Who's Building the Next Web?

Prosper

Chris Larsen does not want you to pay 14 percent interest on your next credit card. He also thinks that lending small amounts of money to regular folks is an investment opportunity that's hoarded by big financial institutions. So the e-Loan founder introduced Prosper. The San Francisco firm allows regular users to take out loans of up to $25,000. They register with the site, specify how much they need and propose a rate of repayment over three years. Lenders either compete to fund that loan, or don't touch it if the buyer's credit rating or reputation is too risky.

To improve their reputations, borrowers can band together in groups with their offline friends. Members of a PTA, for example, might join together to form a virtual credit union and can all vouch for each other's identity and standing. Groups build their status on the site over time, and the better their reputation, the lower the interest rates they can seek. Larsen thinks borrowers will be less likely to default on loans if there's a real-world stigma attached. Meanwhile, the 35-employee company performs all the background credit checks and takes a 1 percent cut of each loan from the borrower. If it can explain this tricky model to consumers, Prosper might do as its name describes.

source: Newsweek

Who's Building the Next Web?

Prosper

Chris Larsen does not want you to pay 14 percent interest on your next credit card. He also thinks that lending small amounts of money to regular folks is an investment opportunity that's hoarded by big financial institutions. So the e-Loan founder introduced Prosper. The San Francisco firm allows regular users to take out loans of up to $25,000. They register with the site, specify how much they need and propose a rate of repayment over three years. Lenders either compete to fund that loan, or don't touch it if the buyer's credit rating or reputation is too risky.

To improve their reputations, borrowers can band together in groups with their offline friends. Members of a PTA, for example, might join together to form a virtual credit union and can all vouch for each other's identity and standing. Groups build their status on the site over time, and the better their reputation, the lower the interest rates they can seek. Larsen thinks borrowers will be less likely to default on loans if there's a real-world stigma attached. Meanwhile, the 35-employee company performs all the background credit checks and takes a 1 percent cut of each loan from the borrower. If it can explain this tricky model to consumers, Prosper might do as its name describes.

source: Newsweek

How I Got My Funding:Trying Out Prosper

Dow Jones

When Ellen Carroll moved from Seattle to Kingman, Ariz., she says she knew the town's need for a speech therapist could work to her advantage.

Ms. Carroll, 27 years old, got a job in the Kingman school district as its second full-time speech therapist, working with students in preschool through junior high school. Ms. Carroll says she has a "gigantic" caseload at the Kingman schools and that showed her that starting her own speech therapy business could be lucrative -- and helpful for the town of 26,000 people.

"I don't get to see kids for very long periods of time, so I'm not seeing much progress," Ms. Carroll said. "If I'm going to make a difference, I have to do things differently."

To start her own business, Ms. Carroll says she needed therapy materials, diagnostic tests which cost up to $700 each, games and toys, and a down payment on rent for an office. She estimated it would cost about $11,000 to get started, so she says she first turned to her credit cards, figuring to put $6,000 on one card and $5,000 on another. But she decided the interest rate of 21% on the cards was too high.

Surfing the Internet for possibilities, Ms. Carroll says she found Prosper Marketplace Inc (prosper.com). "I thought I'd try Prosper first, and if it didn't work, I'd go to a bank," she said.

The San Francisco-based Web startup offers an online marketplace that puts together prospective borrowers and lenders. Borrowers can request a loan of between $1,000 and $25,000, and specify the maximum interest rate they're willing to pay. The site allows lenders to evaluate hundreds of borrowers, who explain why they need a loan, and provide a credit history and a debt-to-income ratio. Borrowers seek loans for a variety of reasons, such as opening businesses, paying off hospital bills or even buying diamond engagement rings.

Prosper works a bit like an online auction, with prospective lenders bidding against each other to fund all or part of a loan. The site also has social-networking features like user groups and profiles.

Ms. Carroll joined Prosper, adding to her loan request another $2,000 that would allow her to pay off old credit-card debt from college. In April, she secured a $13,000 loan with 13% interest from lenders on Prosper. "I felt a sense of relief," she says. "I knew I was going in the right direction, finally doing what I want to do."

Ms. Carroll made her first $312 loan payment in May, an amount she'll pay each month for another two years and eleven months. To pay back her loan, she uses part of her salary from the Kingman school district as well as the cash earned from the speech therapy business.

Starting a business isn't something Ms. Carroll dreamed about when she was young. "I just want the freedom to be able to see kids or adults however long I want to see them," she says.

With her public school caseload, Ms. Carroll already has a vast resource for clients. She is providing private therapy sessions to a few kids on evenings and weekends and hopes to have a full caseload of 20 to 30 kids by the fall. Down the road she wants to open her own clinic with more therapists.

Hilda West, on the other hand, always believed she'd be her own boss. But it wasn't until after CNN downsized in 2001 and eliminated the broadcast engineering job she held for 12 years that Ms. West set out to start her own Atlanta-based videography and photography business.

"My father was a builder, he had his own business too," says Ms. West, 53. "I grew up in that atmosphere. It's more work than working 9 to 5 but there's more satisfaction."

To start her business, the Atlanta native spent about $8,000 -- using credit cards, severance pay and her savings -- to buy computers, a Sony VX2000 camcorder and a Fuji FinePix S2 Pro SLR Digital Camera.

Focusing on weddings and corporate events, she found clients by passing out business cards at wedding conventions and video-equipment businesses, advertising in the local newspaper and on the Internet.

After three years in business, Ms. West says she does about three events a month. To draw new customers, she has been charging less than she would like -- usually about $1,500 for what she estimates is about $3,000 in services.

Recently, Ms. West needed to buy DVD and CD duplication equipment after her clients began asking for that service. But, she says she didn't have the $5,000 she needed for the purchase.

Ms. West says she posted her request for a loan on Prosper and was approved for a $5,000 loan at 11% interest. "It was very fast," Ms. West said. The site's moderator said she should post her request for ten days, and after five days her loan request had been filled at rate of 17.62%. After another five days, the rate offered by lenders on Prosper dropped to 11%.

Ms. West says still relies partly on her savings to pay the bills because she isn't bringing home as much money as she made at CNN. Her standard of living has also changed. But she says the opportunity to own a business is worth as much as money. "I enjoy what I do; this is my passion. The freedom is worth it," she says.

Erica Davis
http://www.startupjournal.com/financing/trends/20060612-davis.html

Lots Of Loans, But No Banks :Finance co-ops have hit the Web, and they look like a good deal for borrowers and lenders

Timothy J. Mullaney, BusinessWeek, Jul-3-2006

When Lyna Lam's family landed in San Jose, Calif., in 1983 after fleeing Vietnam, they soon learned what it means to rely on a community for money. Times were tough, with seven people in a studio apartment. "My parents were on welfare a long time," she says. But the Lams tapped into their local hoi, a cooperative of Vietnamese neighbors who pooled money to lend one another. Lam's father first used hoi to buy a used Oldsmobile. Then he borrowed from it to launch a landscaping business that took the family out of poverty.

Today the Net is taking the logic of Asian microlending co-ops global. One of the Web's most intriguing trends is the rise of peer-to-peer lending communities such as London-based Zopa Ltd. and San Francisco's Prosper Marketplace Inc. Fifteen-month-old Zopa (www.zopa.com) has attracted 75,000 members. But the most buzz surrounds Prosper, the four-month-old site (www.prosper.com) whose undisclosed number of members have made about 1,500 loans for over $7 million. Backed by eBay Inc. (EBAY ) founder Pierre Omidyar and the venture capital firm that funded eBay, Prosper has spawned a raft of microbusinesses that recall the eBay economy. Prosper founder Chris Larsen is the former CEO of Web mortgage pioneer E-Loan Inc. His wife? Lyna Lam. "He was fascinated by how we work together and come through for each other—and that's how he started Prosper," Lam says.

"WHAT DO WE NEED A BANK FOR?"
At first blush, the idea of making loans to complete strangers seems crazy. But it turns out that online communities can do a lot of what banks and payday loan companies do—and cheaper. In Prosper's market, loan rates are set by auction. Borrowers post an application, and prospective lenders bid on the interest rate, aided by basic analysis tools provided by Prosper such as simplified credit scores. Prosper rates borrowers from AA (top credit) to HR (high risk). Many lenders do extra research; some contact prospects by phone.

Analysts say peer-to-peer lending could become a big deal. Americans make 6.1 million friends-and-family loans, for more than $89 billion each year, says Asheesh Advani, CEO of CircleLending, a Waltham (Mass.) startup that provides billing services for friends-and-family loans. Forrester Research Inc. (FORR ) lumps peer-to-peer lending with "social computing" phenomena such as blogging, podcasting, and wikis that are shaking up industries. The opportunity lies in consumers' mistrust of financial institutions: In Forrester studies, most people believe their banks put their own interests ahead of consumers', and a majority don't think their financial institutions have strong ethics. Their attitude, says Forrester analyst Catherine Graeber: "If we can get this done cheaper between ourselves, what do we need a bank for?"

That said, Prosper and Zopa probably won't have an eBay-like upside. EBay created the first national market for stuff people used to move at garage sales and craft fairs. But capital markets are dominated by big companies that sell a smorgasbord of credit cards, mortgages, and other products to people with virtually any credit profile—and rates finely calibrated to borrowers' credit scores and other data. Fact is, no one knows if borrowers will reliably repay loans from relative strangers. CircleLending says 14% of person-to-person loans go unpaid in the non-Internet world. Zopa says its default rates are a tiny 0.05%; Prosper hasn't broken out default rates.

Then again, peer-to-peer lending isn't a risk that can't be managed. The key is diversification. Loans are typically divided among lenders; a $5,000 loan might be funded by 100 people. Payments are sent directly to Prosper or Zopa, which distribute the money to lenders and report deadbeats to credit agencies or collection firms. Lenders can simply ignore high-risk borrowers; only 2% of Prosper applications from poor-credit customers have been funded, according to SavageNumber.com, an Atlanta Web site that tracks Prosper data. Formal arrangements seem to make people responsible about repayment even without a bank involved. Advani says delinquencies fall to 5% when friends-and-family loans use his firm's billing service.

The result: Loans are cheaper, while lenders can earn more than from other investments. Last month Doug Sophia borrowed $12,500 on Prosper to buy equipment for his new pizzeria in North Myrtle Beach, S.C., at 11.75%; his local finance company wanted 26%. Meanwhile, Frisco (Tex.) lender Dave Elliott, CEO of a small software company by day, says he expects a 13% return on 97 loans. "There aren't many investments that will get you more than 12% without much management," he says. Zopa CEO Richard Duvall says the average Zopa lender makes 7% to 10% after bad debt is written off, twice what top British savings accounts pay.

THE SHAME FACTOR
One draw is the sense of community that online peer-to-peer lending shares with Asian co-ops, though there are some differences. At a May dinner for Prosper lenders in New York, a half-dozen agreed on a favorite example of their quirky clique: A mother of five who wanted breast implants to undo the effects of nursing. Members were impressed enough with her—and her AA credit—to bid the interest on her loan down to 7% from 14%.

Mostly, though, borrowers and lenders are drawn by better prices. Take Sophia, who plans to open Acme Pizza in late June. When a partner backed out in May, he needed money fast. Prosper rated his credit AA, its lowest-risk category. His three-year loan, at $413 a month, was not only cheaper than finance companies offered but also felt far safer to him than starting a business with revolving credit cards. "Once that teaser rate goes away, you're looking at the same rate as the finance company," he says.

For lenders, the trick is charging enough to cover defaults and still profit. If online communities are paid as reliably as others, says Prosper, lenders must add 2% or so to rates for defaults. Small fry are springing up to help: Part-timers from Germany to Atlanta have set up sites to crunch data about Prosper market conditions.

Most of all, Larsen relies on a strategy borrowed from hoi: shame. He says people repay real-world co-ops because they fear losing face among peers. So Prosper has 1,000 organized groups set up to let members lend to one another. "If you acquire customers through a Jimmy Stewart sense of community, you'll have a better business," he insists. And if his virtual savings and loan takes off, it will be a wonderful life indeed.

Money: Lend Me a Little?

Money: Lend Me a Little?
Newsweek

July 31, 2006 issue - Banks, shmanks. New person-to-person online lending sites eliminate loan officers (and savings-and-loan regulators) and match borrowers directly with lenders. San Francisco-based Prosper.com and the British site Zopa.com work similarly: borrowers post their needs ($7,000 for backyard landscaping; a $3,000 small-business loan) and lenders respond to the rates and reasons. Payments are automatically deducted from the borrower's bank account and deposited into the lender's account. Zopa says its lenders have been getting an average of 6.75 percent on their loans.

Lending to complete strangers is a risk, but Prosper limits that by vetting the identities and credit scores of borrowers and by threatening collection agencies if they don't pay. Lenders can limit their risks by offering $50 to 100 borrowers (who may each have 100 lenders) instead of making one $5,000 loan. Now that's diversification.

—Linda Stern

This Time, You Be the Bank

Fed up with high interest rates or loan rejections? Try online peer-to-peer lending.

If we all stick together, can we live without banks? Not likely, but the online move toward so-called peer-to-peer lending suggests some of us are ready to try.

The trend plays off the success of eBay, which proved strangers can deal directly just fine. Now, key eBay backers are behind Prosper.com, a new peer- to-peer lending site.

Here's how it works: Prosper.com links folks seeking modest sums -- small business owners, would-be debt consolidators -- with other folks who bid on interest rates they place on money they're willing to lend. For a fee, the site consolidates bids, links them to loans and moves monthly payments between parties.

Sure, such unsecured loans can be risky. But anytime we can skip a middleman, that's its own reward.

source: http://www.rd.com/content/openContent.do?contentId=30377

How is a credit grade different from a credit score or credit rating?

A Prosper credit grade is a letter grade that Prosper assigns you based on your credit score, for use solely in the Prosper marketplace. Prosper obtains your Experian ScoreX PLUS™ credit score from your credit report, and assigns one of eight credit grades.

Here is a table that shows the equivalent credit scores for Prosper credit grades:

Grade:	AA	A	B	C	D	E	HR	NC
Score:	760 and up	720-759	680-719	640-679	600-639	540-599	Up to 539	No credit score

Your credit grade is posted with your loan listing to help lenders plan their bids appropriately. Your numerical credit score is never displayed or disclosed to anyone.

Note: Having Prosper obtain your credit grade won't affect your credit score! Although we are making a request for your credit score, we're doing so at your instruction so no inquiries viewable by subsequent users of your credit report will be placed in your credit file. That means your credit score won't be affected when you register or post a listing. Only if you obtain a loan through Prosper will an inquiry that others can see be placed in your credit file.

Learn about Credit Grades

What is a credit grade?

A credit grade is what potential lenders use to measure your likelihood of repaying money you have borrowed based on your past history. Everything from your first credit card to your home mortgage contributes to your credit history. Your credit grade can be affected by many factors, such as how much money you owe and your on-time payment history. Lenders will consider this credit grade (along with other factors, such as your group's borrowing history) to determine the interest rate they are willing to offer you, and how much to loan.

Borrower Death

If a borrower with a Prosper loan dies, the executor or administrator of the borrower's estate must send proof of death (a death certificate) and proof of authority (a letter testamentary) to Prosper.

Upon the death of a borrower, it is possible that the borrower's Prosper loan will be paid in full by the estate. In this case, lenders will receive their pro-rata share of the outstanding principal, interest, and fees accrued. If the borrower's Prosper loan is not paid in full by the estate, Prosper will sell the loan to a debt buyer as soon as is practicable. Proceeds from the sale of the loan will be distributed pro-rata among participating lenders. Loans in which the borrower has died will receive a special status on the lender's loan accounting screens.

Rules for Lenders

Offers to Make Loans Off-site or Modify Loan Terms

Prosper prohibits email offers between members to borrow or lend money outside of the Prosper web site. Offers of this nature circumvent Prosper's fee structure, may violate state or federal consumer protection laws, and are a potential fraud risk for both borrowers and lenders.

Some examples of off-site loan offers include:

* Using information obtained through Prosper to offer to lend money to a Prosper borrower outside of Prosper
* Offering to lend additional money above and beyond the loan amount stated in your bid
* Offering to accept additional interest or other compensation (in the form of cash or other things of value) above and beyond the interest rate stated on the listing page

If you would like to report a member who is attempting to borrow or lend money outside of Prosper, please contact customer support.

Soliciting of Financial or Identity Information from Borrowers

Lenders may not require prospective borrowers to provide proof of identity, proof of employment, financial statements, a credit report, or authorization to obtain a credit report as a condition to bidding on listings, and borrowers are not encouraged to provide such information. When a borrower creates a listing, Prosper obtains their credit report and determines their credit grade, which is displayed in the listing. That is the only credit grade relevant to lenders placing bids on Prosper.

People-to-People Lending

Here are just few of the names for people-to-people lending:

Egypt: Gameya
Ethiopia: Ekub
Kenya: Mabati
Madagascar: Fokontany
Tanzania: Fongongo
China: Lun-hui
India: Kamet
Japan: Miyin
Korea: Mujin
Vietnam: Hui
Bahamas: Esu
Bolivia: Pasanacu
Brazil: Consorcio
Mexico: Tanda
West Indies: Susu

If I make a loan through Prosper, what guarantees do I have that the loan will get repaid?

There are no guarantees that your loan will be repaid. We try to give lenders as much information as possible about the credit worthiness (or "credit grade") of the borrowers on the site, their debt burden (known as the "debt to income ratio"), and the expected default rate of a borrower with their credit grade, which is based on historical data from Experian, one of the three major credit reporting agencies.

The way to ensure a good return on your investment is to diversify your lending—create a standing order to place bids on many listings, and spread your risk across many borrowers. If you make 100 loans to B-rated borrowers at 8%, and B-rated borrowers have an expected default rate of 1.8%, then you might have 2 borrowers default, which would lower your return by 2%. After annual lending fees of 0.5%, this would give you an annual 5.5% return overall. Learn about diversifying your lending with standing orders.

Lender Death

If a lender with a Prosper account dies, the executor or administrator of the lender's estate must send proof of death (a death certificate) and proof of authority (a letter testamentary) to Prosper, and Prosper will work with the executor or administrator to liquidate the decedent's assets.