As traditional sources begin to dry up, borrowers look elsewhere for help
Jane Bryant Quinn
Sun
Social lending, person-to-person, is getting more attention as other sources of small loans dry up. Borrowers are looking for angels willing to make small business and personal loans. Angels gamble that they can find dependable people, make some money and have some fun.
The two sides are meeting on websites such as Prosper.com and Lendingclub.com. What tempts the angels is that you don’t have to lend very much — maybe $50 or $100 at a time. Fifty dollars to 100 people is a $5,000 diversified bet. Prosper.com says that, after fees and defaults, a low-risk portfolio might earn 5.9 per cent, and a high-risk portfolio, 11.3 per cent.
Zopa.com takes a different approach. Your investment lowers a chosen borrower’s monthly payment. There’s an eBay sort of fascination to scrolling through the pleas at these sites. People post their pictures and stories, and extend their begging bowls. Zopa.com adds videos and blogs. You can lend to Rocketman, who financed an Atlas-E missile silo for his private rocket company and is looking for help with the monthly payments (not many takers). Or to Mistman23, who needs $1,000 to take his family to the amusement park, Six Flags Over Texas (he got his money).
And how about the cute couple that wants $12,000 for their wedding? “You get a lot of cash gifts for the wedding,” they write. They say they’ve got 386 people on their guest list and figure that will bring in enough to repay the loan. Most of the requests are for debt consolidation, from borrowers suffering under the lash of high interest rates on credit cards. They’re not all deadbeats, as you might think. Many have above-average credit scores. Still, they don’t have the money to retire their loans and you can’t count on their smiles to tell you whether they will repay.
Angels typically offer lower rates than the credit-card issuers charge. That’s a win for the borrowers and for the angels, too, if enough of their loans succeed. There aren’t a lot of places where you can earn that much money on a modest investment. When Prosper.com opened its doors 21/2 years ago, most of the borrowers who flocked to the site had no other options. “A pole dancer needing money to buy a pole,” one bemused lender told me. Defaults were higher than predicted.
Last year, more mainstream borrowers started showing up. “Creditworthy people are being cut off from traditional sources such as home-equity loans,” says Chris Larsen, Prosper.com’s co- founder and chief executive officer. That’s an opening for direct loans, although the weakening economy raises the default risk for mainstream borrowers, too.
The sites approach matchmaking in different ways.
At Prosper.com, borrowers post the loan they want, the maximum interest rate they are willing to pay and, in most cases, their monthly income and expenses. Lenders bid on the loan, offering lower rates. The winning bids — often, more than 100 of them, in $50 and $100 pieces — are bundled into a three-year loan at a single average rate. Prosper.com checks identity and provides a credit rating based on credit histories and credit scores. Lenders generally have to gamble that borrowers told the truth about their incomes and expenses. You can also ask Prosper.com to bid for you, automatically, on loans of a type you specify.
Prosper.com publishes its loan-performance data. If a friend of the borrower contributes, the chance of a default drops by 35 percent, Larsen says.
Lendingclub.com specializes in loans within affinity groups such as alumni associations and Facebook friends. You can bet on individuals or buy into a portfolio of loans. Lendingclub.com sets the interest rates, based on its assessment of the borrower’s credit quality. Both companies put delinquent loans out for collection. You can’t dun the borrowers yourself. Lending-club.com has a third-party servicer that would administer the loans if it went out of business.
Zopa.com has a hippie feel, with colorful headlines and happy comments such as “Zopa rocks!” Borrowers get loans from participating credit unions and ask for help in reducing their monthly payments. Investors buy credit-union certificates of deposit at rates slightly higher than the average they would get at banks. They divert some of the interest they earn to borrowers whose stories they like. Your money is safe at Zopa.com, but you’re not earning much or helping borrowers much, either.
You can give away as little as a penny a month.Two new sites for students needing help with college costs look iffier, from a third-party lending point of view.
Fynanz.com bestows ratings on its student borrowers, with the best rates going to seniors and full-time students.
You don’t get credit reports, but there may be co-signers, which helps. At Greennote.com, the students don’t even have co-signers.
Jane Bryant Quinn, a personal finance writer and author of Smart and Simple Financial Strategies for Busy People. She is a Bloomberg News columnist.