To avoid accusations of being mean-spirited, negative, a party-pooper, or just plain stupid, I now offer the many reasons Prosper will succeed:
1. It fills a niche. The biggest Catch 22 of the credit industry is that you can't get credit until you have a credit record, but you can't build a credit record until you've had credit. Because you have no credit record, the only institutions willing to give you credit do so at exorbitant rates–17, 18, 19 percent and up. People without credit don't deserve that–having no track record shouldn't automatically mean you're pegged as a bad customer.
Prosper gives people without a track record the opportunity to have money lent to them without paying through the nose.
Similarly, Prosper allows people who have had a couple of bad breaks get back on their feet before their financial situation snowballs out of control. For people without a credit record who have fallen just a bit behind on their payments, the only option is often payday lenders, who will gladly give you $500 today for $550 next Tuesday, equivalent to a 200%-plus interest rate if calculated over a year. Prosper gives these people an opportunity to get a small safety net–and they're willing to pay fairly high interest rates to do so–after all, what's 18% or 20% when you were paying 200%?
So Prosper is making reasonable loans possible to needy people who aren't currently being served by anyone other than spiffed-up loan sharks. And Prosper lenders are getting a good return on their investments at the same time.
2. Multiple safeguards protect Prosper lenders. It's not foolproof, but Prosper has put in place multiple ways to reduce risk and encourage borrowers to pay the money back, thus making lenders more apt to keep lending.
These safeguards include credit checks with credit ratings of borrowers posted on the site, automatic deduction of monthly payments from borrowers' bank accounts, the creation of "groups" of borrowers in which any particular borrower gets pressure from group members to pay back the loan lest the whole group's credit rating be hurt, and an active forum in which lenders can grill borrowers on why they need the money and pick out any discrepancies in their stories. Scammers may show up, but between the investigative work of Prosper and its community-policing members, most will be ferreted out before doing any harm.
In addition, Prosper strongly encourages you to diversify your loans over many borrowers instead of throwing $500 at a single person. Just like stocks, don't put your eggs in one basket and you won't find all your eggs missing.
3. It's more heartbreaking to screw 3BoyMomi than to screw MBNA. In other words, as a borrower, it's harder on the psyche to know that your lack of paying is going to hurt a real person who trusted you with their money rather than some faceless institution that is just out to screw the consumer anyway. MBNA's not going to starve if you don't pay that loan back, but the Mom in Wisconsin might have it a little tougher.
4. You could just as easily get robbed by the next Ken Lay as get bilked by an unscrupulous Prosper borrower. Risks are inherent in any investment. Who would've guessed that huge companies like Enron, WorldCom, etc. would cook the books and throw millon dollar parties for their cronies on your dime? Now you know better, and you know there are more of them out there waiting to be uncovered–the stock market doesn't seem so warm and cuddly anymore, so why not diversify your investments by taking a chance on the honesty of Prosper borrowers who aren't driven by pure greed?
5. It feels good to help someone. Let's not forget that there are still people in this world who like to help others. Prosper allows lenders to help people that need help. Even if one or two borrower loans default and your hoped-for 12% return goes down to 5%, it still feels a lot better to have helped a struggling family while making 5% than to have gotten a paper statement on the 5% you're making on your bank CD (or whatever boring financial instrument you could be using instead).
6. It's already working in the UK. The Web site Zopa has already been successfully doing in the UK for over a year what Prosper just started doing here (Zopa's going to be in the U.S. soon, btw). They have a slightly different business model, but close enough to make you pretty confident that this peer-to-peer lending thing is workable.
So, it looks as though I'm ready to jump in, huh? Well, not so fast. I have my reservations, as I've already stated, and, more than that, I try to follow the advice of Polonius in Shakespeare's Hamlet:
"Neither a borrower nor a lender be."
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