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
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