lot higher; it might reflect the relative maturity of the sites (or it might reflect something completely different.)

OK, Sell me. (1)

istartedi (132515) | more than 8 years ago | (#15347382)

I have a credit union where I can deposit into an FDIC insured money market at 4.32%. If I like, I can purchase CDs for upwards of 5% if I'm willing to lock in (which I'm not given the historicly low rates, but that's beside the point). If I'm willing to undertake more risk, I know some funds that deal in mortgage-backed securities. No FDIC insurance, but returns more than 6%. Nevermind those, though. Let's just think about how the credit union works.

The CU borrows money from me at 4.32% and loans it out at high 5s to low 6 percent, depending on the type of loan. They make money on the spread. Until the P2P plan can provide me with a comparable rate of return, and loan people money at comparable rates, they ain't gettin deposits from me, and I'm not borrowing from them. Worse yet, for consumer devices like an iPod, retailers often provide the loans as loss-leaders at 0%. There doesn't seem to be much room for an upstart here, but I'm willing to be persuaded, if you've got hard figures.

So. Sell me.

new fraud model? (1, Funny)

Anonymous Coward | more than 8 years ago | (#15347469)

Has anyone patented the concept of a Peeramid-to-Peeramid scheme yet?

A great IDEA!!!!! (0)

Anonymous Coward | more than 8 years ago | (#15347554)

Unfortunately the gov't doesn't like the idea of citizens syndicating and trading debt as a commodity on an exchange without regulation.

Canada (1)

errordactyl (925156) | more than 8 years ago | (#15347659)

Anyone know of a Canadian service?

Prosper wants your SSN for authentication (1)

SecurityGuy (217807) | more than 8 years ago | (#15347745)

And that's where they lost me. First, I don't want to give out my SSN. Or my bank account #. Let me put it on a credit card (which I'd pay off immediately) and I'm interested. Tell me I have to give you everything you need to steal my identity so I can lend money and I'm a lot let interested. Tell me you need it for authentication, of all things, because after all, the only people who know my SSN are everyone I've ever had a loan, bank account, credit card, every school I've ever attended, the U.S. government (who employs millions of people), the HR department of every company I've ever worked for, and you lost me.

SSNs are NOT authenicators, and never will be.
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