Website aims to ‘create an EBay for money’ lending

Elena Patrice, a single parent in Virginia, is eager to shed nearly $20,000 in credit card debt she’s racked up in the four years since her divorce. So last month, she appealed to online strangers to lend her $20,000 at an interest rate that’s about half of what she’s now paying.

“Once my debt has been consolidated, I will be terminating any credit cards and strictly using cash or my debit card,” she promised.

Patrice, 38, made her appeal on Prosper.com, a site that matches people in need with regular folks willing to bid on the opportunity to lend them $50, $100 or more.

Lenders say Prosper gives them a chance to earn a better return than some other investments, and maybe do a little good.

“It’s a person-to-person lending marketplace,” says Prosper founder Chris Larsen in San Francisco. “What we try to do is create an EBay for money.”

Prosper recently celebrated its first anniversary. So far it has handled nearly $50 million in loans and has nearly 240,000 registered users. Borrowers outnumber lenders 2 to 1.

Banking experts say Prosper is an interesting concept, but it’s too early to know if it will affect lending, as EBay did with auctions. Still, experts agree, Prosper could be an attractive alternative to high-rate credit cards and an escape hatch for those trapped in revolving payday loans.

Prosper cobbles all the small loans that people are willing to make into a fixed-rate, three-year loan for each borrower. It collects the monthly payments and forwards them to lenders’ accounts.

Loans can’t exceed $25,000, with the typical borrower receiving $5,000 to $6,000, Larsen says. Prosper collects an upfront fee from borrowers of 1% to 2% -- depending on their credit rating -- and charges lenders an annual servicing fee of 0.5% to 1% of the outstanding balance.

To become a borrower, you must have a bank account, a Social Security number and a credit score of at least 520, says Larsen, who also co-founded online lender E-Loan.

Prosper runs a credit check and assigns one of seven credit grades, from the top rating of AA to HR for high risk.

Lenders can view other information about borrowers, including their number of credit lines, debt-to-income ratio, bill-paying history and any bankruptcy filing.

Borrowers tell lenders how high an interest rate they’re willing to pay.

Lenders have up to 10 days to bid on a loan proposal. Once they make a bid, they can’t withdraw it. If the loan is not fully funded by the deadline, the borrower walks away empty handed.

But if the loan is fully funded with time remaining, the bidding gets more interesting. Lenders then can only place a bid if they offer the borrower a lower interest rate, essentially knocking out a higher bidder.

Prosper conducts an identity check of borrowers and lenders. (It guarantees to repurchase a loan if it falls into default due to identity theft.)

Lenders and borrowers remain anonymous online unless they choose to identify themselves. Borrowers frequently reveal a lot about their situation, something that Prosper encourages to engage lenders’ interest. People describe how they plan to use the money, how they got into financial trouble and usually post a picture of themselves, their babies or pets.

Often borrowers want money to pay off high-rate credit cards. Other recent pitches include: A man in New York state seeks $3,000 to buy a reliable used car for work. A Philadelphia grandmother needs $2,000 for dental work. An Illinois couple wants $8,000 for a May wedding. A California man is asking for $7,500 to pay his taxes and restore a 1951 Chevy truck. A Texas couple desires $5,000 for European travel.

Patrice, the Virginia borrower, runs a publishing company with her sister. With a AA credit rating, she initially requested a $20,000 loan at a rate of no more than 9.5%. By the time her posting expired, she had received 32 bids, but they only amounted to 14% of her goal.

She turned to other borrowers for advice and resubmitted her proposal. This time, she bumped the rate up to 11%, fine-tuned her pitch, and added a playful photo of herself wearing a chef’s hat. “I figure I have to be fun, nothing too serious.”

Lenders have their own strategies.

Jon Ruttenberg, a Baltimore physical therapist, has been a Prosper lender for about six months. He looks for borrowers with top credit ratings who are willing to pay a rate of 11.5% or more. He likes homeowners and borrowers who seek money to expand their business. He shies away from debt consolidators or those wanting money so they can become a Prosper lender.

He has eight outstanding loans averaging 10% and considers this part of his investment portfolio.

“A great side benefit of Prosper is you get to get in on the whole micro-loan trend where you get to do some good for people,” he says.

Some lenders seek out riskier borrowers. Larsen, who has made 300 loans, says for many lenders the “sweet spot” is the middle: borrowers who don’t have the best credit rating, but not the worst, either. These loans carry a higher interest rate, but aren’t the greatest risks.

Interest rates can’t exceed state law where a borrower resides. In Maryland, the top rate is 24%.

Prosper advises lenders to make small loans and spread them out over many borrowers to lessen the impact if a borrower defaults. Prosper charges late fees after 15 days. A collection agency is called after 30 days. Larsen says the default rate -- payments 120 days past due -- so far is about half a percent. But that will probably climb as the three-year loans mature, he says.

Stephen Brobeck, executive director of Consumer Federation of America, hasn’t seen Prosper. But he’s concerned that consumers won’t investigate other low-cost borrowing options first, such as credit unions. “There may be a niche for this product, but do we need another source of easy credit?” he says.

Others familiar with Prosper are big fans.

“It’s a great concept,” says Steve Zuckerman, managing director of the California office of Self-Help, a nonprofit lender. Zuckerman’s group is looking at whether Prosper could work for borrowers needing a loan to break out of the cycle of payday loans, where the effective interest rate can be several hundred percent.

Two days before Patrice’s loan proposal was set to expire, 195 lenders came forward to lend $20,000. Patrice could have stopped the process then. Instead, she let bidding continue. By deadline, 485 bids had come in. Latecomers bid her interest rate down from 11% to 10%.

“It’s inspiring,” she said. “I would want to do that for somebody someday.”